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Policy Instruments directed at renewable transportation fuels – An international comparison
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Policy instruments directed at renewable transportation fuels – An international comparison
Stefan Grönkvist1, Philip Peck2, Semida Silveira1, Jonas Åkerman1 and Mårten Larsson1.
1 KTH Royal Institute of Technology, 2 Lund University
The production of transportation fuels from renewable primary energy sources requires ongoing support if it is to reach commercial maturity. The most common types of support are politically derived ‘policy instruments’. A variety of such instruments are applied in differing contexts in different parts of the world – in this project we describe and dissect policy instruments that have been used in Brazil, the EU (with prime focus on Germany), and the US. This work highlights strengths and weaknesses of a range of relatively universal policy instruments in these different contexts. As the political economy of biofuels these jurisdictions has evolved over past decades, and policy interventions have also changed, the analysis focuses on key points of change or major market inflections. Emphasis was placed on the following aspects of enquiry in particular:
• underlying motivations for policy interventions, how were they formulated, and how outcomes align with the initial objectives;
• how instruments supported the biofuels sector(s) in the short and longer terms;
• lessons of relevance to the promotion of renewable biofuels in Sweden.
This work is to contribute to the formulation of more efficient policy instruments in Sweden that better account for dynamic issues tied to feedstock, climate, technological and industrial development, infrastructure, regulations, and long-term political intent. It departs with a view that although produc-tion, infrastructure, and markets for biofuels in Sweden are of significant scale, they are still in an early stage of their development potential – and that biofuels policy must reflect this.
During the study period, the Swedish government proposed a new ‘hybrid’ quota system for biofuels with pure and high-level blended biofuels outside the quota system and retaining tax exemptions (in contrast to low-level blends). This has affected the deductions drawn for the Swedish way forward regarding biofuel-related policy instruments. Further, two important Swedish policy goals affect biofuel futures: zero net 2050 greenhouse gas emissions, and a fossil independent 2030 transport sector. While transportation biofuels will be part of the toolbox to reach both these goals, lack of clarity regarding their application to biofuels (particularly for the latter) make many questions regarding future policy instruments difficult to answer definitively.
Analysis of the three cases provided a range of contrasting insights that fall within three thematic areas:
• Synergies by design, multi-sectoral or cross-sectoral benefits, and delivery of other social or economic ‘goods’.
• Policy support stability but ‘flexibility’ over relatively long market development periods, with support for both infrastructure investments as well as development of fuel markets, production logistics and technologies.
• Trade-offs between effective/efficient quota systems that mainly support low-level blends and the combination of policy instruments necessary for high-level blend chains.
Synergies by design and multi-sectoral benefits: Synergistic effects stimulate biofuels and increased overall benefit accrues if several sectors gain from the development. Cases highlight a number of areas where biofuels development can be utilised to strengthen and diversify incumbent sectors while delivering socio-economic benefits in other areas (e.g. fiscal deficit and fuel dependence reduction, agricultural and transport sector stimulation, energy-sector development).
Multifaceted policy support and longer-term stability: Cases highlight the benefits of policy mixes that provide relatively stable support. Key stability parameters observed included multiple and flexible support mechanisms, lengthy time horizons for change, and guaranteed market spaces. Ongoing support matched by steady sector growth was mapped for Brazil and the US over more than 30-years, Policy support in these countries helped develop industry confidence, legitimacy, and private sector investment. In contrast, German experiences with rapid policy shifts in systems with high subsidy dependence caused immediate solvency problems and flow-on effects such as marked increases in investor doubt and increased investment risk premiums.
Trade-offs between quota systems for low-level blends and policy instruments that support high-level blends: Contrasting experiences with policies supporting high or low level blends point to a number of policy trade-offs. In Brazil, mid-high level blends have been supported by other initiatives such as a flexi-fuel vehicle programme and have large market shares. In contrast, frameworks in the US have not been conducive to the development of markets and infrastructure for high-blend biofuels is marginal and the US already faces ‘blend wall’ challenges, where the absence of extensive infrastructure and vehicles for high level blends constrains biofuels to 10% of the fuel mix. While quota based systems dominating in the EU can apparently deliver low-share targets for biofuels in total fuel mix, evidence is found that this may not set up the system that is required to deliver much higher penetration of fossil free fuels. This is an endeavour requiring considerable time and massive investment to develop and be accepted by the market.
