The market situation and political framework in Germany for biodiesel and vegetable oil

December 2009

The final details compiled by the Federal Statistics Office and Federal Office of Economics and Export Control (BAFA) confirmed the drop in sales of biodiesel and vegetable oil in Germany in 2008 in comparison to 2007. Although utilization of biodiesel as an admixture component in fossil diesel fuel increased by 190,000 metric tons (MT) to 1.613 million metric tons (MMT), a slump of 739,000 MT in sales of pure fuel offset this positive development. In absolute figures: Whereas 1.821 MMT of biodiesel were marketed as pure fuel in 2007, only 1.082 MMT were sold in 2008, which equates to a reduction of 40.6%. Taking into consideration the increase in the utilization of biodiesel as an admixture, component sales of biodiesel fell overall by 16.9% from 3.245 MT in 2007 to 2.695 MT in 2008.

This negative sales development unfortunately also indicates the stark reduction in the number of public filling stations offering biodiesel. Whereas around 1,900 stations did so at the start of 2007 according to an AGQM (Arbeitsgemeinschaft Qualitätsmanagement Biodiesel e.V.) survey, this figure had fallen to around 250 by the end of 2008. Subsequently, the AGQM was obliged to discontinue quality assurance at the filling station level. Guided and supported intensively by UFOP (Union zur Förderung von Oel- und Proteinpflanzen) for around 20 years, this distribution channel was by far the most significant provision instrument for alternative fuel throughout Germany up to 2007. This network no longer exists, and given that each biodiesel filling station was an important public relations multiplier, biodiesel will also gradually disappear from the public eye. The pure vegetable oil (PVO) sector registered an even more dramatic slump in sales from 772,000 MT in 2007 to 418,000 MT in 2008, a drop of 46%.

Notable from the perspective of the biodiesel and PVO business sectors is the fact that-measured against overall diesel fuel consumption-these biofuels replaced 12.7% of the fossil diesel requirement in 2007 and 10.2% in 2008. As a consequence, the two fuels contributed to a CO₂ reduction within the transport sector of around 9 MMT in 2007 and 7.1 MMT in 2008. The federal government's national decarbonization strategy envisages a targeted reduction within the transport sector of 30 MMT of CO₂ per year from 2020. These figures show that the utilization of biodiesel and PVO is necessary if this climate protection target is to be achieved on time. As a result of the German Bundestag (lower house of German parliament) resolution to change the biofuels policy, a response is even more urgently needed to the question of how the reduction of biodiesel and vegetable oil utility can be compensated in light of climate protection mandates.

Bundestag sets the wrong tax policy agenda

Although the German Bundesrat (upper house of German parliament) vigorously campaigned to adjust tax concessions in favor of biodiesel and PVO-to once more provide a perspective  for the regional marketing of pure fuel and subsequently the small- and medium-sized plant operators-the federal government ultimately pushed through its Draft Law on the Amendment of the Promotion of Biofuels by way of the Bundestag resolution. As such, the mediating committee was overruled. Although the tax increase on biodiesel of $0.03 per liter was reduced retroactively to January 1, 2009, and for the coming years, this is not sufficient to ensure competitiveness given the price decline on the crude oil markets and, as a consequence, the diesel markets. Irrespective of the drastic drop in sales in terms of pure biodiesel (B100) and PVO, the Bundestag endorsed the government bill to change biofuel funding.

In its report on tax concessions, the UFOP recently established that pure biodiesel was undercompensated by $0.20 per liter. Moreover, in the case of the decentralized manufacturers of rapeseed fuel, the UFOP calculation shows an undercompensation of $0.28 per liter. In 2010, as a result of the Bundestag resolution, at least a halving of pure fuel sales must be anticipated if the diesel price remains at its present low level. The refusal to completely exempt public transport and rail traffic from tax has robbed pure fuel of a further future sales perspective.

In addition, the UFOP has reinforced its position that tax concessions from suppliers of petroleum products should specifically benefit the transport sector. In relation to the toll structure, the UFOP has also called for the promotion of climate protection by reducing tolls for companies that verifiably use biodiesel or PVO. Such a move would primarily boost regional sales for small- and medium-sized facilities, thereby providing a perspective for the structurally desired decentralization of raw material and biofuel manufacture. Significant for meeting quota mandates is that a certain quantity buffer in the form of pure fuel is available for generating tradable quotas; otherwise a punitive penalty of around €0.62 per liter may be imposed on incomplete quotas.

The Bundestag resolved in 2008 to reduce the admixture quota from 6.25 to 5.25% retroactively to January 1, 2009. This will be raised to 6.25% for the period 2010 to 2014. From 2015, Germany will be the first European Union (EU) country to introduce a CO₂ reduction quota. How this mandate is to be implemented and monitored remains, however, unclear. What is clear is that, from 2015 at the latest, CO₂ efficiency will be a determining criterion as regards the competitiveness of biofuel providers. As such, biofuel manufacturers should react to this situation as quickly as possible and calculate the CO₂ balance of individual plants to establish the reduction potential.

In terms of the Bundestag elections, of significance is the demand encompassed within the Bundesrat resolution of June 12, 2009, whereby the immediate creation of reliable legal and economic frameworks is required, with a commensurate, dynamic tax regulation adjusted to the market situation. Whether and how the new German government will provide tax framework conditions that are appropriately based on the market situation remains to be seen.

