Sustainability Criteria for Biofuels Workshop Slides Brian Denvir, E4tech October-December 2014

| Strategic thinking in sustainable energy

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Contents 1. Introduction 2. Setting the context

Background

3. Biofuels & the Renewable Energy Directive 4. Sustainability Criteria for biofuels & bioliquids 5. Verification of compliance with sustainability criteria 6. Implementation of sustainability criteria 7. Implementation options

Scrutiny of Articles 17-19 for biofuels Practical implementation

8. General discussion & close

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E4tech: Strategic thinking in sustainable energy • International consulting firm, offices in London and Lausanne • Focus on sustainable energy – expertise in biofuels & bioenergy • Established 1997, always independent • Deep expertise in technology, business and strategy, market assessment, techno-economic modelling, policy support… • A spectrum of clients from start-ups to global corporations

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We work on the major challenges facing bioenergy across the entire value chain • Land and resource use and competition • Infrastructure and regulation • GHG emissions, land use change and water

• Market requirements • Business and finance imperatives • Policy objectives • Policy mechanism and their effectiveness • Stakeholder engagement

Feedstock availability & sustainability

Technology proving & scale up

Market & policy development

Competitiveness

• Development needs and risks • Development stages, timing and learning • Demo and early commercial project needs, roll-out needs • Benefit and acceleration cases

• Competing energy chains and their costs • Resources costs and prices • Technology costs and projections • Financial incentives • Competitive advantage

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E4tech has worked with the UK Department for Transport since 2008 to implement sustainability criteria for biofuels • E4tech assisted the UK government in establishing a national system for the verification of biofuel sustainability criteria in 2008 • We provide ongoing support to the UK Department for Transport (DfT) on Sustainability & Greenhouse Gas issues related to the national system • We built and maintain a Biofuels Greenhouse Gas Calculator which suppliers in the UK and Ireland use to report

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Some key points to keep in mind throughout today’s workshop • All Member States (MSs) and Contracting Parties (CPs) can allow biofuels & bioliquids to be imported/produced domestically and consumed within their boundaries without restriction if they wish • However, in order to count towards national Renewable Energy targets (e.g. 10% RES in transport), biofuels & bioliquids must meet various sustainability criteria – requirement of RED • Each MS/CP must verify that biofuel & bioliquids supplied (both domestically produced & imported) have met the sustainability criteria, in order for the fuels to count towards the targets • This requires the establishment of a national system for verifying that sustainability criteria have been met along with some administrative body/unit to administer it • Biofuel/bioliquid suppliers will report to this administrative body/unit on the sustainability of all biofuel/biolquids they have supplied – reporting takes place after the fuel has been supplied and is often on an annual basis

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Objectives for today • Main objectives of the workshop are to: 1. Bring participants up to speed on the details of sustainability criteria for biofuels as set out in the Renewable Energy Directive 2. Discuss the options for establishing a national system for verification of these criteria Article in RED

Workshop section

17 – Sustainability criteria for biofuels & bioliquids

4

18 – Verification of compliance with sustainability criteria

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19 – Calculation of the GHG impacts of biofuels & bioliquids

4

20 – Implementing measures

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21 – Specific provisions related to energy from renewable sources in transport

6, 4

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Contents 1. Introduction 2. Setting the context 3. Biofuels & the Renewable Energy Directive 4. Sustainability Criteria for biofuels & bioliquids 5. Verification of compliance with sustainability criteria 6. Implementation of sustainability criteria 7. Implementation options 8. General discussion & close

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Why this section is missing • This section differs for each Contracting Party. For content on the status of biofuels in each Contracting Party see the individual summary reports

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Contents 1. Introduction 2. Setting the context 3. Biofuels & the Renewable Energy Directive • Introduction to Biofuels • The RED & FQD 4. Sustainability Criteria for biofuels & bioliquids 5. Verification of compliance with sustainability criteria 6. Implementation of sustainability criteria 7. Implementation options 8. General discussion & close

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Biofuels - an introduction Biofuels are fuels produced from biomass • E.g. Food crops, vegetable oils, cellulosic materials, biological fraction of wastes • Carbon source is biogenic Two most common fuels are ethanol & biodiesel • Ethanol, a gasoline substitute o Produced by fermenting the sugars in biomass materials such as cereal crops or agricultural residues o Ethanol is used in internal-combustion engines most often blended with gasoline • Biodiesel, a diesel substitute o Made by processing vegetable oils and other fats o Used in compression-ignition engines, most often blended with diesel

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Biofuels – Types and associated feedstocks First Generation (1G) Biofuels • Generally used to refer to fuels from food crops • Produced from starch (cereal crops such as wheat, maize), sugar (e.g. sugar beet, sugar cane) or oil crops (e.g. rape, palm oil) • Conversion technologies include fermentation and transesterification. Second Generation (2G) Biofuels • Generally used to refer to fuels from non-food crops • Often agricultural / forestry residues - cellulosic & ligno-cellulosic materials • Produced from cellulose, hemicellulose, lignin or pectin (i.e. non-food feedstock such as: wastes, agricultural and forestry residues, energy crops). • More energy intensive, greater cost (thermochemical and biochemical routes) • Same end product but arguably more sustainable. o Offers greater levels of GHG reduction. o Does not use food crops as a feedstock In addition, biofuels with advanced properties (HVO, FT Diesel, bio-jet, biobutanol, etc.)