That targeted efforts to achieve multi-sectoral benefits has proved to be important for the development of biofuel-chains elsewhere is very relevant for Swedish ways forward. Although some synergies between sectors is inevitable – as at least production, transportation, and distribution must be involved for a full biofuel chain, there are many other opportunities for synergies in Sweden. One vital component is the well-developed infrastructure for district heating that offers systemic advantages for integrated 1st and 2nd generation biofuel production processes that release large amounts of waste heat. Currently, there may also be a relatively positive business climate for integration of 2nd generation biofuel production with the Nordic forest industry, as it offers diversification opportunities to ameliorate decreased profitability in core business areas.
Considering the design of the Swedish hybrid quota system, the Swedish government seems to have taken note of fallout to events such as the rapid change from tax exemptions to a quota-based system in Germany. Some of the promising 2nd generation pathways in Sweden, such as the DME and second generation biogas, are still granted full tax exemptions. This is instrumental for the continued development of these options and an example of stable policy support as well as a trade-off between a quota system that secures low-level blends and a continued support for the pursuit of the high-level blends necessary to achieve the high ambitions for biofuels in the Swedish transport sector.
However, these ambitions, together with the activities most likely required to fulfil the targets with 2nd generation fuels will lead to a situation where capital costs are expected to become a more significant part of the total production cost. As such, it seems logical that the hybrid quota system will be insufficient. There will be a need for increased support for both R&D and for capital investment programmes. Target-specific policy instruments are also more effective to fulfil goals such as energy self-sufficiency and rural development than quota systems and tax exemptions.
Project outcomes
Grönkvist, S., Peck, P., Silviera, S., Åkerman, J., & Larsson, M. (2013). Policy Instruments directed at renewable transportation fuels – An international comparison. Gothenburg, Sweden: The Swedish Knowledge Centre for Renewable Transportation Fuels (f3 – fossil free fuels) 131 pages. July 2013
Research conducted for Chapter 7has been the basis of a new policy/industry study proposal currently under consideration for f3 funding. Project Title: Examining systemic constraints and drivers for production of forest-derived transport biofuels.
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... At the same time, pure f3 2015:11 16 or high blend-in biofuels are exempted from energy tax. According to Grönkvist et al. (2013) the policy instrument was designed to easily control the share of renewables (through the quota), to avoid tax losses for low blend in fuels, and to maintain the market for pure or high blend-in biofuels. The reason that the European Commission did not give the permission for state aid was the combination of the quota system together with the CO 2 tax exemption for biofuels. ...
... There are no large scale facilities in Sweden but a few pilot scale facilities for second generation ethanol exist (Staffas et al. 2013). US Government have supported large-scale plants with investment subsidies (Grönkvist et al. 2013;Stephen et al. 2014). If ethanol production is combined with a process that requires heat, e.g. ...
... Cellulosic biofuels (in practice ethanol from enzymatic hydrolysis) are also incentivized by policy instruments in USA who set targets expressed a certain minimum volume. However these volume have not been reached, partly because the technology is not yet commercially mature (Grönkvist et al. 2013). DME from BLG is much discussed and actors such as Volvo and Chemrec pursue this pathway. ...
Forest-derived methane may contribute significantly to a vehicle fleet independent of fossil fuels by 2030. At present, there is sufficient technical knowledge about energy conversion methods and several Swedish actors have investigated and prepared investments in production facilities, but the technology is not commercially mature yet and it needs support during a development period. Investments in the technology have become less favorable because of the drop in the oil price in 2014. In addition, the predictability of the policy instruments supporting production and use of renewable energy are perceived as low by investors. This report emphasize that these factors combined are major reasons why potential investments are postponed.
We have conducted a literature study and an interview study with three industry actors to answer the question “How can forest derived methane complement biogas from anaerobic digestion in the Swedish transport sector?” Interviews were mostly conducted in situ and in co-operation with the f3 project “Examining systemic constraints and drivers for production of forest-derived transport biofuels” (f3 2014-002370). The literature study included the recent development of renewable transport fuels in Sweden, existing and proposed policy instruments, and possible technical pathways from forest biomass to transport fuels.
Sweden has accomplished a high share of renewables in the transport sector – 12 % based on energy content or 17 % when accounting in accordance with the EU Renewable Energy Sources Directive (RES). Thus, Sweden has the highest share of renewables in the transport sector among the member states and has with a good margin accomplished the EU-RES target of 10 % renewables by 2020. The use of electricity in plug-in electric vehicles is not included in these figures and the number of electric vehicles is increasing rapidly.
