Food crisis strengthens EU biofuel critics, may hasten deal

Wed Aug 15, 2012 8:05am EDT

* EU already has enough biofuel refining capacity

* Indirect land-use change dilemma goes on

* Non-crop feedstock requires higher investment

By Barbara Lewis and Ivana Sekularac

BRUSSELS/AMSTERDAM, Aug 15 (Reuters) - Drought-stricken crops and record-high grain prices have strengthened critics of the European Union biofuel industry, adding fears of a food crisis to their claims that it does not ultimately reduce carbon dioxide emissions.

The renewed anxiety adds to pressure on the EU's executive Commission to forge a deal this year to help ensure that EU biofuels do not clash with food production or the environment.

Such an agreement would remove some of the uncertainty that has hung over the multi-billion euro bioenergy industry during years of debate.

The U.N.'s Food and Agriculture Organization last week called for a suspension of U.S. ethanol quotas as a response to the impact of the worst U.S. drought in more than half a century on corn supplies and prices.

Ahead of a U.S. election, immediate change is unlikely. But the polemic highlights concerns that EU goals also stoke commodity volatility because they exaggerate inelasticity of demand.

"The U.S. situation should be a warning for the EU that our inflexible biofuel mandate can lead to food price volatilities, especially as we are currently converting 65 percent of our vegetable oils into biodiesel," Nusa Urbancic, programme manager at campaign group Transport and Environment, said.

In the European Union, far more than in the United States, the raison d'etre of biofuel is to lower carbon emissions. Urbancic and many other campaigners doubt it achieves that.

"Science has also shown that biodiesel can be worse for the climate than conventional oil, once indirect impacts on forests and peatlands are included," she said.

Action plans drawn up by EU member states predict that bioenergy, including biomass for power generation and biofuel for transport, will provide more than 50 percent of the EU share of renewable energy as part of 2020 climate goals.

Use of biodiesel - dominant in Europe, while ethanol prevails in the United States - is expected to double by 2020 to 19.95 million tonnes of oil equivalent (mtoe) from around 10 mtoe in 2010.

The EU already has enough refining capacity at more than 22 million tonnes to cope with the projected doubling in biodiesel demand, according to Rabobank.

But it faces daunting challenges in coming up with the investment and technology needed to move to feedstock, such as weeds, grass and waste stems, leaves and husks, that would take the pressure off grain supplies for food.

It also needs to find inputs that would no longer result in the clearing of environmentally-sensitive forests and wetlands to plant fuel crops, an issue known as indirect land use change (ILUC).

"When you look at the cost of it, the future is not bright. That's a very complicated field," Thomas Mielke, head of global oilseed research group Oil World, said.

The costs of moving to new feedstocks are hard to specify because of variables including volatile commodity prices.

"You can compare it with iPad; when it first came out, the price was much higher. But now the price has come down because of large-scale production," Rabobank analyst Justin Sherrard said.

POLICY CONFLICT

The European Commission has said it opposes anything that inflates food prices. What it hasn't worked out is how to ensure that its own biofuel policy does not have that distorting effect.

EU sources have said the Commission will attempt to get agreement before the end of the year on how to measure ILUC.

The aim is to clarify the impact of biofuel policies on displacing food crops or driving unwelcome environmental change.

Talks have so far failed to deliver a clear way of assessing the full climate impact of using biodiesel made from European rapeseed and imported palm oil and soy beans, which scientists say do not prevent climate change and could accelerate it.

For now, Energy Commissioner Guenther Oettinger has opposed raising a target of deriving 10 percent of transport fuel from biofuels, as part of an overall goal to get 20 percent of energy from renewables by 2020.

For an industry keen for investment certainty, that means such policy predictability as there is expires in 2020.

Apart from biofuels, bioenergy includes biomass, most commonly made up of wood pellets, for power generation.

It too has been overshadowed by criticism of its environmental credentials. But some say it has become a better economic bet than biofuels.

"I think the debate is shifting away from ethanol, and the focus is more and more on biomass opportunities that are profitable and less contentious," Tenke Zoltani, investment manager at Islan Asset Management in Geneva, said.

Drax Group Plc, operator of Britain's largest coal power station, has said it was moving forward with its plans to become a mostly biomass-fuelled generator.

At the same time, commodities giant Cargill opened in June a new starch-based ethanol plant in Bergen op Zoom, Netherlands.

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