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Biofuels typically deliver life cycle greenhouse gas savings over fossil fuels, but not in all cases Net-zero emissions from combustion o Biofuels are produced from biomass which captures carbon from the atmosphere o This carbon is returned to the atmosphere during combustion o The net emissions from fuel use are thus zero Life cycle GHG impact o In reality this cycle is never 100% closed o Emission from cultivation, harvesting, processing, transport & distribution all need to be accounted for Biofuels typically deliver life cycle savings over fossil fuels o The most efficient supply chains can deliver savings above 90% over fossil fuel alternatives

Source: http://www.besteurope.org/Pages/ContentPage.aspx?id=120

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Biofuels – Key benefits vs risks Benefits

Risks

• Potential to reduce GHG emissions in transport • Security of supply – less reliance on fossil fuels • Support a domestic industry (job creation, additional agricultural distribution channels, strengthen rural economies) • Use of wastes & residues • Lower particulate / pollutant emissions

• Fuel vs food competition – impact on food prices • Land-use impacts (ILUC) • Broader displacement effects (water, soil, biodiversity) • Potential negative social impacts (e.g. land grabbing) • Compatibility / fuel quality issues

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Current status of biofuels in EU – consumption has grown significantly over the past 10 years Consumption of biofuels in Europe 2003-2013 14,0

Million Tonnes of Oil Equivalent

12,0

2003 directive: 5.75% RE in transport by 2010

2009 directive: 10% of RE in transport by 2020

10,0 8,0 6,0 4,0 2,0 ,0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Ethanol (TOE)

Biodiesel (TOE)

Source: EurObserv’ER

Source: Eurostat

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Current status of biofuels in EU – almost 3% of all road fuel by energy content EU biofuel consumption and share of road transport energy 16,0

03%

14,0

03%

12,0 02%

Mtoe

10,0

02%

8,0 6,0

01%

4,0 01%

2,0 ,0

2003

2004

2005

2006

2007

2008

% of road transport fuel by energy content

2009

2010

2011

2012

2013

00%

Biofuel consumption (Mtoe)

Source: Eurostat

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Current status of biofuels in EU – Germany, France, Spain, Italy and the UK dominate demand Share of Ethanol consumption in 2012

Other EU countries; 22%

Share of Biodiesel consumption in 2012

Other EU countries; 29%

Germany; 29%

Poland; 06%

Germany; 18% UK; 15%

Spain; 07% Sweden; 07%

France; 21%

France; 14%

UK; 06% Poland; 07% Italy; 11%

Spain; 08%

Source: Eurostat

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Current status of biofuels in EU – oilseed rape is the dominant domestic feedstock for biofuel Feedstock underlying the European consumption of Biodiesel (2010)

Feedstock underlying the European consumption of Ethanol (2010)

7,0

03

6,0 02

Other

Other

Suger cane

RVO

4,0

Tallow Sunflower Seed

3,0

Palm Oil

Wine

02

Sugarbeet

Mtoe

Mtoe

5,0

Triticale 01

Rye

Soybean

2,0

Barley

Rapeseed

Maize

01

1,0 ,0

Domestic

Imported

Wheat

00

Domestic

Imported

Source: Chatham House

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Fiscal measures for biofuel support in the EU – two general approaches • The key distinction is between: o fuel duty exemptions – state / tax payer pays o mandate based market mechanisms - the industry incurs higher costs which are passed onto the consumer • Despite the variable success, partial or total tax exemptions for biofuels have been vital in promoting biofuels in EU. o All MS who have succeeded in achieving high biofuel penetration rates have had differentiating tax schemes in place o Exemption schemes have been most successful in MS with high fossil-fuel tax rates (Pelkmans, 2008) o Has nevertheless resulted in significant revenue losses for governments • Trend is towards mandates as governments are less keen to pay and it makes more sense that industry / consumers pay o Since 2005 twelve EU Member States, accounting for almost 90% of biofuel consumption in the EU, have switched from tax exemption schemes to obligation schemes • Biofuels were also initially supported through agricultural policies • E.g. the Energy Crop Scheme through the CAP - direct subsidy of up to 45€/ha for farmers

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Technical requirements for biofuel • In the EU any gasoline fuel (with or without ethanol blend) should meet the requirements of EN 228:2004, and any diesel fuel (with or without FAME biodiesel blend) should meet the EN 590:2004 standard. • FQD requires the following: o FAME biodiesel should meet EN 14214 o Max FAME blend of 7% by volume o Max ethanol blend of 10% by volume • Derogations can be made for blending levels (e.g. in Sweden). 20% blends likely to be acceptable once E20 standard is defined

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Contents 1. Introduction 2. Setting the context 3. Biofuels & the Renewable Energy Directive • Introduction to Biofuels • The RED & FQD 4. Sustainability Criteria for biofuels & bioliquids 5. Verification of compliance with sustainability criteria 6. Implementation of sustainability criteria 7. Implementation options 8. General discussion & close

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EU main policy mechanisms and their time of implementation

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Renewable Energy Directive 2009/28/EC sets out renewable transport target • Sets a minimum target of 10% for the proportion of final energy consumption in transport that should be from renewable sources by 2020. • … “all types of energy from renewable sources consumed in all forms of transport” should be taken into account. • However, in the calculation of the total amount of energy consumed by transport, only petrol, diesel and biofuels used in rail and road transport, as well as electricity, are relevant  Directive adopted by Contracting Parties in 2012 through Ministerial Council Decision 2012/04/MC-EnC

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Proposal for amendment of Directive 98/70/EC (FQD) and Directive 2009/28/EC (RED) – Communication 2012/0288, 19th October 2012 • …with the aim to limit the impact of ILUC emissions from biofuels, to improve the GHG performance of biofuel production processes, to encourage greater market penetration of advanced (“low ILUC”) biofuels, and including a requirement to account for estimated ILUC emissions. • The proposal limits the share of energy from biofuels produced from food crops (cereals, other starch rich crops, sugars, oil crops) to maximum 5% of the final consumption of energy in transport in 2020. It also proposes an increase in the minimum GHG savings threshold to 60% for installations in operation after 1st July 2014, and for older installations the fuels would have to provide GHG savings of at least 35% until 31st December 2017 and at least 50% thereafter. • Biofuels from feedstocks that are classified as “wastes” would have zero ILUC emissions.

