IS it really in Europe’s interest to provoke a trade war with emerging markets in Southeast Asia and Latin America over biofuels? Of course it is not.
At the centre of this emerging trade conflict is the Renewable Energy Directive (RED), a law with the noble ambition of substituting fossil fuels with biofuels, yet in a manner that espouses green protectionism in Europe.
EU biofuel policy is generally prejudiced against foreign production. Production in Europe is both heavily subsidised and protected by tariffs, especially ethanol, with tariffs of up to 63 per cent.
Total subsidies add up to between 25 and 35 per cent of the market price for the fuel. Unsurprisingly, biofuels consumption in the EU is heavily dependent on local production.
Yet a big (but not the entire) part of the European biofuel industry remains uncompetitive when compared with foreign producers. For Europe’s biodiesel industry, which is heavily over-invested and only utilises 45 per cent of its capacity, this is becoming a big problem.
It has invested on the premise of a future demand for European fuels that expands as rapidly as in previous years. But it is impossible for Europe to continue with current levels of direct subsidisation to compensate for the larger production costs in Europe.
It also borders on economic madness to subsidise biofuels so heavily when it is cheaper to continue with fossil fuels and buy carbon offsets on the Climate Exchanges.
A cheaper way to expand the use of biofuels is to increase imports. And imports have increased, especially from Latin America.
But foreign producers will soon find it increasingly difficult to continue to expand exports to Europe.
The EU has added grand industrial ambitions to its policy and considers it a way to promote biofuels production in Europe.
Expansion of energy-crop farming has been a central tenet in the policy to transform the remarkably inefficient programme for agricultural subsidies in Europe to become more conducive to market conditions.
And if local production, especially of biodiesel, is to expand, it needs new forms of protection. Without it, it will not prosper under intensified competition from producers in Southeast Asia and Latin America.
The RED adds a new type of protection: technical regulations of the methodology of production, or how the biofuel has been made.
At the heart of this regulation are the tax-excise exemption for biofuels and the obligation for each EU member to reach an agreed level of biofuels in its energy mix by 2020 (the target varies between countries).
To qualify for the tax-excise exemption for biofuels, the greenhouse gas savings of shifting to biofuels must be higher than 35 per cent from next year. From 2017, or perhaps earlier, greenhouse gas reductions should be 50 per cent.
Furthermore, RED regulates that new biofuels cannot be made from land with high biodiversity value and high carbon stock, or peatland.
Unless there are changes made to the way these sustainability criteria will be used in new certification schemes, some foreign biodiesel is likely to fail these tests next year and should consequently be treated differently than local biodiesel.
If that happens, however, the EU is likely to be taken to the World Trade Organisation for a trade dispute with Southeast Asia, Latin America and the United States.
And the EU is likely to lose because of the blatant discrimination and biased methodologies for assessing GHG savings.
But even if it would win such a dispute, Europe would not achieve much on the environmental front. In fact, a plausible outcome is that it would rather corrupt Europe’s ambition to reduce its carbon emissions.
First, biofuels that cannot be sold on the European market can instead be shuffled to other markets with less stringent environmental standards, or with less biased methods for assessing conformity with sustainability criteria.
Rather than producing biodiesel, an exporter can use the same crop to produce a vegetable oil and sell to European importers using it in food production without risk of discrimination.
And if the producer continues with energy production, the biodiesel or the feedstock can be exported to other countries. Hence, the notion that Europe through its use of biofuels regulations can change the behaviour of other countries is false.
Europe’s market power is not that big. For instance, it represents only 15 per cent of the global demand for palm oil, a competitor to EU’s rapeseed biodiesel, and its share is declining fast for the simple reason that growth outside Europe is so much bigger.
Power is the ability to get other actors to do what they do not want to do. Neither Europe nor anyone else has that power.
Second, the more foreign biofuels that will be discriminated, the less the supply of biofuels on the European market will be. Limited supply reduces competition and pushes prices upwards.
It further disconnects European prices from world-market prices.
One of the casualties of this policy will be the ambition to rapidly reduce the use of fossil fuels.
The higher the price of biofuels, the higher the cost of shifting away from fossil fuels.
It is possible to substitute fossil fuels with biofuels while keeping markets open to competition. Green markets and free trade can mix nicely.
But the third wheel in Europe’s biofuels policy, various forms of support of local production at the expense of others, will have to go.
Source: New Straits Times