Order Code RS22404
March 16, 2006
CRS Report for Congress
Received through the CRS Web
European Union Biofuels Policy
and Agriculture: An Overview
Randy Schnepf
Specialist in Agricultural Policy
Resources, Science, and Industry Division
Summary
Several different economic and environmental forces have converged in recent
years to generate growing interest in alternate sources of energy, including biofuels,
within the European Union (EU). The European Commission (EC) is using both
legislation and formal directives to promote biofuel production and use within the EU.
However, EU biofuel production is impeded by its high production costs relative to
fossil fuels. To date, the most important biofuel produced in the EU has been biodiesel
with an 80% share of biofuel production in 2004. Bioethanol has accounted for the
remainder. The major feedstock for EU biodiesel production is rapeseed oil, while
bioethanol is generally produced using a combination of sugar beets and wheat.
U.S. policymakers are closely watching EU biofuel developments, particularly for
any successful policy choices that might work in the United States. In addition, both the
production and use of biofuels have important long-run implications for EU agricultural
production and trade. This report briefly introduces some of the more salient
agricultural policies and issues related to EU biofuel production and use. This report
will be updated as events warrant.
Introduction
Various policy goals — reducing greenhouse gas emissions, boosting the
decarbonization of transport fuels, diversifying fuel supply sources and developing long-
term replacements for fossil oil while diversifying income and employment in rural areas
— have motivated the European Union (EU) to promote the production and use of
biofuels (i.e., transport fuels produced from renewable organic materials).
Between 1985 and 2004, road transportation (i.e., cars and trucks) fuel consumption
in Western Europe (primarily the EU) grew by nearly 50%. By 2000 the then EU-15 was
importing 75% of its petroleum needs with expectations for this import dependence to
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continue to grow into the future.1 In 2004, Western Europe consumed over 270 million
metric tons (MMT), or approximately 89 billion gallons, of road transportation fuel —
60% as diesel fuel and 40% as gasoline.2 (By comparison, U.S. fuel use was 177.6 billion
gallons in 2004.) Petroleum accounts for about 98% of EU transport fuels; biofuels
comprise slightly more than 1%. Based on a 2001 forecast, the European Commission
(EC) expects vehicle fuel use in the EU to reach 325 MMT by 2020. In addition, under
the Kyoto Protocol the EU has committed to an 8% reduction of carbon dioxide (CO )
2
emissions by the end of 2012.3 Various analyses have suggested that both biodiesel and
bioethanol produce substantially less CO emissions (depending on the particular
2
feedstock) than their fossil fuel counterparts. With these facts in mind, in 2005 the EC
set a goal of replacing 20% of conventional motor fuels with alternate fuels (e.g., biofuels,
natural gas, and hydrogen fuels) by 2020.
EU Biofuels Production
The EU produced an estimated 768 million gallons of biofuel in 2004 (
Table 1)
compared with U.S. biofuel production of 3.4 billion gallons (mostly ethanol).4 Biodiesel
accounted for nearly 80% of EU biofuel production. Germany produced over half of the
EU’s biodiesel. France and Italy are also important biodiesel producers, while Spain is
the EU’s leading bioethanol producer.
The supply of feedstocks is crucial to the success of the EU’s biofuel strategy
because they represent the primary cost component in the biofuel production process. The
major feedstock for EU biodiesel production has been rapeseed oil, although almost any
vegetable oil or animal fat (including restaurant deep-fry grease) is viable. In 2004, EU
biodiesel production used about 4.1 MMT of rapeseed, or 27%, of a record EU crop of
15.3 MMT.5 In 2004, the EU harvested oilseeds on an estimated 7.5 million hectares of
which 60% was rapeseed, 29% sunflowerseed, and 4% soybeans.
EU bioethanol is generally produced using a combination of sugar beets and wheat.
In 2004, EU bioethanol production used 1.2 MMT of cereals out of total EU production
of over 289 MMT of grains and 1 MMT of sugar beets out of 123.5 MMT of sugar beet
production. In the long run, abundant domestic supplies and production potential for
cereals and sugar beets suggest that bioethanol production likely has greater potential in
the EU than does biodiesel. However, high-production costs of EU-produced biofuels
(due primarily to high-priced internal feedstocks) relative to fossil fuels remain a major
impediment to market-based expansion of EU biofuel production, particularly for
1 EC,
The European Union’s oil supply situation (Oct. 2000) and outlines of a strategy for the
future, at [http://europa.eu.int/comm/energy/oil/index_en.htm].