Renewable Energy Directive (EER) comes into effect

The energy and climate protection package was adopted in March 2007 within the scope of the German EU Council presidency. This envisages an average minimum 20% reduction of EU greenhouse gas emissions by 2020, a 20% increase in energy efficiency, and a 20% proportion of renewable energies within the energy mix. A subordinate obligatory goal for all member states is a renewable energy share of at least 10% for the transport sector from 2020. The EER proposal of the EU Commission and council resolution had to be approved by the European Parliament. Heated debate in the Parliament ultimately led to the compromise that verifiable sustainability criteria would be established as additional requirements, particularly regarding the use of vegetable oils for generating electricity and heat as well as for biofuel production. A prerequisite for national funding is the provision of evidence that biofuels and liquid bio-combustibles reduce greenhouse gas emissions by at least 35% in comparison to the emissions from fossil diesel fuel. This reduction figure has to rise to a minimum of 50% from January 2017, and at least 60% for new plants that are built after January 1, 2017.

Thus, a "CO₂ reduction gap" would exist in relation to biodiesel made from rapeseed as regards the required greenhouse gas reduction level. Consequently, to afford rapeseed a long-term opportunity to serve as a raw material for biodiesel production or as a fuel in a cogeneration unit, additional efforts to close this gap are needed throughout the life cycle, beginning with cultivation of the raw material and then through the processing stage to biodiesel production. Commensurate with this objective, the UFOP commissioned the German Biomass Research Centre (DBFZ) with a relevant project: "Optimization of the greenhouse gas balance of biodiesel." Noteworthy is the fact that "mixing" biofuels in relation to the balancing out of greenhouse gas emissions is only possible when the biodiesel produced using the respective raw material achieves a minimum 50% reduction in greenhouse gases! The Renewable Energy Directive was published in the EU Official Journal at the end of June 2009; member states have 18 months to incorporate the directive into national law.

German "Biofuels" Biomass Sustainability Ordinance

Germany is going its own way as regards to its incorporation of the directive into national law. The key requirements of the biomass sustainability ordinance for biofuels are set forth in paragraphs 4 to 7, which specifically concern the verification obligations and limits concerning biomass origin requirements:

1. No utilization of biomasses grown in areas deemed worthy of high-level nature conservation. These include: primeval forests and natural areas containing domestic tree species or areas in which no clearly visible signs of human activity are evident; and areas that are already conservation areas or are conserved within the scope of international agreements.

2. Grassland encompassing significant biological diversity.

3. Carbon-rich areas, e.g., moors, wetlands, or  permanently wooded areas.

4. No utilization of biomasses grown in areas that were deemed turf moors on January 1, 2008 (reference date).

5. Biomass cultivation must be carried out according to good professional practice (cross compliance).

Implementation of this ordinance is now generating discussion in the agricultural trade regarding its practicality and bureaucratic excessiveness. The background of the debate lies in the requirements of the EU directive and the aforementioned laws that stipulate the verification of sustainable biomass production via corresponding certification systems. Continuous proof of maintenance of these sustainability requirements has to be provided along the supply chain in the form of so-called mass balance systems. One question in particular is: under what contractual conditions must the raw material volumes be recorded at the first stage, the agricultural trade?

The motivation and origin of this debate are one of the reasons that an end-use-related verification is stipulated in the Biomass Sustainability Ordinance for biofuels. Previously, such verification was only required within the scope of the obligatory setting aside of fallow land and cultivating renewable resources on such land. The agricultural trade rightly demands that verification should be effected with as little bureaucratic involvement as possible and by way of requirements that go beyond cross compliance. Yet the directives and Biomass Sustainability Ordinances encompass supplementary requirements within the aforementioned paragraphs 4 to 7 that have to be adequately documented. These requirements have raised fears among agriculturalists that the bureaucracy will increase considerably. The Federal Office for Agriculture and Nutrition (BLE) is responsible for the implementation; however, in contrast to the obligation to set aside fallow land, it is apparent that in relation to implementation, the BLE is exclusively focusing on monitoring the "monitoring systems." Introduction and implementation of the corresponding certification systems at the first documentation stage and subsequent stages (oil mills, biodiesel manufacturers) are incumbent upon the relevant business sector, whereas the BLE merely approves the certification systems and monitoring posts.

Pressure from the relevant trade associations was nonetheless successful in ensuring that the new regulation would not actually apply to the 2009 harvest. As such, the ordinance stipulates that biomasses can be used for energy purposes without limit until June 30, 2010, that is, without verification. In Germany this relates to 1 million hectares of rapeseed crops, equating to around 3.5 MMT of rapeseed, as well as the domestically generated grain for bioethanol production. From July 1, 2010, onward, either proof of origin from the 2009 harvest or a sustainability certification will have to be presented. As such, the requirements stipulated in the Biomass Sustainability Ordinance only apply in full for the 2010 harvest. This ordinance will present all participants in the trade with enormous challenges. More­over, there is much debate regarding the enforcement of these requirements in terms of third-party countries. Yet it is notable that practically all the agricultural nations involved (which are also the most internationally significant biofuel manufacturers)-the United States, Brazil, Argentina, Malaysia, and Indonesia-are intensely debating the national introduction of certification systems. It is apparent that a level playing field is being created in the form of practically equivalent, international regulations for biomass cultivation and documentation obligations. Such regulations would have been unthinkable or impossible to implement in the past due to frequent criticism aimed at the World Trade Organization from the EU as regards unfair competition in the biomass cultivation sector. However, it is still too early for a conclusive evaluation

Dieter Bockey is with the Union for the Promotion of Oilseeds and Protein Plants reg. Ass., and managing director of the Working Group Quality Management Biodiesel reg. Ass. Contact him via e-mail at d.bockey@bauernverband.net .