Department of Biosystems Engineering

University of Manitoba
BIOE 7180 Bioprocessing for Biorefining

Due date: Sept. 21, 2016

Assignment No. 1

Title: Government regulations and policies on biofuel markets

Prepared by: Obiajulu Nnaemeka

Abstract

The continual increase in global population to an estimated 8.5 billion by 2030 as predicted by
the United Nations means inevitable issues of energy security and environmental sustainability
if the increased energy demand is not addressed accordingly. The exhaustion of reserves in
high energy consuming countries like the US, China and India few decades from now will
place huge pressure on the oil exporting countries, and result in their reserves even depleting
at a much faster rate. Governments around the world, mostly in developed nations, are taking
proactive measures to explore other alternatives for new fuels of which biofuels show the most
prospect. This report aims to review notable past and current policies that has driven the
development of the biofuel market using the United States and European Union as case study.
The study shows that while government policies and regulations in these regions have resulted
in significant increase in the production of biofuels and development of biotechnologies in the
recent years, there would be a challenge of keeping up the trend while adhering to sustainable
production requirements. Replicating similar policies in many nations across the globe will
ensure significant growth in biofuel industry will potentially attract more investment and make
the market less uncertain, drive rural development, and guarantee environmental sustainability.
1.0 Introduction

Over the years, there has been emergence of numerous government policies in the United
States and EU specifically sculpted to promote competitiveness and encourage development of
biofuels and associated technologies considering the current setbacks including the high
production costs, immature technology and poor supporting infrastructures compared to
traditional fossil fuels. These policies and regulations are reviewed as follows:

1.1 Government policies and regulation of biofuel markets in the United States

The United States is currently the world leader in the production of biofuels and the
development and the government has played a major role in this remarkable accomplishment
(Su et al. 2015). The policies on biofuels in the US are majorly designed to encourage research
and development and also drive industrialization of conventional and advanced biofuels and
technologies. As far back as 1978, the Energy Tax Act was established as part of the National
Energy Act to attract investors into the renewable energy field by providing them with income
tax credits. Even though the bill covered just investments in solar, wind and geothermal
technology at the time (Plante 2014) it set precedence for adoption of a similar policy by the
US Senate Finance Committee in 2012 where tax credits of as much as $1 per gallon were
provided to producers of cellulosic biofuels and biodiesel (Su et al. 2015).

The Energy Policy Act (EPA) of 2005 was established when energy security and environmental
sustainability became more concerning issues and it gave the Congress more power of control
within the biofuel industry. The EPA imposed an obligatory target to blend 7.5 billion gallons
of renewable fuel (ethanol) with gasoline annually by 2012 (Mondou and Skogstad 2012).
Subsequently in 2007, the Energy Independence Security Act (EISA) was established with a
new Renewable Fuel Standard (RFS II) set to raise production of biofuels to 36 billion gallons
annually by 2022. In contrast with EPA 2005, the EISA incorporated into the program biofuels
from other sources apart from corn starch (e.g. biodiesels from vegetable oils or algae) and also
required environmental sustainability targets to be met (Su et al. 2015). The result of these
government interventions was an increase in production by about 10 million US gallons
between 2005 and 2011 (Figure 1) and the country has become a net exporter of biofuel with
bioethanol and biodiesel exports accounting for 6 and 13% respectively in 2012 (United
Nations 2013).

The US government is also accelerating the growth of biofuel technology by making huge
financial commitments both in the form of grants, loan guarantees and project support on a cost
sharing basis. There has been huge amount of money pumped into various programs that help
 Figure 1: US annual ethanol production (Data source: U.S. Energy Information Administration)

biofuel research and advance large scale pilot demonstration projects. Notable examples
include the Biomass Research and Development Initiative (BRDI), Small Business Innovation
Research (SBIR) and Small Business Technology Transfer (SBTT); all which promotes the
commercialization of biofuel projects by assisting with high capital requirements to help reduce
investment risks (Su et al. 2015).

