Key Elements of EU Sustainability Criteria for Biofuels

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Vertical UK LLP London Geneva Branch – 21-23 rue du Clos 1207 Genève - Suisse
Tel. +41 22 317 00 40 – Fax +41 22 317 00 43 – www.verticaluk.com
FO LICHT WORLD ETHANOL CONFERENCE 2011
Presentation by Hubert de Biolley
Slide Two: Presentation Introduction and Outline
To assess the future potential of markets for
sustainable and non-sustainable biofuels we must first
establish what “sustainability” means.
An academic definition – like that of the University of
California – focuses on the ability to provide an on
going and uninterrupted supply without damaging
ecosystems or compromising the capacity of future
generations to meet their own resource needs. To
paraphrase the old adage – it is about continuing to produce the golden eggs while
preserving the health of the goose that lays them.
But in practice, sustainability is not so easily defined – it means different things to
different people. Definitions of what makes a biofuel sustainable and the processes
under which sustainability is proven and then certified vary widely across markets.
Today we will explore these various definitions of sustainability, identify and examin the
sources of sustainable biofuels and look at the potential market impact of the
splintered approach to sustainability across global markets.

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Slide Three: Biofuels Sustainability in
California
USA and California Biofuels policy has to date
focused on meeting the incorporation targets set
under the Renewable Fuels Standard. However, there
has not been regulation of GHG emissions reductions
or the sustainability of the production processes
used to grow the feedstocks and transform them in
to ethanol.
This all changes from January 2011 when California introduces measures to reduce the
carbon intensity of its transport fuels. The legislation developed by CARB (California
Air Resources Board) imposes fuel suppliers or “regulated parties” to reduce the
emissions of the fuels they supply by 10% by 2020.
Sustainability requirements will not be restricted to simple emissions reductions. A
committee was established in March 2010 to evaluate and develop more stringent
sustainability criteria. The Committee will report back in May 2011 and deliver a first
draft of the provisions to CARB by December 2011.
Slide Four: Biofuels Sustainability under the US EPA
In the USA, nationally, the EPA is also developing
sustainability criteria for biofuels under its Renewable
Fuels Standards 2 program. RFS2 provisions establish
minimum GHG reduction requirements for each
biofuel type.
Like the Californian legislation, the EPA’s framework
includes the treatment of Indirect Land Use Change
but the calculations for each pathway are different to
those established by CARB – leading to two separate, and at times potentially
inconsistent, sustainability systems for biofuels within the one nation.
Conventional (or Corn Based) ethanol must provide an emissions reduction of 20% to
qualify for Renewable Fuel Identification Numbers (RINs). Advanced Biofuels, which

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could be met by existing imports of sugar cane ethanol, must reduce emissions by
50% and cellulosic ethanol must reduce emissions by 60% to allow them to count
under RFS2.
RFS2 is also focused on ensuring that biofuels are produced from “renewable
biomasses”. To be classed as a “renewable biomasses”, it must be produced from
feedstock produced on land that must have been cleared prior to December 2007.
Slide Five: Emissions Grandfathering
Suppliers who provide product that is produced in
facilities that were built or planned (either in the US
or outside) prior to December 2007 and use
feedstock grown on agricultural or forest land that
was cleared prior to this time do not need to meet
the GHG emission reduction standards.
Unlike the “grandfathering” provisions in the EU
legislation, which we will look at soon, there is no
phase out period for grandfathering in the US. In
effect, if you are producing ethanol from a pre-December 2007 plant (which includes
some plants that were not actually completed by that time) then you can produce
ethanol without any restrictions on GHG emissions …..forever!
But then again, aren’t the Elderly often to be excused for emissions?

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Slide Six: Key Elements of EU Sustainability
The EU has been the leader in the development of sustainability criteria.
Under the Renewable Energy Directive (RED - effective from December 2010), producers
and suppliers may only supply renewable fuels that can prove to reduce GHG emissions
by a minimum of 35% and although a “grandfathering” clause applies for existing
facilities it is phased out by 2013. By 2017 emissions must be reduced by 50% and
new plants are required to lower emissions by 60% or more by 2018.
Emissions reduction requirements are only the beginning of the criteria with the RED
establishing a range of ecological and social criteria that producers must also meet.
Producers must demonstrate that land with high carbon stocks including Wetlands, high
biodiversity land and Forests have not been converted to manufacture their biofuels.
A range of social principles and criteria also need to be reported on including
measures guaranteeing worker’s rights, safety standards as well as the rights of
indigenous land holders.
Slide Seven: Sustainability in Practice – the German Model
As producers and suppliers are required to comply
with EU RED, they have also to comply with their
national legislations. Germany is the first to
establish a biofuels sustainability framework under
the European RED.
Germany is to implement its sustainability system
from 1 January 2011. By this date, all biofuel sold
Key Elements of EU Sustainability Criteria
• No raw material from
undisturbed Forest
• Highly diverse grassland
• Nature protection areas
• Cross Compliance with
CAP
• Soil, water, air quality
• Monitor impact on food
prices
• No Conversion of
• Wetlands
• Forest
•  Peat land
• 35% reduction
• 50% by 2017
• 60% by 2018
GHG
Emissions
Reductions
Protect
Land with
High
Carbon
Stocks
Protect
Land with
High
Biodiversity
Good
Agricultural
&
Economic
Practices

