BRUSSELS/SEVILLE A divisive European debate over the green credentials of biofuels has stalled investment, but the stalemate may soon be over for advanced biofuels and some types of bioethanol.
The debate over biodiesel, however, looks set to rage on.
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.
That is a problem, after the EU agreed to get nearly 10 percent of its road fuels from biofuels within a decade, creating a $17 billion annual market for biofuels from producers such as France, Germany, Brazil, Malaysia and Indonesia.
The battle over ILUC has poured doubt on the security of any new investments, but that could be ended this summer when the Commission announces moves to curb the least sustainable.
"The ILUC debate has been highly damaging for the industry," said Kare Riis Nielsen, head of EU affairs at Danish enzymes producers Novozymes. "The uncertain policy conditions on biofuels have stalled much needed investments in sustainable biofuels, particularly in next-generation biofuels."
The concept of "indirect land-use change" is relatively new, and still being developed.
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 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.
"People are talking about a domino effect to a very faraway place -- you can argue this, but any scientific modeling is very shaky," said Raffaello Garofalo, secretary general of the European Biodiesel Board.
The emergence of the Commission's strategy this summer should help end the political uncertainty, and allow investment to resume, but only in some sectors.
EU sources involved in the debate say a ranking is starting to emerge, giving the cleanest credentials to advanced bioethanol from farming residues such as straw. Next comes bioethanol from sugar beet and sugar cane, followed by the most efficient bioethanol from wheat.
"If you look at the rural agricultural models... it gives you a very strong indication as to which of the biofuels are likely to be more high-risk than the others," Richard Stark of British Sugar, said on the sidelines of the World Biofuels conference in Seville, Spain.
"It would appear... that biodiesel feedstocks do have some considerable risks," he added.
The Commission's new evidence will also create pressure to speed up the adoption of next-generation biofuels from agricultural residues such as straw, which do not compete with food and therefore do not create ILUC.
"Ethanol from wheat or maize straw has a reduction of about 80 percent in the carbon cycle, so not much analysis to be done there," said Manuel Sanchez Ortega, chief executive of Abengoa.
"The important part is whatever analysis may be done on cereal-based biofuel and that is where we still have to await the final conclusions," he told Reuters.
Abengoa runs a pilot plant in Salamanca, Spain, producing 5 million liters of ethanol a year from straw and plans a commercial plant of 100 million liters a year in Kansas.
But many industry players say Europe's political incentives are not enough to compensate for the risks and added costs of investing in new technology.
"The technology is available." said Kare Riis Nielsen of Novozymes. "Now we are facing a political barrier. The current policies are ineffective. A specific blending target or mandate for next-generation biofuels in all petrol is key."
The EU could also create new incentives during the current overhaul of agricultural policy, he added.
Novozymes has partnered Italy's Mossi & Ghisolfi Group plant in northwest Italy to turn farming residues into 50 million liters of advanced bioethanol a year.
But the European Commission, the body that first came up with the plan to get 10 percent of EU road fuel from biofuel, admits that investment is slower than hoped.
"We are lagging behind our schedule on flagship (plants)," said Commission research expert Bruno Schmitz.
When Europe decided to embrace biofuels in its quest to curb greenhouse gas emissions from transport and boost farmers incomes, many rushed to invest in biodiesel.
Over 50 percent of Europe's cars run on diesel and biodiesel refineries looked like a safe investment. But those assets now look at risk of becoming stranded, and the industry is fighting for its future.
Abengoa's Sanchez Ortega argues that since all biofuels are being judged against a benchmark of fossil-fuel emissions, regulators must be very careful to get that right.
"The comparisons are very harmful," he said.
Garofalo of the biodiesel board wants fossil fuels put under equal scrutiny to establish a fairer benchmark.
"Four million tonnes of oil spill in the sea each year -- what is the impact of that?" he said. "What about fossil fuel refining; the Exxon Valdez; the Gulf of Mexico spill, and the flaring of gases. What are the indirect impacts of that?"
(Writing by Pete Harrison)