2 L’institut Français du Petrol,
Panorama 2005, “Road Transport Fuel in Europe: the Explosion
of Demand for Diesel Fuel,” available at [http://www.ifp.fr/IFP/en/ifp/ab.htm].
3 Renewable Energy Access; “Legislation to Spur European Biofuels Market,” Oct. 18, 2005.
4 For more information on U.S. agriculture-based biofuel production, see CRS Report RL32712
Agriculture-based Renewable Energy Production.
5 EU feedstock levels are from EC Memo/06/65, Brussels, 8 Feb. 2006. EU production data for
wheat, rapeseed, and vegetable oil are from USDA, FAS,
PSD database, Feb. 9, 2006; sugar
beets are from USDA, FAS, GAIN Report No. E35080, Apr. 4, 2005.
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bioethanol. According to the EC, EU-produced biodiesel breaks even at oil prices of
around 60 ($71.60) per barrel, while bioethanol becomes competitive with oil prices of
about 90 ($107.37) per barrel.6 During February 2006, a barrel of oil — Europe Brent
spot price FOB — was quoted at $60.73/barrel.7
Table 1. EU Biofuel Production by Member State, by Fuel Type
Biodiesel
Ethanol Total
Country
2002 2003 2004
2002 2003 2004
2002 2003 2004
Million gallons
Germany
141
224
324
0
0
7
141
224
330
France
114
112
109
30
27
34
145
139
143
Italy
66
85
100
0
0
0
66
85
100
Spain
0
2
4
59
53
65
59
55
69
Denmark
3
13
22
0
0
0
3
13
22
Czech Republic
22
22
19
2
0
0
23
22
19
Austria
8
10
18
0
0
0
8
10
18
Sweden
0
0
0
17
17
17
17
18
18
Poland
0
0
0
22
20
12
22
20
12
Un
ited Kingdom
1
3
3
0
0
0
1
3
3
Slo
vak Republic
0
0
5
0
0
0
0
0
5
Lithuania
0
0
2
0
0
0
0
0
2
Intervention Stocksa
0
0
0
0
23
29
0
23
29
Total
355 470 604
130 141 164
484 612 768
Source: EurObservER, No. 167, May-June 2005; as reproduced from EC Memo/06/65, Brussels, 8 Feb.
2006. Note: Conversions to million gallons from 1,000 metric tons undertaken by CRS.
a. Under the CAP, the EU is obligated to purchase, at intervention prices, many qualifying crops offered
by farmers and traders who are unable to sell at a higher price on the private market.
EU Policy Measures Affecting Biofuels Production and Use
The EU’s Common Agricultural Policy (CAP). EU crop production patterns
have traditionally been heavily influenced by the CAP with its high support prices,
planting restrictions, intervention buying, stock management, and rigid border controls.
International trade agreements have also been influential on cropping decisions. Reforms
enacted since 2003 have removed many of the previous distortions in EU commodity
markets. However, EU policies and programs remain important in providing support for
the agricultural sector. Presently, the CAP includes rules on agricultural land use, as well
as a special payment for the production of crops dedicated to biofuels.
Blair House Restrictions. The 1992 Blair House Memorandum of
Understanding8 (Blair House Agreement) between the United States and the EU helped
to resolve a mutual dispute over EU domestic support programs that impaired U.S. access
6 EC, “An EU Strategy for Biofuels,” Com(2006) 34, p. 5. Note: on Mar. 13, 2006, a Euro ( )
was trading for $1.193, Pacific Exchange Rate Service, Univ of B.C. at [http://fx.sauder.ubc.ca/].
7 U.S. Dept. Of Energy, Energy Information Administration, at [http://www.eia.doe.gov/].
8 For more information on the Blair House MOU see USDA, FAS, U.S. Mission to the European
Union, at [http://useu.usmission.gov/agri/oilseeds.html].
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to the EU oilseed markets and thus facilitated completion of the Uruguay Round
Agreement for agriculture. Specifically, the Blair House Agreement limits the amount of
EU oilseed production for food on non-set-aside land, and for non-food (i.e., industrial or
energy) purposes on set-aside land. Set-aside-based oilseed production is restricted to
roughly 0.7 million hectares (MHA).9 However, the EC believes that, pursuant to CAP
reforms undertaken in 2003, it is no longer subject to the Blair House limitations on
oilseed production.10 In 2005, rapeseed production intended for use as biodiesel feedstock
was grown on 1.8 MHA including 0.9 MHA of set aside.