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2012/0288(COD) - 11/09/2013 Text adopted by Parliament, 1st reading • During its first reading in the European Parliament, several key revisions were voted on and adopted: • A minimum 7.5% share of renewable energy in petrol by 2020 in each Member State. • The share of energy from biofuels from cereal and other starch rich crops, sugars, oil and other energy crops grown on land is capped at 6% of final consumption of energy in transport by 2020 • A sub-target for biofuels produced from more novel conversion technologies, with the final consumption of energy in transport to be met from advanced biofuels set at 0.5% in 2016 and 2.5% in 2020. • Issues still being debated by European Parliament and the ENVI committee However, RED target for 10% of final energy consumption in transport met from renewable sources by 2020 is still valid |

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Fuel Quality Directive 98/70/EC, as amended by Directive 2009/30/EC • The most recent amendment (by Directive 2009/30/EC) added a target for the reduction of lifecycle GHG emissions of these fuels as part of the integrated approach on CO2 and cars. • This target is set in Article 7a(2) and mandates Member States to ensure that energy suppliers reduce lifecycle GHG emissions (per unit of energy from fuel and energy supplied) by at least 6% by the end of 2020 (compared to the baseline in 2010). • Article 9 of the Directive indicates the potential source of savings that might be delivered in the supply of energy, as it notes that GHG savings could be delivered from “reductions in flaring and venting at production sites”, in addition to biofuels and other alternative fuels. Other options would be to reduce emissions from refining generally and to use less GHG intensive fuels. •

Rather than define biofuels itself, Article 2(9) of the FQD refers directly to the definition of biofuels used in the RED.

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Current state and key issues for biofuels in EU

 Policy uncertainty (cap on food crops, lack of targets beyond 2030?)  Issues regarding additional environmental concerns (ILUC) still not resolved  Demand stalling in some markets until policy uncertainty addressed  EU technology base is very strong and exportable  Some resources becoming limited, in particular Used Cooking Oils  Limited commercial progress with second generation fuels

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Contents 1. Introduction 2. Setting the context 3. Biofuels & the Renewable Energy Directive 4. Sustainability Criteria for biofuels & bioliquids 5. Verification of compliance with sustainability criteria 6. Implementation of sustainability criteria 7. Implementation options 8. General discussion & close

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Sustainability criteria – A summary of this section In this section we will look in detail at the requirements of Articles 17 & 19 (also Article 21) – the core elements of these Articles are known as the ‘Sustainability Criteria’

• The compulsory sustainability requirements of the RED are as follows: o Biofuels must achieve at least a 35% GHG emissions savings o Biofuels may not be made from raw materials obtained from land with high biodiversity value o Biofuels may not be made from raw materials obtained from land with high carbon stock • Special provisions are made for wastes & residues (e.g. double-counting) • Contracting Parties are required to prepare a ‘regional compliance report’ • Further requirements may be imposed related to Indirect Land Use Change • There are no specific compulsory measures related to broader environmental and social sustainability |

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Sustainability criteria – we will discuss the requirements in order of importance • Topics are grouped based on the level of priority they should be given: 1. Compulsory: Minimum sustainability criteria that biofuels must meet 2. Flexible: Issues which Member States/Contracting Parties have some flexibility to determine themselves 3. Undecided: Issues that have not yet been decided Subject Greenhouse Gas Criteria

Articles

Group

17(2), 19

1

17(3-5)

1

17(6)

1

17(1), 19(3), 21(2)

2

Regional Compliance Report

19(2)

2

Indirect Land-Use Change (ILUC)

19(6)

3

Broader Environmental & Social Sustainability

17(7)

3

Land Criteria Common Agricultural Policy Wastes & Residues

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Why do we need sustainability criteria for biofuels & bioliquids? • Biofuels are unique in the RED that in order count towards mandatory national renewable energy targets, they must comply with sustainability criteria • This is due to concerns about sustainability risks associated with biofuels: o Life cycle GHG savings – some biofuel routes can potentially result in increased GHG emissions compared to fossil fuels o Land-use impacts – risk that financial incentives could lead to conversion of high carbon/high biodiversity land (e.g. Forests) to agricultural land, defeating purpose of RED o ILUC – reliance on 1G biofuels to meet transport target could result in mass diversion of food crops to fuels => indirect land use impacts o Social sustainability – concern regarding land grabbing, food prices etc. • Thus mandatory sustainability criteria as well as precautionary measures regarding social sustainability feature in the RED

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Contents 1. Introduction 2. Setting the context 3. Biofuels & the Renewable Energy Directive 4. Sustainability Criteria for biofuels & bioliquids • Greenhouse Gas Criteria • Land criteria & Common Agricultural Policy • Wastes & Residues • Regional Compliance Report • ILUC & Broader Social & Environmental Sustainability 5. Verification of compliance with sustainability criteria 6. Implementation of sustainability criteria 7. Implementation options 8. General discussion & close

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GHG Criteria – from 2017 all biofuels must deliver at least 50% GHG savings over a fossil fuel comparator • Articles in the RED related to GHG criteria are 17(2) and 19 • In order to be considered eligible to count towards the 10% transport target, a biofuel must demonstrate GHG savings. • Savings are compared against a ‘Fossil Fuel Comparator’ figure = 83.8 gCO2e/MJ[fuel] • The required GHG savings depend on the production plant in which the fuel was produced: Plants in operation before January 2017

