Biofuels Face Uncertainty in Europe

Source: By ART PATNAUDE And CASSIE WERBER, Wall Street Journal • Posted: Thursday, September 12, 2013

Move Aims to Ease Fears of Rising Food Prices

BRUSSELS—The European Parliament voted Wednesday to limit the use of biofuels in the European Union, one of a series of potential changes to the bloc’s climate-change policies that investors say are creating uncertainty and bottling up energy investments.

The Parliament approved a proposal to limit the share of food-based biofuels in cars and trucks to 6% of total consumption by 2020. This means that to meet its target of having 10% of Europe’s transport energy come from renewable sources by then, the EU would have to rely on a much-faster expansion of electric cars and commercially unproven biofuels made from nonfood crops.

The decision—which must still be approved by EU governments before it can take effect—would represent a turn away from 4-year-old rules meant to encourage the use of biofuels, a general term for gasoline and diesel substitutes derived from plant matter.

Such fuels are increasingly seen by experts, including at the European Commission, as diverting farm production away from food crops, thus potentially driving up food prices.

The debate over biofuels comes at a time when Europe’s economic weakness has trumped global warming as a top concern for policy makers, leading to an uncertainty that investors say has made them hesitant to invest in longer-term projects.

“We need a clear and stable energy-policy framework or else power-sector investment will dry up,” said Craig Mackenzie, investment director and head of sustainability at the U.K. life-insurance and pension firm Scottish Widows Investment Partners.

The EU’s flagship climate-change program, the Emissions Trading System, a market in which European companies trade rights to produce carbon dioxide, has seen prices collapse in recent years, thus offering little incentive for polluters to embark on expensive efforts to reduce emissions.

Later this year, the European Commission—the EU’s executive—is expected to propose that the bloc significantly scale back its ambitions in the area of climate change.

Current policy for 2020 includes pledges to reduce carbon-dioxide emissions to 20% below 1990 levels. Targets established for 2050 aim for CO2 emissions at least 80% below 1990 levels, as well as nearly eliminate emissions from the electricity sector.

The commission will lay out plans for how Europe should reach these targets, laying out goals for 2030 for reducing greenhouse gases, boosting renewable energy, and cutting total energy consumption.

Those proposals could have great influence over how Europe generates its power during the next decade. But one major question will be whether to make the 2030 targets mandatory or merely recommendations.

Günther Oettinger, the EU energy commissioner, has said there is no longer the same political consensus on combatting climate change as there was in the relative boom year of 2007, when the 2020 legislation was passed.

The EU’s energy policies officially shifted in May to take more account of economic considerations. EU leaders approved proposals aimed at keeping EU businesses competitive by addressing high energy prices, which some companies have said could force them to move operations abroad.

The International Energy Agency, based in Paris, in June declared uncertainty related to renewable energy policies in Europe to be “public enemy No. 1” for investors.

A new proposal is also expected to emerge this fall to try to fix the carbon-trading market, which started in 2005. An oversupply of permits has limited the market’s utility and seen prices for emitting a ton of carbon drop to around €5 ($6.65) from more than €30 in 2008.

The biofuels debate was “very difficult,” said Corinne Lepage, the lawmaker who had been driving the legislation, adding that because the vote was so close, industry still would not have “certainty regarding its investments.”

The European Biodiesel Board, representing producers, said industry should not be punished based on “inconclusive science.”

The ultimate place for biofuels in EU policy remains uncertain. The decision could spur development of so-called second-generation biofuels, which move away from food crops.

The European Bank for Reconstruction and Development advocated in March the use of fuels made from agricultural waste such as straw and manure. Growing nonfood plants such as grasses, and harvesting algae from water, are also possible.

Negotiations with European governments over the biofuels ceiling will now ensue. If a common position isn’t agreed on, the issue will go back to the Parliament.

The EU climate-change proposals are officially the responsibility of the commission’s departments of energy and climate change, which themselves don’t always see eye to eye.

But the weak economy has increased the influence wielded by Olli Rehn, the economics commissioner, and Joaquín Almunia, who heads the bloc’s antitrust unit. Both have argued that the commission’s proposals shouldn’t undercut the region’s economic competitiveness, according to EU officials.

Some groups, including energy-intensive industries, argue that strict climate targets for 2030 would increase energy costs and become a drag on growth. Environmental groups say that a lack of binding targets will allow fossil fuels to remain the dominant source of energy, making it harder to meet the EU’s 2050 targets.

Not all industries oppose climate regulation. Some companies would stand to benefit. For instance, the insulation industry says strict efficiency targets would tackle EU’s climate goals, while boosting jobs and economic output.

Barry Lynham, group director of strategy and communication at Knauf Insulation, said that EU laws requiring building upgrades would “fundamentally change our perspective,” and could lead his company to build new factories in the region.

“Insulation is very driven by regulatory environments,” Mr. Lynham said. Knauf is active in 35 countries and the biggest insulation firm in the U.K.