EU biofuels policy will ‘make things worse’

by Fredrik Erixon

12 April 2013 

Yet again, the EU’s committee-style approach is about to repeat past mistakes – and to espouse policies that will only cause further problems – claims think-tank

Europe, we are told, is now ushered into the era of ‘smart regulation’. Under great fanfare the governments of Denmark, the Netherlands and the United Kingdom in 2010 launched a campaign to make regulations in Europe smarter. The European Commission was quick to respond and later unveiled – no less ceremonially – a strategy for smart regulation in the European Union.

Cynics have, somewhat unfairly, claimed smart regulation to be all spin and little nerve; nothing but a new title on the same unclever stuff that governments always have produced. Yet support for this view has been surprisingly forthcoming from some Brussels’ regulators, especially among the band that designs new environmental regulations on commerce. The commission’s latest gambit on Europe’s biofuels policy – ironically supported by the three governments campaigning for smart regulations – is a case in point. Its authors clearly never received the instruction that new regulations should be simple to understand, transparent, evidence-based and not impose unnecessary burden on the platoons of welfare creation – the small and medium-sized enterprises.

There is a good case to reform biofuels policy in Europe, especially the controversial Renewable Energy Directive that in 2010 set the tone for what has become an extremely costly and protectionist strategy to switch energy consumption in Europe from fossil fuels to greener alternatives. The policy has helped to fracture the single market in Europe as member states have been allowed to introduce or maintain regulations that blatantly discriminate between products in Europe. And it has upset other countries that argue quite strongly that this policy – if used to block import from a third country – would run foul of Europe’s obligation in the World Trade Organisation to keep its market open and not discriminate between like products.

The best way to support a rational, open and competition-based policy for biofuels and to support research and development into more advanced fuels would be to deregulate and de-subsidy production and trade in biofuels and feedstock. The commission feels differently and now wants to salvage Europe’s biofuels policy by introducing new market distortions and trade restrictions. It has proposed to cap the market-share of conventional biofuels to 5 per cent and reinforce the aspects of current policy that resembles central planning.

Furthermore, the commission is proposing to take a big step towards introducing so-called ‘indirect land use change’ factors in its policy, initially by demanding suppliers to report emissions savings from the indirect ILUC associated with a particular energy crop – cereals and sugars. The proposal falls short of conditioning market access on ILUC factors but the ambition is to elbow producers, consumers and EU member states – through national reporting – to use crops with allegedly smaller ILUC emissions.

There is just one catch. It is impossible to make reliable, transparent, evidence-based assessments on ILUC emissions for a particular crop; and especially so when it is the global ILUC emissions that should be targeted. Many attempts have been made to model the ILUC emission effects but they come to profoundly different results. That is not very surprising – it is impossible to manage so many different and changing factors that constitute the derivative effects of one company’s decision to use a particular feedstock to produce a fuel.

This new ILUC dimension reinforces the incompatibility of Europe’s biofuels policy with its obligations in the WTO. If turned into law, suppliers of biofuels will be forced to document and label products – with a centrally-decided ILUC emission figure that we with certainty can say will be wrong. But this also makes biofuels policy subject to the disciplines on discriminatory and arbitrary technical regulations to trade in the WTO, more precisely the agreement on technical barriers to trade. A vast body of scholars and commentators have already shown RED to be inconsistent with WTO rules because of its blatant discrimination. Like other agreements in the WTO, the disciplines on technical regulations build on the principle of ‘like products’.

By assigning to a foreign crop an arbitrary ILUC factor that would make it less favourable than domestic crops, the EU will overstep the obligations it has signed up to. It could very well be that a particular product receiving less favourable treatment may differ very much in this regard from other products made of the same crop, or that it actually entails much lower ILUC emissions than those crops that the revised directive has generally given more favourable status because it is believed that its ILUC emissions are lower. The point is that no one can say with the smallest degree of certainty what these emissions are. And building a system of discrimination on that basis simply will not be acceptable to other countries defending their trading rights.

Anyone who cares about smart regulations would bin this policy, straight away. It fails on all accounts of the strategy for smart regulations heralded by the EU. It is certainly possible to construct a green and economically rational policy for biofuels but it cannot be done when policy is also guided by hidden motives to support domestic production; and to aggressively regulate affairs of other countries.

Fredrik Erixon is director of the European Centre for International Political Economy think-tank, in Brussels 

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