Plants in operation after January 2017

Today

>35%

-

From January 2017

>50%

>50%

From January 2018

>50%

>60%

GHG savings biofuels must achieve over FF comparator

• Thus from 2017 all biofuel must achieve ‘Carbon Intensity’ of 50% GHG reduction requirement

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GHG criteria - Use of default values – these can only be used in certain circumstances • A Default Value can only be used if: o A default value exists for the biofuel chain in question AND o The change in land carbon stock associated with the feedstock cultivation is less than or equal to zero AND o One of the following is true about the feedstock: a) it is a waste/residue OR b) it was cultivated outside the EC OR c) it was cultivated inside the EC in a ‘compliant region’ (see section on regional compliance report) • As well as default values, there are ‘disagreggated default values’ – separate GHG emission figures for the cultivation, processing & transport steps for suppliers that want to use a combination of default inputs and actual inputs

‘NUTS2’ regions of the European Union

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GHG criteria – if default values cannot be used, actual fuel chain emissions should be calculated • An Actual Value is a figure calculated by the supplier using a specific GHG calculation methodology and information from their own supply chain (e.g. crop yields, transport distances, energy use in processing steps etc.) • A GHG calculation methodology is set out in Annex V Part C of the RED. This defines the boundaries of the GHG calculation – all obligated reporters must follow this methodology when assessing their biofuel

Scope of GHG Calculation (Source: UK DfT)

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GHG criteria – the GHG calculation methodology is set out in Annex V of the Directive

Total Emissions from fuel use Emissions from extraction & cultivation Emissions from carbon stock changes from land-use change

Emission savings from soil carbon accumulation

Emissions from processing Emissions from transport & distribution

Emissions from fuel in use = 0

Emission savings from cogeneration

Emission savings from carbon capture & storage Emission savings from carbon capture & replacement

User-friendly tools exist to assist obligated parties carry out these calculations |

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GHG criteria – the GHG calculation methodology includes an incentive to use degraded & contaminated land for crops • The component of this methodology which accounts for ‘emissions from carbon stock changes from land-use change’ (el) contains a special bonus of -29gCO2e/MJ • This bonus is awarded if the raw material for the biofuel comes from ‘severely degraded land’ or ‘heavily contaminated land’ that has been restored • Note that the definitions of these land types have not yet been agreed, so in practice this bonus is not yet applied

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GHG criteria - a combination of default values & actual values – third option for reporting • Obligated parties can also report a combination of disaggregated default values and actual values, e.g.: Cultivation Emissions Actual Value

Processing Emissions

Transport Emissions

Disaggregated Default Values

• This approach can be used if: o A default value is > the required minimum (35%, 50% or 60%) o Feedstocks do not come from a compliant region (see section on regional compliance report) • For further information on whether to use approach a, b, or c see flow chart in Annex 1 of EC COM(2010/C 160/02)

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GHG criteria – there are pros and cons to each approach for obligated reporters and government

Approach

Pro

Con

a) Default Values

Simplest approach; Lower administrative burden

Value may be higher than actual fuel chain emissions

b) Actual Values

Better reflection of actual fuel chain emissions

Administrative burden in gathering data

c) Combination

Less data gathering required

Risk of ‘cherry picking’ data

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Contents 1. Introduction 2. Setting the context 3. Biofuels & the Renewable Energy Directive 4. Sustainability Criteria for biofuels & bioliquids • Greenhouse Gas Criteria • Land criteria & Common Agricultural Policy • Wastes & Residues • Regional Compliance Report • ILUC & Broader Social & Environmental Sustainability 5. Verification of compliance with sustainability criteria 6. Implementation of sustainability criteria 7. Implementation options 8. General discussion & close

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Land criteria - high biodiversity and carbon stock lands are protected • Articles in the RED related to land criteria are 17(3-5) • The land criteria prohibits the use of ‘raw materials’ (i.e. feedstocks) that have been obtained from land that was one of the following types on or after January 2008: o High biodiversity land:  Primary forest and other wooded land (where there is no clearly visible indication of human activity)  Natures reserves and other protected areas  Highly biodiverse grassland o High carbon stock land:  Wetlands  Continuously forested areas  Undrained peatland • Land criteria does not apply to wastes & residues other than agricultural, aquaculture, fisheries and forestry residues

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Common Agricultural Policy – existing environmental requirements of CAP must also be met • Article 17(6) requires any raw materials cultivated in the European Community that are used for biofuels to meet the environmental requirements of the Common Agricultural Policy • This includes upholding the requirements for good agricultural & environmental condition, as well as Council Directives on the following: o Conservation of wild birds o Protection of groundwater against pollution caused by certain dangerous substances o Protection of the environment, in particular of soil when sewage sludge is used in agriculture o Protection of water against pollution caused by nitrates o Conservation of natural habitats of wild flora and fauna o Placing of plant protection products on the market

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Contents 1. Introduction 2. Setting the context 3. Biofuels & the Renewable Energy Directive 4. Sustainability Criteria for biofuels & bioliquids • Greenhouse Gas Criteria • Land criteria & Common Agricultural Policy • Wastes & Residues • Regional Compliance Report • ILUC & Broader Social & Environmental Sustainability 5. Verification of compliance with sustainability criteria 6. Implementation of sustainability criteria 7. Implementation options 8. General discussion & close

