On December 17, 2008, the European Parliament approved a comprehensive climate and energy package for the EU, hailed by the European Commission’s President, José Manual Barroso, as a green “new deal” for Europe.  A core component of the package is a Directive on the Promotion of the Use of Energy from Renewable Sources, which mandates the increased use of biofuels in the EU in order to achieve, by 2020, at least a 20% share for renewable energy and at least a 10% share for biofuels in road transport.  While some EU Member States already produce significant quantities of biofuels, the Directive is expected to increase imports of biofuels and biofuel feed stocks into the EU, as well as spur substantial new investment in biofuel production capacity.  For now, however, the Directive and a series of EU and Member State measures are generating uncertainty in European biofuel markets—particularly in the case of biodiesel.

One source of market uncertainty is the Directive’s provisions specifying “sustainability criteria” that biofuels must meet in order to count towards the renewable fuel targets specified in the Directive.  Chief among these is the requirement that any biofuel production pathway represent at least a 35% greenhouse gas (GHG) savings over the relevant fossil fuel comparator.  For many existing biofuel production pathways, an annex to the Directive specifies a deemed level of GHG savings.  For example, rape seed biodiesel (one of the principal production pathways in Europe) is deemed to represent a 38% level of GHG savings, while soybean diesel (one of the principal production pathways in the U.S.) is deemed to represent a 31% GHG savings level.  The Directive’s 35% GHG savings threshold is likely to impact the relative market values of biofuels falling on either side of this threshold, and therefore affect trade and investment flows.

Other sustainability criteria in the Directive will also likely affect trends in biofuel markets.  For example, to count towards the Directive’s renewable fuel targets, a biofuel must not have been produced from feedstock obtained from land with a high biodiversity value or land with high carbon stocks.  Similarly, it must not have been produced from feedstock obtained from peatland.  The Directive sets forth detailed guidelines for the application of these sustainability criteria.  It also provides mechanisms for review of the effectiveness of these criteria, as well as enforcement provisions to ensure compliance by individual economic operators.  Further, reflecting the 2008 global spike in food inflation and the controversy surrounding the impact of biofuel production on food prices, the Directive calls for occasional review of the Directive’s “social sustainability,” particularly as to its impact on developing countries, and possible future revision of the Directive if warranted.

Compounding uncertainties caused by implementation of the Directive’s sustainability criteria, biodiesel producers, importers, and distributors face market volatility caused by at least two additional factors.  One is the ongoing EU investigations of alleged unfair trade practices by European importers of U.S.-origin B99 biodiesel (i.e., blends comprising 99% biodiesel and 1% petroleum biodiesel).  The ongoing EU investigations, based on a petition filed by the European Biodiesel Board (EBB), are examining whether importers are selling at “dumped” prices and whether the imports at issue benefit from alleged U.S. subsidies, including a federal tax credit provided to blenders of B99.  The EU is scheduled to release its preliminary determinations in the coming months, which may result in the imposition of antidumping and countervailing duties on U.S.-origin B99 imports.  In the meantime, according to the EBB, EU imports of B99 biodiesel in 2008 were 40% higher than in 2007, and reports indicate that the European biodiesel industry is operating well below its production capacity.

Legislative developments in Germany—Europe’s largest biodiesel market and home to its largest biodiesel industry—provide yet another layer of uncertainty in biodiesel markets.  A tax increase on biofuels, scheduled by statute to enter into effect on January 1, 2009, has yet to be implemented.  Proposed legislation currently under consideration could effectively restrict the importation of soy oil and palm oil for the production of biodiesel, based on sustainability criteria akin to those in the new EU Directive.  Like the tax change, this measure was originally intended to take effect on January 1, 2009, but is still undergoing review.  Uncertainty persists whether these German laws, if and when finalized, will be imposed with retroactive effect to January 1, 2009.

For further information about this topic, please contact Akin Gump.