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into Germany must have their production and distribution process registered by the
German Federal Institute for Agriculture and Nutrition (the BLE).
To do so, producers or traders have to be certified by a recognized certification body
and must after this obtain a Sustainability Proof of Compliance from the BLE for each
parcel sold to German users. Already several bodies, such as ISCC and RedCert, have
been recognized by the BLE as certification systems.
Whilst the UK, the Netherlands, Belgium and France are likely to follow Germany early
in 2011, the EU Commission is yet to set any penalties for failing to comply with the
Directive – so it is likely that many other EU states will be slow in applying the
directive and it will take most of 2011 or even longer to implement.
Slide Eight: Diversity in Sustainability in Asia
In Asia, while there have been progressive moves to
ensure that biofuels exports from the Asia region will
meet the sustainability requirements being
implemented in the EU, there has been more limited
progress in establishing domestic sustainability
requirements.
India and Thailand are yet to develop or adopt any
formal certification process for biofuels or to
implement specific GHG reduction targets for biofuels
used in transport but they have each undertaken studies to determine potential
feedstock availability and environmental planning.
China also has introduced broad targets on GHG reductions but to date, they have not
imposed specific targets for transport fuels nor developed a framework for other
sustainability measures.
In Korea, targets of GHG emissions reductions of 30% by 2020 have been announced
but here again without specific GHG reduction targets for transport fuels.

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In Japan, the country’s ministry for Energy, Trade & Industry is closely watching
developments in Europe and has committed itself to a minimum cut in GHG emissions
of 50% by 2017 in line with the EU’s adopted strategy.
The Australian state of New South Wales has adopted compliance with the
Sustainability Criteria of the Lausanne-based Roundtable on Sustainable Biofuels as part
of its mandated biofuels consumption while Queensland, which was to introduce a 2.5%
mandate from 2011, just announced its decision to delay the introduction of a ethanol
mandate, and is yet to indicate its approach to biofuels sustainability.
Slide nine: Sustainability of Sugarcane Ethanol
Sugarcane ethanol is one of the best commercially,
economically and socially sustainable options
available.
Ethanol yields from sugarcane are in excess of 8,000
litres per hectare, production costs are competitive
with existing fossil fuels and its GHG emission
reductions can compete even with cellulosic ethanol.
The sugarcane ethanol supply chain already emits
80% less CO2 than fossil fuel. Developing transport infrastructure in the form of rail
lines and designated fuel ethanol pipelines will lower these emissions even more. Cane
sugar bagasse provides a source of low emission energy produced for ethanol
production and for co-generation electricity that is being fed into the grid for domestic
and industrial use. Bagasse also provides some of the best prospects for a
commercially sustainable cellulosic ethanol feedstock.
Slide Ten: Sustainability of Corn & Grain Ethanol
In a global market until recently dominated by
export trade in sugar cane based ethanol, it is
easy to forget that corn and other grains
including wheat, barley and sorghum are the
feedstock of choice in the majority of the world’s
domestic production of ethanol.
Sustainability of Sugarcane Ethanol
Sugarcane
Low
Emissions
Best
prospects as
a cellulosic
ethanol
feedstock
Gov’t
regulate
environment
& social
outcomes
Industry self-
regulation
Leader in
national &
multi-
national
initiatives
Company
sustainability
& social
Initiatives
Bagasse
provides low
emissions
renewable
energy
Emissions under
the EU’s RED

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Agricultural yields of corn and grains have continued to grow over recent years –
ensuring a constant improvement in the amount of land required to grow a gallon of
ethanol and reducing the need for further land clearing. Recent studies argue that
Indirect Land Use Change generated by corn ethanol production are negligible.
Efficiencies at the factory level have also allowed for improved yield from a set
quantity of corn or other grain. And by allowing production to be based closer to
major fuel markets, grain based ethanol is able to reduce the amount of emissions
created in transporting biofuels to end-destination.
But perhaps the greatest contribution that the use of corn, grains and other sources of
ethanol feedstock production can make, are their ability to increase the diversity of
biofuels feedstocks.
Slide Eleven: Diversification of Feedstock Supply
No one feedstock alone can conceivably meet the
growing demand for sustainable biofuels production
and relying upon one feedstock alone will generate
greater volatility of supply.
As recent events have shown, having alternative
sources of ethanol from different origins and
feedstocks can help to protect the supply to key
import reliant markets. When supply tightness in Brazil
last season restricted the availability of product from
the world’s major exporter, traders were able to source product from other regions like
the US, Pakistan or Eastern Europe to ensure supply. This also helped balance prices
paid by consumers, lessening the impact on market demand.
The media often likes to categorize biofuels into good and bad varieties but that
approach is naive and simplistic and it ignores the huge advances that have been
made in recent years. There is no one biofuel feedstock that outcompetes all others
in terms of sustainability and, as we shall see later, each has it’s place in meeting the
growing demands for a sustainable low carbon future.