1.2 Policies and regulation on biofuels markets in the European Union

Like in the US the European Union (EU) have had several policies that very well
encouraged the development of biofuels. The EU has similar strategy of setting renewable
energy oriented target, rendering industrial support, financing research, funding demonstration
projects and granting tax subsidies. In 2003, the Directive to Promote the Use of Biofuels or
Other Renewable Fuels for Transport (2003/30/EC) was issued and member states were
expected to voluntarily work towards raising the renewable energy ratio in the EU
transportation sector to 2% and 5.75% in 2005 and 2010 respectively compared with 0.6% in
2002 (Mondou and Skogstad 2012). By 2009, it became evident that the target would not be
met as only five states had achieved the goal due to its voluntary nature and a new legislation
(Directive on The Promotion of the Use of Energy from Renewable Sources, 2009/28/EC) was
approved legally binding member states and also holding them accountable with environmental
sustainability goals in terms of GHG emissions and indirect land use change (United Nations,
2013). The Directive mandated all states with major objectives to be achieved by the year 2020:
(i)20% reduction in GHG emission compared to 1990 levels (ii) 20% reduction in basic energy
consumption (iii) 20% of total energy use to come from renewable sources. The states were
given the leverage to set individual targets to meet the above objectives, however, since most
of the states heavily relied on fossil fuels to power vehicles, the Renewable Energy Directive
specifically mandated all member states to attain a minimum of 10% renewable fuel content in
the transportation sector. As of 2014, only Sweden, Finland, Austria, Estonia, Romania,
Lithuania, Bulgaria, Italy and the Czech Republic had achieved the legally binding target
(Source: Eurostat).

The world trending issue of sustainable development is also being utilized by the EU to a large
extent for the promotion of biofuel development. In addition to the GHG reduction targets by
the 2009/28/EC Directive, it also encouraged the use of second generation biofuels in member
states by initiating ‘double counting’ where waste based biofuels are counted twice when
renewable energy shares in the transportation sector are evaluated. However, the double
counting measure is negatively affecting the EU demand and production as evident by a
reduction in the annual average marginal increase in bioethanol from 700 million litres in 2008,
2009 and 2010 to 176 million litres in 2011 and 2012 (United Nations 2013). Furthermore,
legislation has also been passed in the EU regarding the taxation of renewable energy sources.
The Directive 2003/30/EC and 2003/96/EC stipulates that entities in member states may apply
for reductions or partial tax exemptions within 6 years which must be authorized by the
Commission to avoid issues of over-compensation and cut-throat competition (Su et al. 2015).

All the highlighted policies and more have contributed significantly to the current status of the
EU as the largest producers and importers of biodiesel in the world. Finally, the 2015 European
Commission progress report on the 2020 renewable energy goals records that the Directive has
led to an increase of share of renewable energy in total energy consumption to 15.3% and
reduction in the EU’s fossil fuel demand by 116 Mtoe, a market which has been obviously
captured by biofuels.

2.0 Conclusion

The policies of two of the largest biofuel producing regions in the world have been reviewed
and the study indicate that government policies have significantly driven production and
technology growth in the biofuel industry by providing sustainability targets, financial
incentives and cost sharing initiatives to enable further research, subsidize feedstock and carry
out pilot demonstration projects. Furthermore, the debate on the environmental sustainability
of biofuels have caused government to place strict production criteria and it may be a challenge
to continue producing at current rates while complying with the restrictions. In general, the
existing data indicates government policies and regulations in these regions have made the
biofuel market more attractive and also reduced investment risk. Similar policies can be
replicated in several countries across the world to further drive development.
References

Mondou, M., G. Skogstad. 2012. The regulation of biofuels in the United States, European
Union and Canada. Canadian Agricultural Innovation and Regulation Network (CAIRN).

Plante, R. H. 2014. Solar Energy, Photovoltaics, and Domestic Hot Water: A Technical and
Economic Guide for Project Planners, Builders, and Property Owners. Elsevier Science.

Su, Y., P. Zhang and Y. Su. 2015. An overview of biofuels policies and industrialization in
major biofuel producing countries. Renewable and Sustainable Energy Reviews 50: 991-
1003.

United Nations. 2013. The state of the biofuels market: Regulatory, trade and development
perspectives. United Nations Conference on Trade and Development (UNCTAD).