CAP Land Use Rules. Under the CAP, EU farmers are required to set aside 10%
of their land to qualify for other CAP benefits. Participating farmers receive a set-aside
compensation payment.11 In addition, EU farmers are allowed to plant oilseeds on the set-
aside land (subject to Blair House Agreement limitations) as long as it is contracted solely
for the production of biodiesel or other industrial products and not sold into either food
or feed markets.
Energy Crop Payments. In 2003, a new round of CAP reforms established a
special aid for energy crops grown on non-set-aside land. Energy crops — those grown
for the production of biofuels or for use as biomass in the production of electric and
thermal energy — were eligible for a premium of 45 per hectare. To establish a
budgetary ceiling on such outlays, the energy payments were to be restricted to a
maximum guaranteed area of 1.5 MHA.12 If fully implemented on 1.5 MHA, the program
would cost 67.5 million. In 2005, an estimated 0.5 MHA received the energy crop
payment.
Sugar Sector Reform. On February 20, 2006, the EU adopted significant reform
measures for its sugar sector including a 36% cut in the internal sugar support price,
elimination of the intervention system of sugar purchases, and partial sugar production
quota buyback. The sugar reforms could impact biofuel feedstock availability since they
substantially reduce internal sugar beet production incentives.13 However, much of the
potential decline in sugar production could be offset by a drop in EU sugar exports which
are restricted to not more than 1.273 MMT annually (compared with an estimated 7.1
MMT in 2005/06). In addition, two reform provisions are likely to positively impact the
availability of sugar beets as a biofuel feedstock: first, sugar beet production now qualifies
for both set-aside payments when grown as a non-food crop and for the energy crop aid
of 45/HA on non-set-aside area; and second, sugar used for the production of bioethanol
9 Set-aide oilseed production is limited to a volume that, after crushing, would produce a quantity
of protein meal no greater than 1 MMT of soybean meal equivalents or about 0.7 MHA; based
on the following assumptions: rapeseed is the primary oilseed grown on eligible set-aside land;
average rapeseed yield is 3.1 metric tons (mt) per hectare; average protein-meal extraction rate
is 58%; and 1.28 mt of rapeseed meal equals 1 mt of soybean meal.
10 USDA, FAS, GAIN Report No. E35172, Sept. 9, 2005.
11 Council Regulation (EC) No. 1251/1999, Article 6(1), May 17,1999.
12 Council Regulation (EC) No. 1782/2003, Title IV, Chapter 5, “Aid for Energy Crops,” Sept.
29, 2003, p.29 (O.J. L270, 21/10/2003).
13 For more information, see the USDA, FAS, GAIN Report No. E35225,
EU Agrees Sugar
Reform, Nov. 30, 2005.
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will be excluded from sugar production quotas. Despite the reforms, the EU’s internal
sugar prices are expected to remain substantially above international market prices thus
preserving it as an expensive feedstock.
EC Directives. In recent years the EC has attempted to focus increasing attention
on the development of the EU biofuels sector.14 Three principal legislative directives
governing biofuels use, taxation, and quality have been issued recently by the EC to guide
Member State agriculture-based renewable energy production.
Biofuels Use Directive. In 2003, the EC established a goal of deriving at least 2%
of EU transportation fuel from biofuels by the end of 2005, then growing the biofuels
share by 0.75% annually until December 31, 2010, when it would reach 5.75%.15
However, the biofuels goal is not mandatory and individual Member States are free to
establish higher standards. As a result, the degree of participation varies substantially
across EU Member States. Because the targets are not mandatory, no penalty for
noncompliance is involved; however, Member States are expected to report annually those
measures undertaken to aid compliance as well as on the sales of both total transport fuel
and the share of biofuels. Despite various State and EU-wide policies designed to support
biofuels production, the EU biofuels goal of 2% by 2005 was not achieved. Instead, it
appears that biofuels attained an EU-wide share of only about 1.4% of transport fuels.
Energy Taxation Directive. In 2003, the EU’s framework for the taxation of
energy products and electricity was amended to allow Member States to grant tax
reductions and/or exemptions in favor of renewable fuels under certain conditions.16
However, to minimize the tax revenue loss for Member States, the final tax on biofuels
intended for transport use may not be less than 50% of the normal excise duty.
