Europe's biofuel dispute splits the industry

BRUSSELS Tue May 3, 2011 8:41am EDT

BRUSSELS (Reuters) - A divisive European debate over the green credentials of biofuels has stalled investment and threatens the future of some producers, but could also create lucrative opportunities, companies said on Tuesday.

After a two-year investigation, the European Commission has decided that the complex issue of "indirect land use change" (ILUC) can lessen carbon savings from biofuels. In July it may announce moves to curb the least sustainable -- possibly by raising an EU-wide sustainability benchmark.

"Such a factor would render the European biofuel industry no longer viable," the European Renewable Ethanol Association and the European farmers' body Copa-Cogeca said on Tuesday. "ILUC is far too complex an issue for any quick policy fix."

The battle over ILUC has thrown into doubt EU plans to create a $17 billion annual market for biofuels from producers such as France, Germany, Brazil, Malaysia and Indonesia.

"It has sent a lot of signals to investors that the policy environment is uncertain," Kare Riis Nielsen, head of EU affairs at Danish enzymes producers Novozymes, told Reuters. "The whole industry is suffering from that."

But the very greenest of biofuels, such as the next-generation biofuels Novozymes is involved in creating, could also benefit from the EU's review of biofuels strategy.

"What's most important now is that we come out of this with crisp, clear signals to the investment community and consumers," said Nielsen. "ILUC could create a window of opportunity."

WHAT IS ILUC?

The concept of "indirect land-use change" is relatively new, and still being developed, so it is not surprising that industry is reluctant to accept it.

In essence, it means that if you take a field of grain and switch the crop to biofuel, somebody somewhere will go hungry unless those missing tonnes of grain are grown elsewhere.

The crops to make up the shortfall could come from anywhere, and economics often dictate that will be in tropical zones, encouraging farmers to cut out new land from forests.

Burning forests to clear that land can pump vast quantities of climate-warming emissions into the atmosphere, enough in theory to cancel out any of the climate benefits the biofuels were meant to bring.

The Commission has run 15 studies on different biofuel crops, which on average conclude that over the next decade Europe's biofuels policies might have an indirect impact equal to 4.5 million hectares of land -- an area the size of Denmark.

Some in the biofuels industry argue that the science is flawed and that the issue could be tackled by a major overhaul of agricultural strategy to improve productivity or by pressing abandoned farmland back into action.

Waste products from biofuels production can also be fed to animals, reducing the pressure on land resources.

EU sources say July's announcement by the European Commission will broadly endorse the green credentials of bioethanol but raise questions about some sources of biodiesel.

It will also create pressure to speed up the adoption of next-generation biofuels from agricultural residues such as straw, which do not create ILUC and are no longer just a dream, says Novozymes.

"It's not yet cost-competitive, but it will be," said Nielsen. "The volatility of oil prices makes it a tough guess, but probably by 2020 it can compete with gasoline."

However, the EU biofuels strategy has so far failed to help next-generation fuels take off and needs tweaking, he added.

"There is no longer a technical barrier. It is a political barrier. We need to incentivize the best performing biofuels. We need support for those that take the first-mover disadvantage."

(Reporting by Pete Harrison, editing by Jane Baird)

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