Europe biofuel legislation overview & implications for the U.S. market 

This is the first article authored by our newest Senior Associate, James Primrose. James resides in the UK and is a leader in the global low-carbon energy space with more that 20 years’ experience. Prior to joining Stillwater, James spent 33 years with bp in various roles, where he played a pivotal part in developing and shaping bp’s low-carbon energy strategy, as well as in establishing new businesses. In his last role as Vice President for Gas and Low Carbon Energy he led the development of bp’s renewables and bioenergy strategies as part of bp’s 2020 energy transition strategy involving the deployment of over $25 billion capex out to 2030. In earlier roles as Head of Portfolio for bp Alternative Energy, and Head of Strategy for bp biofuels he led the work underpinning bp’s re-entry into solar in 2018 and the Lightsource bp partnership, bp’s entry into offshore wind, and the establishment of bp’s sugarcane bioenergy business in Brazil, now the 2nd largest such company in that country. He has also been the Chair of Bonsucro – the global sugarcane sustainability standard, as well as a Board Trustee for the UK’s Low Carbon Vehicle Partnership.

In this article James attempts to untangle the sometimes complex and overlapping policies and regulations impacting biofuels in the European market. With Europe being the world’s 3^rd largest biofuel market (after the US and Brazil) and reliant to a fair extent on imports, there has always been a high degree of interdependency with the U.S. This interdependency is arguably only going to increase given the convergence of policy themes and feedstock competition. Now more than ever it is important for players in the U.S. biofuel market to understand Europe.

As a high-level orientation, the European Union (EU) is not a federal structure and its legislation does not regulate the market directly. Instead, the legislation consists primarily of directives that set out requirements for the EU member states (MS) to fulfill, which they do via introducing their own national legislation. The discussion below centers on the former (EU directives), and not the latter (national legislation) where there is yet more detail and diversity!

Europe’s biofuel and transport de-carbonization targets and legislation sit within the EU’s “Fit for 55” package. Released in 2021, the package aims to reduce EU greenhouse gas (GHG) emissions by 55% by 2030, as a milestone to achieving the EU’s 2050 net zero ambition as set out in the European Green Deal established in 2019.

“Fit for 55” includes a number of renewable energy, decarbonization, and energy efficiency programs stretching across the transport, energy, industry, residential, commercial, agriculture and waste sectors. For biofuels and transport, however, there are five key regulations: Renewable Energy Directive III (RED III), ReFuelEU Aviation, FuelEU Maritime, EU Emission Trading Scheme (EU ETS) and the new EU Emission Trading Scheme 2 (EU ETS2), as per Figure 1. We discuss each in turn below.

Figure 1. Summary of EU Biofuel Relevant Policies and Regulations

Renewable Energy Directive III is the primary EU legislation supporting biofuels in Europe and follows on from RED I (2010-2020) and the RED II which it replaced in 2023 with more ambitious targets in the wake of the Ukraine War. RED III covers the use of renewables across all energy sectors (power, heat, transport etc., and sets an overall 2030 target of 42% renewable energy as share of total EU gross energy consumption.

Specifically relevant for biofuels, RED III sets the following:

• 2030 targets of 29% (by energy) of renewables in transport (this includes road, rail, aviation and marine) OR a 14.5% carbon intensity (CI) reduction vs the fossil gasoline / diesel comparator. EU MS can choose which target to adopt, and compliance can be in the form of biofuels, biogas, RFNBO¹, or renewable power for EVs.
• Carbon Intensity qualifying reduction thresholds vs fossil fuels of:
  • 50% for biofuel plants in operation before 2015
  • 60% for biofuel plants in operation before 2020
  • 70% for biofuel plants in operation from 2021 onwards
• Sustainability requirements excluding the use of biofuels from high biodiversity land, wetlands, peatlands and natural land converted after 2008. This is in principle instead of a quantitative assessment of indirect land use in the determination of carbon intensities.

In addition, the RED III splits the 2030 target into sub-targets as per Figure 2.

Figure 2. RED III Transport Sub-Target Structure

Key elements of this structure are:     

1. Conventional biofuels from food or feed crops (e.g. wheat ethanol, biodiesel from soybean or canola oil) are subject to a 7% (by energy) cap.² If a MS wishes to set a lower cap (Germany, Netherlands, Spain being some examples), then they are allowed to commensurately reduce their 2030 target (either in energy or CI reduction terms).
2. Indirect Land Use Change (ILUC) – While RED III does not consider any ILUC GHG emission factors in a biofuels CI calculation, the 2030 target does exclude biofuels determined to be of a high ILUC risk. Currently this is just palm oil.
3. Advanced biofuels from non-food/feed feedstocks are defined in Annex 9 of the directive and split into two categories:
   • Part A – non-food feedstocks processed with advanced technologies (e.g. cellulosic biofuels, municipal solid waste etc.)
   • Part B – non-food feedstocks processed by mature technologies (e.g. cooking oil and certain grades of tallow)There has been a recent revision to Annex 9 that allows intermediate crops (cover or catch) to be considered as Part A feedstocks provided they are used for sustainable aviation fuel (SAF), otherwise these crops are a Part B feedstock and so potentially limited by the Part B cap.
4. A 2030 combined advanced biofuel target of 5.5% min that consists of a 1% min RFNBO target, a capped 1.7% contribution from Part B advanced biofuels, with the balance delivered by Part A advanced biofuels.
5. Multipliers are allowed (at the MS’s option) to qualify against the target. For example, double counting (2x) is allowed for advanced biofuels (Part A and B), RFNBO with an additional 1.2x for fuels used in aviation and marine. Power used in road transport is allowed a 4x multiplier.