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Slide Twelve: Markets with No Sustainability Requirements
To demonstrate the different emerging “families” of
sustainable biofuels, we have adopted a simplified
approach.
Firstly those markets that have yet to impose specific
restrictions on GHG emissions or sustainability criteria
on the biofuels used in their markets. These include:
Brazil, US - pre-2007 facilities, China, India, Pakistan,
Philippines, Middle East, and Australia.
Total consumption in these markets equates to over 77 million cubic metres or over
90% of total current biofuels consumption. By 2020, if none of these markets were to
adopt sustainability measures then this market segment could grow to 120 million cubic
metres or more. This is unlikely, given the growing focus on sustainability leading to a
possible “domino effect” once sustainability rules become established and some
harmonization in standards occurs.
Slide Thirteen: Transitional Markets
A number of countries are effectively sending a
“warning signal” to suppliers, having imposed national
targets to GHG reduction. We have categorized 1.66
Million cubic metres or 2% of the world market for
biofuels in this group.
However, these markets will have completed their
transition to “fully sustainable” by 2020, most probably
adding another 12.450 Million CBM of sustainable fuel
ethanol demand.

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Slide Fourteen: Markets with Existing Sustainability Rules (2011)
Countries and markets leading the charge to
introduce sustainability requirements include segments
of the US market as well as the EU and other
associated Western European markets like Norway or
Switzerland. They have combined annual
consumption of around 7.035 Million CBM. That
represents around 8% of total world consumption.
By 2020, this could grow to at least 29.925 Million
CBM. As we have indicated earlier, they will be
joined by those countries currently developing their sustainability criteria and many of
those who are yet to embrace GHG Emissions reductions requirements and additional
sustainability criteria.
While these markets only represent around 8-10% of current consumption they
represent a much larger percentage of the current global trade in ethanol for use as
biofuels – closer to 60%. Markets like the EU, Japan, California and the market for
Advanced Biofuels in the US also represent the greatest growth potential for global
ethanol trade.
Slide Fifteen: Trade Flow Impacts
What does this vast array of different legislations
and variable timings give us? In short, it gives us
chaos. Many markets are still giving a “green light”
to biofuels without any form of definition of
sustainability or guarantee of emissions reductions
but, as we have seen, more and more markets are
introducing new measures.
It is important to recognize that while there is a high level of potential demand in
many countries or groups of countries, many are looking to meet their domestic biofuel
requirements from their own production. In fact, this may be a reason why some

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countries are slow to move on establishing sustainability requirements for their own
domestic markets – they don’t want to risk placing a requirement on biofuels that may
place their domestic production at risk from imports.
Until there is a harmonization and streamlining in sustainability rules and regulations
across continents, countries and markets; producers and traders will need to be aware
of the different standards applicable in each country or region. The differing
sustainability standards will present opportunities for arbitrage trades.
During the transition phase to a more unified system, if ever, price premiums should
develop for biofuels sold into markets with higher standards. Traders may then be
presented with opportunities to target specific markets and standards with specific
products. In times of limited supply, markets with the highest “sustainability premium”
are likely to attract supply and other “non-sustainable” markets may be forced to pay
more to attract product.
However, if markets aren’t prepared to “pay up” for sustainability in times of limited
supply, the trade will not be encouraged to supply these markets and countries may
eventually fail to meet their expansion targets for biofuels consumption leading to an
continued reliance on traditional fossil fuels or the development of non ethanol based
alternatives to fossil fuels.
Slide Sixteen: Review & Conclusion
While a harmonized approach may develop with time,
in the short-to-medium term, the wide variety of
biofuels legislation requires producers and traders to
constantly keep abreast of the latest changes, and to
tailor their supply to meet the requirements of each
market they are selling into.
This creates an increasingly heavy burden for
producers, traders and end user who are trying to
comply with those regulations and compliance will be at a cost and will limit biofuels
market development. Biofuels must remain an economically sustainable alternative to
fossil fuels and these measures could make it increasing difficult for ethanol to
compete on a fair playing field with their fossil fuel competitors that do not have to

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meet the same obligations. This begs the question; Where are the unified and global
sustainability rules covering oil exploration and extraction?
A globally sustainable biofuels market will benefit all the actors in the industry;
producers and traders alike. We have a moral obligation to assist in the development
and implementation of sustainability legislation while at the same time ensuring that it
will not stifle, with the erection of trade barriers, the industry it is aiming to develop
and grow. .
Slide Seventeen: Final Message
We have demonstrated during this presentation that
non-sustainable biofuels will not have a future, but that
their global introduction and harmonization will take
time. A lot of time.
A native American Proverb says: “We do not inherit the
earth from our ancestors, we borrow it from our
children.”
Biofuels offer hope in addressing the problems of climate change and finding
alternatives to dwindling fossil fuel resources. To truly achieve this aim, it must be
produced in an environmentally sustainable way. But unless the sustainability goals are
approached in a practical fashion with an emphasis on free trade, then there is a risk
of harming the very industry they aim to foster.
In the long term, ecological sustainability will also depend on economic sustainability.
Thank you for your attention.

Key Elements of EU Sustainability Criteria for Biofuels

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