The most common biofuels in transport are biodiesel, ethanol, and biogas. Biodiesel increases rapidly, mainly through low blend-in, and is now the most common biofuel in the Swedish transport sector. The majority is HVO (Hydrotreated Vegetable Oils), but the share of FAME (Fatty Acid Methyl Esters) is still considerable. The use of ethanol peaked during 2008 and has been decreasing since then. Ethanol is distributed through both low and high blend-in (E5 and E85).
The use of upgraded biogas in the transport sector has increased continuously since its introduction 1996. Upgraded biogas is complemented by natural gas to meet the vehicle gas demand. A voluntary agreement among the distributors maintains a minimum biogas share that corresponds to 50 %. The biogas share is much higher today (74 % by volume, average Jan.-Aug. 2015) and some large end-users use pure upgraded biogas. Upgraded biogas is mainly distributed in compressed form through gas cylinders (79 %), but also through injection to the natural gas grid (21 %). Very little biogas is distributed in liquid form (LBG).
Studies of the practical production potential shows that the current vehicle gas demand could be met entirely with upgraded biogas. However, an increased demand will eventually require other production pathways based on other feedstocks. Gasification of forest biomass is one such pathway. One alternative is that an increased demand is met with natural gas, resulting in fossil lock-in effects. Another alternative is a stagnated vehicle gas market.
Production of upgraded biogas and use in the transport sector have been promoted in different ways, e.g., demand on handling of waste that will promote anaerobic digestion, investment support to production facilities, support to distribution infrastructure, environmental car premiums, and exemptions of energy and CO2 taxes. The tax exemptions are only granted until the end of 2015 but the Swedish government has applied for permission to the European Commission for a tax exemption until the end of 2020. A biofuel may only be compensated to a certain level to comply with rules set by the European Commission. If the renewable alternative is cheaper because of tax exemptions or tax reductions it is considered as overcompensation and illegal state aid and the compensation has to be adjusted. This has in Sweden occurred for FAME, E5 and E85, but since the cost for biogas is almost twice that of natural gas, it is not likely that the tax exemptions for biogas will be considered as illegal state aid.
Among the suggested policy instruments in the FFF inquiry are the price premium model and the quota obligation. The government prepared for a quota obligation but it was later withdrawn because the European Commission considered it as illegal state aid when combined with Sweden´s current CO2 tax. These changes decrease the predictability for potential investors. The actors that we have interviewed propose different policy instruments to promote production of transport fuels from forest biomass: the price premium model, a quota obligation, or a system inspired by the tradable green certificate system. However, more important than the type of policy instrument is that the support is substantial and predictable during the pay back period of the investment.
There is a large potential in forest biomass for transport fuel production in Sweden. Different pathways, which result in different transport fuels, compete not only for the feedstock and the end-users, but also for financing, research & development funds, and the policy makers’ attention. This study suggests that:
• In order to attract investments in forest-derived methane, the vehicle gas market must continue to increase. Increased policy support directed at the demand may be needed. This is because the gasification technology is sensitive to economies of scale and the size of the facilities that have been considered are equivalent to the entire market for upgraded biogas. To invest in such a facility implies too large a risk given the size of the current demand and the uncertainties of the future market.
• If methane should be able to play an increasingly important role in a future transportation sector, the gasification technology need policy support during a development period.
• The predictability of policy support is perceived as low. The predictability is more important than the specific type of policy instrument to attract investments. The interviewees in this report suggest the following policy instruments for the support of forest-derived methane: the price premium model, a quota obligation, or a system inspired by the tradable green certificate system.
• The current low oil price decreases the likelihood for investments. Policy instruments that compensate for the oil price risk are needed, e.g. the price premium model.
• Swedish industry actors can realize the potential in forest biomass through production of transport fuels if beneficial conditions are given. Such a development does not only contribute to a vehicle fleet independent of fossil fuels but also to regional development.
... På 70-talet infördes programmet Proalcohol som stöttade hela värdekedjan -från odling av sockerrör i jordbruket till etanolproduktion. 1976 infördes en obligatorisk inblandningskvot på 11 % vilket säkrade en inhemsk marknad för etanolen ( Grönkvist et al. 2013 ...
... The proposed blend-in quota applied on gasoline and diesel and would gradually increase (Government of Sweden, 2013b) and the energy tax would apply to low blend-in biofuels but not to pure or high blend-in biofuels. According to Grönkvist et al. (2013), the instrument was designed to easily control the share of renewables (through the quota), to avoid tax losses for low blend-in fuels, and to maintain the market for pure or high blend-in biofuels. ...