Fuel Quality Directive. In 2003, the EU’s environmental specifications for market
fuels was amended to establish specifications for petrol and diesel. The new specifications
encompassed the incorporation of biofuels. The European Committee for Standardization
(CEN) has set limits on biodiesel blending to no more than a 5% share by volume (or 4.6%
in energy terms) for technical reasons.17 As a result, this appears to be an issue that the
EC will need to resolve to achieve its goal of a 5.75% share of transport fuel by 2010.
EU Biofuels Trade
Biomass productivity — whether sugar cane for bioethanol or palm oil for biodiesel
— is highest in tropical environments. As a result, biofuel production costs are relatively
lower in a number of developing countries, most notably ethanol production in Brazil.
However, global trade in biofuels remains fairly small relative to both biofuel demand as
well as to traditional fossil fuel trade. In 2004, the EU imported nearly 825,000 gallons
14 For example, see EC Directives “A Biomass Action Plan,” Com(2005) 628, and “An EU
Strategy for Biofuels,”Com(2006) 34, at [http://europa.eu.int/comm/agriculture/biomass/biofuel/
index_en.htm].
15 Council Directive 2003/30/EC of 8 May 2003 (O.J. L123, 17/5/2003).
16 Council Directive 2003/96/EC of 27 October 2003 (O.J. L283, 31/10/2003).
17 Standard EN 590 as discussed in EC Memo/06/65, Brussels, 8 Feb. 2006.
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of bioethanol.18 About 36% of this volume was imported as normal Most-Favored Nation
(MFN) trade and subject to import duties of 10.2/hectoliter ( 0.39/gallon) on denatured
alcohol (HS Code 220720) and 19.2/hectoliter ( 0.73/gallon) on undenatured alcohol (HS
Code 220710). Brazil is the largest ethanol exporter to the EU with all of its exports made
as MFN. During the 2002-04 period, 25% of EU ethanol imports were from Brazil.
During the 2002-04 period, about 64% of EU ethanol imports entered under
preferential trade arrangements including the Generalized System of Preferences (GSP),
the Cotonou Agreement (ACP), Everything But Arms (EBA) initiative, and others.
Pakistan, with a 20% share of EU ethanol imports, is the largest ethanol exporter under
preferential trade arrangements. Other ethanol exporting countries that benefit from EU
trade preferences include Guatemala, Peru, Bolivia, Ecuador, Nicaragua, and Panama
(unlimited duty-free access accorded under special drug diversion programs); Ukraine and
South Africa (GSP); the Democratic Republic of Congo (EBA); Swaziland and Zimbabwe
(ACP); Egypt (Euro-Mediterranean Agreement); and Norway (special quota).
EU imports of biodiesel are subject to an
ad valorem duty of 6.5%. Since biodiesel
production outside of the EU is still limited there has been no significant external trade in
biodiesel. However, to relax pressure on rapeseed oil production, biodiesel producers
have begun sourcing feedstocks from foreign sources. Since 1999, EU imports of palm
oil (primarily from Malaysia) have more than doubled to 4.5 MMT in 2005 (representing
18% of world palm oil imports).
Policy Summary
Although the various EU-wide policies discussed above encourage common goals
across Member States, there exists considerable State-level variation in terms of the degree
of participation in biofuel requirements, incentives, production, and use. In addition, EU
oilseed production remains constrained by suitable land and growing conditions, as well
as high domestic costs of feedstocks relative to foreign producers. As a result, trade of
both biofuels and biofuel feedstocks is likely to play an increasingly important role in the
EU in the future.
For More Information
European Commission, Energy,
New and Renewable Energies, available at
[http://europa.eu.int/comm/energy/res/index_en.htm].
European Biodiesel Board — a non-profit organization established in January 1997 to
promote the use of biodiesel in the EU, at the same time, grouping the major EU biodiesel
producers. For more information see [http://www.ebb-eu.org/].
European Biomass Industry Association — an international nonprofit association that
supports European biomass industries, at [http://p9719.typo3server.info/97.0.html].
USDA, FAS, U.S. Mission to the European Union, “Biofuels,” available at
[http://useu.usmission.gov/agri/Biofuels.htm].
18 EC, “An EU Strategy for Biofuels,” Com(2006) 34, Annex V.