ReFuelEU Aviation – Enacted in October 2023, this is one of the most recent pieces of legislation and aims to accelerate what was otherwise the slow adoption of SAF under the RED alone.   The legislation sets targets for SAF and synthetic SAF (eSAF) starting in 2025 and extending out to 2050 (see Figure 1).

It is an ambitious piece of legislation both in terms of its targets (particularly for eSAF given its lack of maturity), and the non-compliance penalty which is stipulated to be twice the price delta between SAF and conventional jet, with any shortfall in volumes still requiring to be achieved in the following year.

The legislation runs in parallel to the RED with SAF volumes qualifying under both pieces of legislation. Obligated fuel suppliers will therefore be highly motivated to comply with the aviation target first and take any shortfall within the RED III.  It requires SAF to be produced from advanced /Annex 9 feedstocks; unlike RED III, ReFuel EU Aviation makes no distinction between Part A or Part B feedstocks.  

FuelEU Maritime – Enacted in July 2023, this legislation aims to progressively reduce the CI of marine fuels for all vessels >5000 tonnes³ used in European waters and by applying a 50% factor on international voyages to or from European ports. Comparing to a reference well-to-wake CI of 91.16 gCO2e/MJ, the legislation seeks to reduce the CI of marine fuel supplied by 2% starting in 2025, increasing to 6% in 2030, and accelerating to 80% by 2050.

Qualifying fuels are biofuels, biogas, RFNBO and RCF⁴, as well as low-carbon gases as defined in

Gas Directive, which could include blue hydrogen.  As an additional incentive, RFNBOs receive a 2x multiplier to boost their CI reduction benefit. Similar to the aviation legislation, food/feed biofuels do not qualify.  Compliance is driven by penalties that remove the economic benefit of non-compliance and detention / expulsion orders for vessels that are repeat offenders.

EU Emission Trading Schemes (ETS) 1 & 2 – Aviation fuel has been covered under the EU ETS 1 since 2012. Despite significant debate, however, only intra-European flights are currently covered, with the potential of extending coverage to all flights in 2027 following a review in 2026. Until now, aviation has received free allowances, but these are being progressively phased-out, with all allowances ending in 2026. With the EU ETS carbon price trading in the 60-100 €/tonne range over the last three years, this equates to a SAF premium in the range of $220-370 per tonne, $0.65 – $1.1/gal  (i.e. insufficient in itself to cover SAF’s cost premium vs jet notwithstanding the impact of free allowances).

From January 1, 2024 marine emissions from vessels >5000 tonnes departing or entering EU ports will also come under the EU ETS 1. Like for aviation, the marine system of free allowances will be progressively phased out by 2027, and it is unlikely that the carbon price will be sufficient in its own to drive the use of low carbon marine fuels.

A new separate emissions trading scheme will come into force in 2027, the EU ETS 2. This scheme will cover CO₂ emissions from fuel combustion in buildings, road transport and additional sectors (mainly small industry not covered by the existing EU ETS). The ETS 2 cap will be set to bring emissions down 42% by 2030 vs 2005. To ensure a progressive start to the scheme there will be a price cap of 45 €/tonne for the first three years, and a mechanism to postpone the start in case of exceptionally high oil or gas prices. As far as road transport fuels are concerned, the impact of this initiative is likely to be second order, given that Europe’s high gasoline and diesel tax rates are likely to mask any pricing differences due to higher or lower biofuel blend rates.

Implications for the US

There is undeniably a lot of detail we do not have the space to cover here, and there’s still more detail layered on when one delves down to the MS level. That said, at the highest level, the implications for the U.S. market are as follows:

1. There will be an increasing convergence between the U.S. and EU to focus on growing biodistillate (renewable diesel (RD) and SAF). Europe will no longer be the outlier in focusing on biodiesel vs bioethanol.
2. Competition for feedstocks is growing, particularly for low-CI, non-food feedstocks for SAF and RD produced via hydroprocessing esters and fatty acids (HEFA). With its move to phase out conventional biofuels, Europe has set very stringent sustainability requirements for feedstocks in its target growth areas. Europe lacks the U.S.’s agricultural resource base, however, so it will remain reliant on imports to a large extent. There is already competition for non-food feedstocks (e.g. UCO) between the two markets, and this will only increase as targets become more stringent and extend when new feedstocks (i.e., cover crops) come into the frame.
3. This battle will in part be determined by the relative support and incentive mechanisms that exist in the U.S. and Europe. The U.S. mechanisms tend to be more transparent (i.e., RFS RINs, and LCFS credit prices) and are reinforced by tax credits (the 45Z provision of the IRA, etc.). While less transparent, the non-compliance penalty-based mechanisms in Europe could provide equally high incentives to drive compliance. In particular, the ReFuelEU aviation penalty mechanism appears set to ensure it is the highest bidder to make it the first resort compliance option.
4. Given current feedstock supply constraints, there is emerging a clear need for advanced biofuel feedstocks beyond those utilized for HEFA SAF and RD in both markets. Again, Europe’s high non-compliance penalties combined with a likely need to seek alternatives to high cost, low maturity eFuels (RFNBO) could make for an interesting dynamic with the U.S.