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Biofuels Rulings Shift Geopolitical Landscape

Mackinnon Lawrence — January 17, 2012

A series of recent policy-related developments within the biofuels industry may have set the stage for what could prove to be a significant shift in biofuel geopolitics over the next decade. 

To recap: the European Court of Justice (ECJ) affirmed an earlier ruling that held the imposition of carbon taxes on flights touching down or taking off on EU soil did not infringe international law or the Open Skies Agreement; a U.S. District Court ruled that California’s Low Carbon Fuel Standard (LCFS) violates the U.S. Constitution; and the long-standing U.S. ethanol producer credit (aka “VEETC”) slipped quietly into the history books.   

Where do these developments leave the industry? 

While the inclusion of airline emissions in the EU’s ETS indicates that the buzz around aviation biofuels won’t fade anytime soon, the threat of costly trade wars by the United States and China in response to the ruling could put a crimp on the expansion of international biofuel trade flows. 

Meanwhile, just as the expiration of VEETC eliminates an estimated $6 billion worth of annual subsidies to the ethanol industry, the lucrative California fuel market is (at least for now) once again open for Midwest ethanol producers, and likely at the expense of Brazilian ethanol (more on this below).

On the whole, the decisions are generally good for advanced biofuels and corn-based ethanol alike. 

Aviation Biofuels Lack Production Volumes, Not Willing Buyers

In the case of advanced biofuels, the decision to uphold the carbon fee suggests that international carriers will not escape the added costs associated with doing business in Europe, adding further incentive to integrate carbon-cutting technologies.  As I discussed in an earlier blog, the combination of impending offset purchases and high oil prices appears to be forcing the aviation industry’s hand when it comes to fossil fuel alternatives, which has been signaling strong demand for sustainable advanced biofuels in recent years (note that first-generation biofuels lack the performance characteristics necessary to power commercial and military aircraft).

Although expected, the ruling is generally good news for energy feedstock producers looking to commercialize next generation feedstocks like camelina, jatropha, switchgrass, and algae, and seeking reliable markets and off-take contracts to offset the risk associated with growing relatively unknown crops.     

But the advanced biofuels story is not about lack of demand, which suggests that the ECJ decision may actually not have much impact at all.  In the case of the aviation industry, rising oil prices mean that demand for biofuel alternatives is deep, durable, and widespread.  Even without the EU tax, assuming adequate supply, price parity with petroleum-based fuels, and sufficient distribution logistics, aviation fuel buyers would be clamoring to lock-up every last drop of advanced biofuels production.

Meanwhile, with the threat of trade wars from the United States and China among others, costly tariffs and other punitive measures could actually stifle biofuels development, an unintended consequence of the aviation tax.      

Corn-based Ethanol Gets a Boost

Over on the other side of the pond, Judge Lawrence J. O’Neill’s December 29 decision declaring California’s carbon fuel standard unconstitutional represents a significant victory for Midwest corn ethanol producers (see my 2010 article on the LCFS and Green Federalism for more on the legal issues).  The California Air Resources Board’s (CARB) policy, introduced in 2007, aims for a reduction in the “life-cycle carbon intensity” of fuels consumed in the state by 10 percent over the next decade.  Due to corn ethanol’s inherent inefficiencies, the policy excludes most of the corn-ethanol produced in the United States from one of the world’s largest fuel markets. 

Implementation of the policy had led to the peculiar situation where Midwest ethanol producers were shipping their offending product 6,000 miles to Brazil to make up for a shortfall in sugarcane ethanol production.  Midwest corn’s exclusion from California, coupled with a national blending wall policy, put a serious constraint on U.S. producers’ scale-up ambitions.  The ruling may put corn ethanol back in the domestic driver’s seat, at least for now.      

Looking Beyond 2012

As discussed in Pike Research’s report, Biofuels Markets and Technologies, we expect the production of conventional biofuels – namely corn- and sugarcane-based ethanol – to increase steadily over the next decade as demand for alternatives to petroleum-based fuel outstrips advanced biofuels production volumes.  The corn-based ethanol industry appears to have established viability, and even without the VEETC, we foresee an increase in production as access to markets like California and the likely raising of U.S. blend walls (e.g. implementation of E15 or expansion of E85) opens up new opportunities for producers. 

The key question raised by these decisions: where will the production go over the next decade?  As corn-based ethanol ventures beyond VEETC, the industry will need to fight for market access at home and abroad despite this most recent victory.  Meanwhile, the EU may be positioning itself as the primary market for advanced biofuels at the expense of U.S. and China.     

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