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Wastes & Residues – there are various special provisions for biofuels derived from wastes & residues which encourage their use • Articles in the RED related to wastes and residues are 17(1), 19(3), 21(2). • There are various special measures made in the RED for wastes and residues: o Land criteria (17(1)): land criteria do not apply to wastes & residues other than agricultural, aquaculture, fisheries and forestry residues o Default values (19(3)): default values may be used for reporting the GHG impact of wastes and residues other than agricultural, aquaculture and fisheries residues o Double counting (21(2)): the contribution of biofuels made from wastes, residues, non-food cellulosic material and ligno-cellulosic material shall count double towards national renewable energy targets o No upstream GHG emissions (Annex V.C): wastes, agricultural crop residues and residues from processing shall be considered to have zero life-cycle GHG emissions up to the process of collection of those materials

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Wastes & Residues – no explicit definition of wastes or residues is provided in the RED. • The RED does not explicitly define wastes & residues, although the EC Communication on its practical implementation (2010/C 160/02) elaborates on the meanings: o Waste:...In this context waste can be understood as any substance or object which the holder discards or intends or is required to discard. Raw materials that have been intentionally modified to count as waste (e.g. by adding waste material to a material that was not waste) should not be considered as qualifying..... o Processing Residue: ...A processing residue is a substance that is not the end product(s) that a production process directly seeks to produce. It is not a primary aim of the production process and the process has not been deliberately modified to produce it. •

Discussions ongoing to define a definitive list of ‘wastes and residues’ that are eligible to count double towards the target - a new Annex will be added to the RED listing these feedstocks (Annex IX) |

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Wastes & Residues – many Member States support the use of wastes & residues by issuing ‘double certificates’ • Many Member States incentivise biofuels from wastes and residues by awarding fuel suppliers double certificates for such fuels – thus suppliers need to supply a smaller volume of biofuel to meet their obligation • Different feedstocks are eligible for double counting according to different Member States:

Feedstocks considered eligible for double counting in various Member States (source: ePure, 2013)

• There can be broader sustainability concerns with each of these waste feedstocks (e.g. risk of fraud, perverse incentive to produce more) so many Voluntary Schemes and member state systems require additional evidence to demonstrate sustainability |

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Wastes & Residues – summary of how special measures apply to different categories of feedstocks

Source: RTFO Guidance (2013)

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Contents 1. Introduction 2. Setting the context 3. Biofuels & the Renewable Energy Directive 4. Sustainability Criteria for biofuels & bioliquids • Greenhouse Gas Criteria • Land criteria & Common Agricultural Policy • Wastes & Residues • Regional Compliance Report • ILUC & Broader Social & Environmental Sustainability 5. Verification of compliance with sustainability criteria 6. Implementation of sustainability criteria 7. Implementation options 8. General discussion & close

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Regional Compliance Report – Article 19(2) requires Contracting Parties to produce a report on cultivation GHG emissions • Article 19(2) requires Contracting Parties to produce a report listing regions in which typical GHG emissions from cultivation are lower than the disaggregated default value for that feedstock • This list is determined by calculating typical emissions using data on yields, farming practices, soil types etc. • For example: for ethanol from wheat in the UK: o The disaggregated default value for cultivation for wheat is 23gCO2e/MJ[biofuel] o The UK report assessed all regions in which wheat is cultivated with a carbon impact Certification Example: the RSB EU RED scheme: 1) Operator / obligated party applies for membership 2) Operator prepares information in line with requirements of the VS 3) Operator identifies an accredited certification body 4) Certification body carry out audit of supply chain 5) If compliant certificate is issued (usually valid for 1 year) RSB EU RED scheme process. Source: RSB

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Voluntary Schemes – from a supplier perspective VSs have pros and cons • Pros: o Accepted by all Member States – simplifies verification burdens o Given guidance through complicated verification process by certification body o Some schemes have global recognition – reflects well on supplier’s product • Cons: o Costs can be prohibitive for smaller suppliers:  Certification fees: not all schemes but often there is 1) a membership fee and 2) a quantity-dependent fee (based on volumes certified). Costs vary depending on feedstocks. Progressive memberships (lower cost for smaller suppliers)  Internal adaptation costs: setting up systems for recording data  Auditing fees: certification body fees o Administrative burden imposed along supply chain |

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Contents 1. Introduction 2. Setting the context 3. Biofuels & the Renewable Energy Directive 4. Sustainability Criteria for biofuels & bioliquids 5. Verification of compliance with sustainability criteria • Voluntary Schemes • Mass Balance Reporting • Other reporting & auditing requirements • Bilateral & Multilateral agreements 6. Implementation of sustainability criteria 7. Implementation options 8. General discussion & close

65

Mass balance reporting – ‘mass balance’ is one type of approach to implement what is known as ‘chain of custody’ reporting • It is necessary to track carbon & sustainability data back to its original source to demonstrate that the biofuel meets the sustainability criteria • The method by which a connection is made between C&S information or claims concerning raw materials (or intermediate products) and claims concerning final products is known as the chain of custody (CoC) • Chain of Custody refers to the chronological documentation or paper trail showing the progression of physical or electronic evidence • The CoC normally includes all the stages from the feedstock cultivation up until the fuel is assessed for eligibility • There are several different possible chain of custody approaches: 1. Identity preservation (or track-and-trace) 2. Physical segregation (or bulk commodity) 3. Mass balance (units in = units out) 4. Book and claim (tradeable certificates) Reference: de Staaij et al (2012)

Increasing flexibility for suppliers

Decreasing level of certainty regarding origin

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Mass balance reporting – mass balance means certified volume in = certified volume out • To demonstrate compliance with the sustainability requirements, economic operators are required to use a mass balance chain of custody • Mass balance: o Physical mixing of certified and non-certified products is allowed – ‘consignment mixing’ o A physical link between all stages is required – each actor in the supply chain must keep track of the quantity of certified product it sources and sells o For each supply chain step, certified volume into supply chain = certified volume out of supply chain (taking into account conversion efficiencies)