... Th is has been heavily discussed in Sweden and is already used in a number of EU countries. 41 Such quotas typically involve an obligation for retailers to purchase a pre-determined amount (or share) of renewable fuels (e.g. in MWh). Th e advantage of a mandatory quota is that it creates a protected space for renewable fuels where they do not have to compete with fossil alternatives. ...
Abstract: This paper provides an innovation systems perspective on the combination of policy instru-ments that will be required to stimulate technological development in the advanced biorefi nery fi eld. We fi rst consult the established innovation policy literature, and provide a general framework that can be used to identify the type of policy instruments needed to develop new sustainable technology. In a second step, we illustrate how these general principles can be applied in the context of future biore-fi neries based on either the thermochemical or biochemical conversion of lignocellulosic biomass feedstocks. We draw heavily on the experiences of biorefi nery development in Sweden. A central con-clusion is that in Sweden, and elsewhere, there are few niche markets for advanced biorefi neries and a lack of long-term policy instruments for the more established renewable fuels. For this reason, there is a need for innovation policy instruments that create markets for renewable fuels and green chemicals, thus supporting technology development during a niche market phase and allowing for the fi rst com-mercial-scale plants to be built. The aim of such a policy would be to stimulate learning, form value chains, and experiment with various design options on a larger scale; this complements the use of technology-neutral policy instruments such as carbon pricing, which primarily promotes the diffusion of mature technologies. The policy instruments that are candidates for the niche market phase include, for example, public procurement and various types of price guarantees.
... The fact that the set target for 2020 is estimated to be exceeded ratifies the effectiveness of the Swedish policy measures in place. In fact, the country's policy framework not only recognizes biofuels as a reliable energy source but also explores their manageable integration into distribution networks as blended fuels (McCormick et al., 2012;Grönkvist et al., 2013). Yet, the current framework is not sufficient to guarantee the establishment of a vehicle fleet independent of fossil fuels by 2030. ...
The objective of this study is to present an analytical framework monitoring the development of the Swedish biofuels system, to evaluate its impacts on the achievement of 10% of renewable fuels by 2020, and to identify development patterns in order to establish a vehicle fleet independent of fossil fuels by 2030. The methodological approach relies on systems thinking approach and uses causal loops diagram as a guide to our analysis. The results show that policymakers have to decide among different pathways of growth based on internal- and external-resources of the Swedish biofuel system as well as to apply either supply or demand pressures onto the system in order to accomplish a vehicle fleet independent of fossil fuels by 2030.
The United States of America and Brazil are the world’s first and second-largest biofuels producers. The United States (U.S.) has dedicated a significant portion of agricultural land for crops to produce biodiesel, while Brazil has been using sugar cane as raw material to produce ethanol. To make the world’s top producers in global biofuel markets, various institutions in each country have played significant roles. These institutions include renewable energy legislators, bioenergy policymakers, and energy ministries of their governments. This study delineates the historical role of these institutions responsible for the sustainable development of biofuel industries in both countries. It also provides an overview of economic impacts as a result of institutional decisions. The study reveals that systematic legislations and sustainable and robust renewable energy policies of government institutions have helped the U.S. and Brazil to boost their bio-economies. As both countries intend to keep expanding their biofuel productions, the role of key government institutions is vital in the sustainability of biofuels.
Now organizations are always vulnerable to the liabilities of newness, but such pressures are especially severe when an industry is in its formative years. We focus on one set of constraints facing entrepreneurs in emerging industries-their relative lack of cognitive and sociopolitical legitimacy. We examine the strategies that founders can pursue, suggesting how their successful pursuit of legitimacy may evolve from innovative ventures to broader contexts, collectively reshaping industry and institutional environments.
in 2012, the German government plans to achieve the EU's renewable transport target mainly through the use of mandatory blending targets applied to the mineral oil industry for the use of biofuels. This study highlights that the prevalent policy interventions in Germany—mandatory blending requirements and tax exemptions — have a number of related costs. These costs are not necessarily linked to direct fiscal costs imposed on German government, but rather channelled through to the private sector and consumers.
The study provides an overview of Germany's biofuel market and discusses current trends and developments in German biofuel support schemes. A number of issues linked to the use of blending mandates and other biofuel support measures are investigated and, where possible, an estimate of the potential costs provided.
