European Ethanol Industry Needs Market Reforms to Counter Growing Trade Threat

by Jacques Moss (KNECT365) Recent changes in the EU’s trading relationships with the US and the Mercosur trade bloc may render the European ethanol industry uncompetitive. Taking measures to safeguard the EU’s domestic production base will bring benefits for the economy and the climate.

High sustainability standards in the EU continue to drive improvements in the greenhouse gas savings domestically produced ethanol delivers compared to petrol – 71% and rising, according to the European renewable ethanol association (ePURE).

Complying with these standards increases the costs of ethanol production, but it also helps to ensure that ethanol delivers on its promise as a low carbon alternative fuel. Unfortunately that doesn’t always translate into a competitive advantage.

Moreover, European feedstock growers do not enjoy the same level of political support as some of their rivals. Powerful agricultural lobbies in the US, for instance, ensure that the country’s ethanol producers have ready access to an abundant, low cost feedstock source.

Unfortunately for European ethanol producers, two recent trade developments mean that they may soon have to compete against cheaper imports from the US and South America.

More cautious voices have pointed out that most of the corn ethanol produced in the US does not exceed the 50% GHG savings threshold required by European regulations.

The additional cost of shipping ethanol to Europe may also make exports uneconomic for many US producers.

The Mercosur deal, on the other hand, will permit 450,000 tonnes of South American ethanol exports to enter the EU duty free each year, in addition to a further 200,000 tonnes per annum subject to a “Most Favoured Nation” tariff rate of 33%.

These quantities could at most displace 14% of the EU’s current ethanol production. A market share reduced by 14% could make a big difference for individual producers – but the survival of the industry as a whole would not be in question.

The Mercosur deal has also yet to be ratified by the member states and the European Parliament. Given the level of criticism that it has received from France and some other member states, it is likely that the agreement, which has already been two decades in the making, will be subjected to further changes before it is fully approved over the coming years.

These recent developments do however demonstrate how vulnerable the European biofuels industry is to alterations in the status quo. Apparently, the advantages of locating biofuels production domestically are still not fully appreciated by European policy makers.

For instance, the land usage footprint of European ethanol production is limited by the fact that ethanol plants also co-produce protein for the animal feed market.

Even if imported ethanol is indeed sustainable, increasing the share of imports would aggravate the EU’s protein deficit, leading to more imports of soybeans and other monocrops that are often grown on deforested land. Producing both ethanol and protein at home helps to ensure that these impacts are avoided.

One would be to ensure that the value of more sustainably produced ethanol is adequately priced into the market to protect against lower quality imports. The EU’s 50% minimum of GHG savings is a start, but it sets a low bar.

Market-based incentive structures that reward biofuels producers in proportion to the GHG savings delivered by their product would do more to promote sustainability. They would also motivate producers within the domestic market to compete to deliver a product with higher GHG savings. If emissions along the supply chain can also be factored in, so much the better.

The other response to increased imports would be to increase the size of the market, in this case by raising blend rates. At present, Europe achieves an average blend rate of only 5%. But the reasons policy makers have so far dragged their feet on switching to E10 are often based on shaky assumptions.

Some of these were addressed by a major report released this month by the All-Party Parliamentary Group for British Bioethanol, which advocated increasing blend rates to 10% in the UK. READ MORE