Source: de Staaij et al. (2012)

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Mass balance reporting – all actors along supply chain required to collect sustainability information • Each actor along the biofuel supply chain, from the origin of the feedstock to the obligated party, needs to put in place the administration necessary to maintain the chain of custody – ultimately it is the responsibility of the obligated party to ensure that this happens

Source: UK DfT

• All EC-recognised VSs use a mass balance system and set out rules for record keeping and documentation. • The rules around mass balance vary for each Voluntary Scheme as well as each Member State national system. Clear guidance not always provided • Some MSs require mass balance at site-level, others at company / warehouse level

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Mass balance reporting – physical segregation approaches to CoC allowed, but not a ‘book and claim’ approach • More stringent approach to CoC such as physical segregation are allowed since they fulfil the requirements of mass balance (e.g. RSB EU RED allows for this approach) • However a ‘book and claim’ approach in which sustainability information is traded separately is not allowed

A ‘Book and Claim’ approach - sustainability information is traded separately from the physical consignments of feedstock/fuel. Source: de Staaij et al. (2012)

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Contents 1. Introduction 2. Setting the context 3. Biofuels & the Renewable Energy Directive 4. Sustainability Criteria for biofuels & bioliquids 5. Verification of compliance with sustainability criteria • Voluntary Schemes • Mass Balance Reporting • Other reporting & auditing requirements • Bilateral & Multilateral agreements 6. Implementation of sustainability criteria 7. Implementation options 8. General discussion & close

70

Reporting & auditing requirements – Article 18(3) sets out some specific details reporting systems must have • As well as requiring the use of a mass balance system in reporting, some other details of the reporting systems are specified. Member States are required to do the following: o Ensure that Economic Operators arrange for independent auditing of their information o Submit to the European Commission, in confidence, the above audit information provided by EOs o Provide a list of appropriate and relevant information which EOs should supply o Avoid imposing an excessive administrative burden on EOs (e.g. for small farmers) • All of these requirements make it essential that the Member State / Contracting Party provide some process guidance to Economic Operators

Cover of UK RTFO Guidance

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Contents 1. Introduction 2. Setting the context 3. Biofuels & the Renewable Energy Directive 4. Sustainability Criteria for biofuels & bioliquids 5. Verification of compliance with sustainability criteria • Voluntary Schemes • Mass Balance Reporting • Other reporting & auditing requirements • Bilateral & Multilateral agreements 6. Implementation of sustainability criteria 7. Implementation options 8. General discussion & close

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Bilateral & Multilateral agreements – another option for verifying sustainability but no experience with this to date • Member States can establish bilateral or multilateral agreements with ‘Third Countries’ to ensure the sustainability criteria are met – essentially state-negotiated agreements • At present none exist, for the following reasons: o Responsibility to establish agreements lies with government and is resource intensive (negotiations). With VSs responsibility lies with suppliers. o Voluntary Schemes allow more flexibility – supply not geographically-constrained o No clear implementation guidelines in RED – not clear how these would work in practice • Ultimately these agreements are more relevant to countries exporting to Europe (e.g. Malaysia, Brazil) rather than Member States and Contracting Parties with imports from multiple countries. • However this is an interesting unexplored option which may suit some • Would look similar to the EU FLEGT programme – bilateral agreements to prevent illegal logging |

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Contents 1. Introduction 2. Setting the context 3. Biofuels & the Renewable Energy Directive 4. Sustainability Criteria for biofuels & bioliquids 5. Verification of compliance with sustainability criteria 6. Implementation of sustainability criteria 7. Implementation options 8. General discussion & close

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Implementation of sustainability criteria– a summary of this section Every Member State has taken a different approach to implementing the sustainability criteria here we look at some of these approaches. In summary:

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Each Member State has established a ‘national system’ for verifying compliance with the sustainability criteria

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There are two general types of national system: 1. VOLUNTARY SCHEME BASED SYSTEMS – based solely on Voluntary Schemes 2. NATIONAL VERIFICATION SYSTEMS – combining Voluntary Schemes and other ways to demonstrate compliance

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National systems must strike a balance between: o Effectiveness of measures to ensure sustainability criteria are met o Administrative burden for suppliers (and government)

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Implementation – all Member States / Contracting Parties must establish some form of national system • Most EU Member States have implemented the biofuel sustainability criteria provisions of the RED, albeit in different ways • Each Member State has developed its own ‘national system’ which Economic Operators must use to demonstrate compliance with the RED • A national system will ideally involve an administrative body in order to: o Record sustainability claims and check that they are true o Ensure that any biofuel obligations are being met (if there is a mandate) • A recent report to the European Commission (Peters et al., 2012) recommended that national systems must strike a balance between: o Effectiveness – national systems must request sufficient information/evidence from obligated parties to provide assurances that the sustainability criteria have been met o Administrative burden - national systems must not request excessive / unnecessary information from obligated parties

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Implementation – there are two general categories of ‘implementation system’ 1. VOLUNTARY SCHEME BASED SYSTEMS – Member States that only allow the use of VSs 2. NATIONAL VERIFICATION SYSTEMS – Member States that allow the use of VSs and have developed a ‘national verification system’ to allow suppliers to ‘self report’ • Each Member State has taken a slightly different approach • MSs denoted by a * use national systems that link compliance with land criteria to the environmental requirements of the Common Agricultural Policy (e.g. land zoning to indicate REDcompliant/non-compliant regions) • Note German system applies before duty point Categorisation of Member State national implementation systems. VSS = Voluntary Scheme System NVS = National Verification System