This paper provides an overview of the economics of biofuels. It starts by describing the remarkable growth of the biofuel industry over the last decade, with emphasis on developments in the United States, Brazil and the European Union, and it identifies the driving role played by some critical policies. After a brief discussion of the motivations that are commonly argued in favor of biofuels and biofuel policies, the paper presents an assessment of the impacts of biofuels from the economics perspective. In particular, the paper explains the basic analytics of biofuel mandates, reviews several existing studies that have estimated the economic impacts of biofuels, presents some insights from a specific model, and outlines an appraisal of biofuel policies and the environmental impacts of biofuels. The paper concludes with an examination of several open issues and the future prospects of biofuels.
The United States and the European Union have taken different paths in the design and implementation of biofuel policy measures. In the European Union, a target has been set for the contribution of renewable energy in transport use, but policy implementation mechanisms are diverse and decentralized. Mandatory targets have been approved voluntarily by several EU Member States, but these mandatory targets are national initiatives and not an obligation from the European Union. The US biofuel policy has specified targets in absolute quantities rather than in percentages of use, as was done in the European Union. Because of this quantitative target and the fact that the implementation is through a mandate rather than a less-binding target, compliance is assured, but different implementation problems may arise that may not occur in the EU system. In this article, we provide an analytical discussion on lessons learned from the current and previous EU and US biofuel policy mechanisms and consider the possibilities, opportunities, and challenges for future policy development in both economies.
For most of the Southern African Development Community (SADC) countries, energy security is a key developmental issue, given the limited capacity and supply of modern energy services. Fortunately, the region is bequeathed with abundant natural resources that can potentially be developed to support a thriving biomass energy industry. The development of modern biomass energy is likely to contribute to solving energy security concerns, improving rural livelihoods, and mitigating a number of environmental and socioeconomic impacts of current energy systems. This chapter explores the numerous opportunities and challenges associated with an expansion of biofuel production from the sugar industry as well as potential international trade implications. Current analysis shows that land is not a limiting constraint to bioenergy production from sugar resources. This chapter discusses possible implementation mechanisms to maximize the benefits of sugar resources through multiproduct strategies. One of the key issues to emerge from the analysis is the implementation of regional biofuel strategies to take better advantage of the complementarities in local, regional, and global biofuel markets.
A conceptual framework is advanced that determines world biodiesel prices, the policy parameters in the country establishing
the price, and the binding mandate or tax exemption. The effect of a tax credit differs with international trade compared
to traditional closed economy analysis. The U.S. “splash & dash” program, with its $1/gallon tax credit, had minimal impacts
on European Union (EU) biodiesel producer profits. Reduced world oil prices and EU tax exemptions, as well as increased rapeseed
oil prices, are shown to have reduced the profitability of EU biodiesel production. EU imports from the United States can
be beneficial for EU taxpayers, fuel consumers, and U.S. biodiesel producers.
The production of ethanol from corn is a mature technology that is not likely to see significant reduc-tions in production costs. The ability to produce ethanol from low-cost biomass will be key to making it competitive as a gasoline additive. If Department of Energy goals are met, the cost of producing ethanol could be reduced by as much as 60 cents per gallon by 2015 with cellulosic conversion tech-nology. This paper presents a midterm forecast for biomass ethanol production under three different technology cases for the period 2000 to 2020, based on projections developed from the Energy Infor-mation Administration's National Energy Modeling System. An overview of cellulose conversion technology and various feedstock options and a brief history of ethanol usage in the United States are also presented.
The rational for the launching of the Alcohol Program from sugarcane in Brazil in the mid-1970’s is described as an answer to the first “oil crisis” as well as a solution to the problem of the fluctuating sugar prices in the international market. The technical characteristics of ethanol as a fuel are given as well as a discussion of the evolution of the cost of production, environmental and social consequences. Regarding costs, ethanol production was close to 100 dollars a barrel in the initial stages of the Program in 1980 falling rapidly due to economies of scale and technological progress to half that value in 1990, followed by a slower decline in recent years. Considering the hard currency saved by avoiding oil importation through the significant displacement of gasoline by ethanol and the decrease in the amount of external debt that the displaced oil importation was able to provide it is possible to demonstrate that the Alcohol Program has been an efficient way of exchanging dollar debt by national currency subsidies which are paid by the liquid fossil fuel users. Even with this economic gains for society, the continuity of the Program is difficult to maintain. Two solutions to this problem are discussed: internal expansion of the use of ethanol and exports to industrialized countries where it could be used as an octane enhancer. The main attractiveness of the Program – the reduction of CO2 emissions as compared to fossil fuels – is stressed, mainly as a solution for industrialized countries to fulfill their commitments with the United Nations Framework Climate Change Convention.