Historically, the primary support schemes for biofuel uptake around the world have been volumetric blending mandates. In recent years however, several key markets moved to incentives through emission reduction obligations. California was the first jurisdiction to introduce a low carbon fuel standard (LCFS) in 2009. British Columbia followed suit in 2013, Germany in 2015, Oregon in 2016 and Sweden in 2018. In Brazil, the LCFS-style RenovaBio program came into full force in January 2020, the same month when road fuel emission reduction obligations kicked off in all EU countries, the UK and Norway. In 2017, less than 9% of global biofuel demand was consumed in markets where a fuel pool emission reduction applies. In 2020, this had risen to 49%. The share could increase to 80% by 2023.
Not only do LCFS-systems cover some of the strongest growth markets, but more jurisdictions will likely follow. US President Elect Biden has expressed support to the roll-out of a nationwide LCFS-style obligation. In parallel to this, Colorado, Illinois, New York, Washington State and Nevada all have ongoing legislative processes that may lead LCFS-adoption. Canadian lawmakers are getting more serious about national emission reduction quota, and the EU will likely strengthen existing obligations. Stratas Advisors does not expect any kind of LCFS will be in place by 2023 in China, South Korea or Japan. However, each of these countries have made carbon-neutrality pledges in the last 6 months; they may follow further down the line.
Source: Stratas Advisors
Despite such a large proportion of global markets introducing fuel emission reduction obligations in a few years’ time, there is barely any harmonization in the carbon intensity (CI) calculation methodology. This is exemplified by comparing California to Germany, the world’s two largest purely LCFS-driven markets. While California factors in indirect land use change (ILUC), Germany does not. As a result of this and other methodological differences (e.g. allocating co-products differently), almost identical products can have CIs that differ by a large factor. Biodiesel from Southeast Asian palm oil that is reported as reducing emissions by 75% in Germany is not consumed at all in California because it scores worse than fossil diesel. Sugarcane ethanol reduced emissions by over 50% in both geographies, but corn ethanol was 7 times more carbon intensive in California (fossil references are comparable). Germany imports a lot of its used cooking oil methyl ester (UCOME) from coal-dependent and distant China, California sources its used cooking oil (UCO) domestically. Yet UCOME’s CI is 3 times lower in Germany.
If Germany and California were neighbors in a free trade area, the differences in CI rules would divert a large flow of crop-based product to Germany and vice versa for waste biofuels. Tariffs, product standards and geography are putting a lid on this, but that will not remain the case for other markets. Soon LCFS-systems could be in place from the most Northern tip of Canada to the Mexican border, from Sweden to the Czech Republic. The average CI difference between Canada and California is even larger than between Germany and California for many feedstocks. About 30 countries in Europe’s customs union are increasingly vying for the same limited feedstocks to reach mandatory emissions savings, yet different CI frameworks apply. Diverging CI scores between regions are justified to the extent that they are a result of different agricultural practices, other energy inputs, transport logistics etc. If the desired policy effect is to decrease global emissions however, methodological harmonization will be needed.