Reference: Peters et al. (2012) Analysis of Member State RED Implementation

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Implementation example – the UK RTFO uses a ‘national verification system’ approach • The RTFO is an example of a national system in which EC Voluntary schemes are accepted and self-reporting of sustainability information is allowed • RTFO identified as one of the four most effective national systems (UK, Germany, Netherlands, Sweden) • RTFO is administered by a dedicated team in the UK Department for Transport (DfT) the RTFO Unit • Obligated parties are the fuel suppliers (when duty point is crossed) – they must report at least once a year on all biofuel supplied • Reports must be accompanied by a limited assurance opinion – a limited audit which must be carried out to a certain standard – an independent auditor will review the company’s data and provide the assurance opinion • Risk based sampling approach – auditing by DfT annually • RTFO is in principle a simple system – but details get complicated!! Industry needs guidance |

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Implementation example – the RTFO in practice • The UK has a biofuel mandate, currently 5% of road fuel supply •

5% obligation made on all fuel suppliers supplying >450,000 litres of fossil fuel per year

• Biofuel becomes subject to the RTFO at the point when the fuel becomes liable for excise duty – the ‘duty point’ • Suppliers can meet their obligation by doing one of the following:

Source: UK DfT

• The certificates (RTFCs) have value and can be traded between suppliers. At the end of the reporting year, each obligated supplier must have enough certificates or they must pay a fine (‘buy-out’) |

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Implementation example – obligated suppliers report the following information annually

Source: UK DfT

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Implementation example – most qualifying biofuel in the UK is certified under a Voluntary Scheme • In the UK most biofuel now meets a Voluntary scheme • UK only accepts EC approved schemes and UK benchmarked schemes (including the Hungarian National System)

Share of biofuel verified via a VS

Source: UK DfT

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Implementation example – Croatia has recently established its national system • 2020 RES-transport target transposed into dedicated Act on Biofuels for Transport • Annual biofuel targets included in Quota Obligation Rules (Rules on Measures to Encourage the Use of Biofuels in Transport) • Sustainability criteria transposed into Regulation on sustainability requirements for biofuel production and use • Croatia has established a National Verification System o All EC-recognised Voluntary Schemes recognised o Suppliers can ‘self-report’ – evidence requirements are quite stringent – all supply chain actors must maintain detailed records • Croatia imposes penalty fines on suppliers who do not meet their obligation (i.e. those who do not supply sufficient sustainable biofuel) • There are also tax exemptions for biofuels – no excise tax imposed on biofuels

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Implementation examples – some MSs have implemented limited national systems • Lithuania has implemented a very limited national system o Currently only EC approved VSs accepted o Information required in reporting is limited - focuses on volumes supplied, no other sustainability information requested as all local suppliers are ISCC certified o Unclear what measures are in place to check imported biofuels o Limited guidance provided. • Belgium has a more robust scheme based on VSs. o Recognise EC-approved schemes as well as VSs approved by the Belgian authorities and other national systems o Assume that land criteria are met automatically through compliance with the Birds and Habitats Directives o Reporting requirements are more detailed than Lithuania (sustainability information required including GHG saving)

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Contents 1. Introduction 2. Setting the context 3. Biofuels & the Renewable Energy Directive 4. Sustainability Criteria for biofuels & bioliquids 5. Verification of compliance with sustainability criteria 6. Implementation of sustainability criteria 7. Implementation options 8. General discussion & close

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Implementation options – a national scheme must be effective, without imposing a large administrative burden

Any national system should be both effective in ensuring that sustainability criteria have been met, without imposing a large administrative burden on obligated parties

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Implementation options – principle choice is between a Voluntary Scheme based national system or something more flexible Implementation approach

Advantages

Disadvantages

Voluntary Scheme based national system

Simplest approach – does not require design of national verification system; lower administrative burden

Additional costs could disadvantage small suppliers; limits options for demonstrating compliance. Need accredited bodies working in country (e.g. SGS)

National verification system (including Voluntary Schemes)

Flexibility for suppliers (can ‘self-report’); arguably more transparent for assessing eligibility

Resource required to design and administer scheme; technical knowledge required (e.g. GHG calculations)

Bilateral and Multilateral agreements

Flexibility in implementation (details not prescribed)

No experience to date; limited to a few countries; negotiations required to develop agreements

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Implementation options – important to consider the needs of all stakeholders when designing a national system • Government will likely prefer a national system that: o Is easy to implement and administer, given resource, budget and time constraints o Ensures that the requirements of the RED are met  A Voluntary Scheme based system is probably preferable • Economic Operators (e.g. Suppliers) will likely prefer a national system that: o Gives them flexibility to comply in different ways o Does not make excessive reporting demands o Requires as little change as possible to their practices at least cost  A flexible National Verification System is probably preferable • Non-Governmental Organisations will likely prefer a national system that: o Requires obligated parties to be very thorough in their reporting o Involved auditing  A comprehensive National Verification System is probably preferable Important to engage all relevant stakeholder in design of national system

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Implementation options – there are many other details to consider when designing any kind of national system • Regardless of whether a VS based system or national verification system is chosen, there are details which must be considered: o Obligated parties – who is obligated to report? o it is likely to be the fuel supplier / owner of the fuel at the border o Administrative body – should obligated parties report to a single body or several? o Simpler to report to a single body o Reporting information – what information is required of obligated parties? o The Commission have published a list of recommended minimum requirements o Reporting frequency – how often should they report? o Annually is typical, covering all consignments of biofuel supplied in that period o Auditing – what approach to auditing will be taken? o A simple risk-based approach or random auditing can both work o Penalty system – should suppliers be penalised for not meeting sustainability criteria? o Fines are an effective way of ensuring compliance

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Implementation options – some recommendations for national systems have been made in a recent report to the Commission High Importance • Reporting requirements which cover all RED requirements – a national system should require obligated parties to report all of the information required to confirm compliance – a suggested list has been published • Guidance documents – guidance should be given to obligated suppliers on how to report, AND IDEALLY to verifiers/auditors on how to assess as well • Auditing at some level - Voluntary Schemes will already involve some level of auditing – a national verification system should require some independent assurances to be given Significant Importance • Multiple ways to demonstrate compliance – multiple options for suppliers gives them greater flexibility – a national verification system is preferable • Well-defined mass balance system - guidance for obligated parties; limit on reporting period (36 months) • Report to a single administrative body – rather than report to several • One obligated party – official reporting under a national system should be limited to one party where possible • Robust penalty system - fines for non-compliance

Ref: Peters et al (2012)

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Implementation options – if implementing a national verification system, existing laws on environmental protection may play a role • Several countries allow suppliers to demonstrate compliance with the land criteria through existing national & European regulations: o Austria, Hungary, Latvia, Slovakia link compliance with land criteria to compliance with the CAP and its own legislation on nature protection o Belgium consider land criteria to be covered by existing European Directives • There may be existing environmental laws which may be applicable for domestic feedstock for meeting the land criteria (relating to forestry, biodiversity, agriculture?)

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Implementation options – some summary remarks • Any national system must be effective without imposing a significant administrative burden • The principle choice is between a Voluntary Scheme based system and a national verification system o The easiest option for government will be to implement a Voluntary Scheme based system o A national verification system gives greater flexibility to industry • Perhaps the most important thing to ensure in any national scheme is that reporting requirements are comprehensive enough to ensure all RED requirements are covered • It is possible to ‘borrow’ from existing national systems & voluntary schemes when designing national system and writing guidance – learn from the mistakes of others!

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Contents 1. Introduction 2. Setting the context 3. Biofuels & the Renewable Energy Directive 4. Sustainability Criteria for biofuels & bioliquids 5. Verification of compliance with sustainability criteria 6. Implementation of sustainability criteria 7. Implementation options 8. General discussion & close

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EU experience in implementation of legislative framework for biofuels Legal Framework • UK

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• Germany

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• France

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Incentives

Energy Act – primary legislation which included biofuel target RTFO Order - secondary legislation, establishes the Renewable Transport Fuel Obligation (RTFO) - biofuels quota for suppliers

• Fines - If quota not met, obligation to ‘buy-out’ at 30p/certificate. • Double counting - 2 certificates per litre given for 2G & waste biofuels • Duty reduction - reduced duty for UCO biodiesel (now removed)

Biofuel Quota Act - Share of biofuels, monitored by certificates Biofuel Sustainability Ordinance - GHG and sustainability criteria.

• Tax exemptions - largely replaced now by the quota act. Until 2015 2nd gen biofuels fully tax exempt. • Fines - If quota not met, levy €43/GJ for gasoline and €19/GJ for Diesel.

Energy Act - No dedicated legislation, part of the “Energy Act” Includes biofuel share targets, GHG and sustainability criteria

• Double counting - 2x counting of waste-based biofuels towards target • Tax - TGAP (pollution tax) fully exempt if target reached, otherwise linearly increasing. TICPE (domestic energy consumption tax) exemption subject to units produced.

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EU experience in implementation of legislative framework for biofuels Legal Framework

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Royal decree - A dedicated Royal Decree establishing the biofuel share targets and establishing sustainability requirements (currently not mandatory)

• Fines - Penalty for non-compliance €350/certificate. Revenue from fines is distributed among suppliers that exceeded their biofuel targets. • Double counting – for biofuels made from wastes, rasidues and non-food cellulosic feedstock. • Excise tax - same as for petroleum products.

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Dedicated Act - on biofuels for transport. Various additional rules on quota obligation, incentive measures and environmental penalties.

• Tax exemption – originally no excist tax, now discontinued • Subsidies – for biofuel producers, financed through fuel excise duty. • Fines - Penalty for non-fulfilment.

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Dedicated Act - on Biocomponents and liquid Biofuels. Includes biofuel share obligations and sustainability requirements, monitored by a certification scheme.

• Fines - Penalties for failing to meet the quota.

Spain

Croatia

Poland

Incentives

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Further reading / References •

UK RTFO guidance on GHG and land criteria: RTFO Carbon & Sustainability Guidance (DfT, 2014) http://bit.ly/1DyZTfP

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Report comparing Member State national systems: Analysis of Member State RED Implementation – Final Report (Peters et al., 2012) http://bit.ly/1042uBe

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Report examining mass balance implementation: Analysis of the operation of the mass balance system and alternatives – Final Report (de Staaij et al., 2012) http://bit.ly/1t6WSx6

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RSB mass balance standard: Mass balance CoC standard (RSB, 2013) http://bit.ly/1xEwe2N

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List of EU-approved Voluntary Schemes: http://bit.ly/10iNOi1

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Communication from the Commission on Voluntary Schemes: http://bit.ly/1tz0eOJ

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De Staaij, den Bos, Toop, Alberici, Yildiz (2012) Analysis of the operation of the mass balance system and alternatives Final Report (Task 1)

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Diaz-Chavex et. Al (2013) – Mandatory requirements in relation to air, soil, or water protection: analysis of need and feasibility

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Pacini, Assuncao (2011) Sustainable biofuels in the EU: the costs of certification and impacts on new producers

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Peters, Alberici, Toop, Kretschmer (2012) Analysis of Member State RED implementation Final Report (Task 2)

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