Solving ILUC by Thinking Out of the Box

By Robert Vierhout | November 15, 2011

In various circles, the current thinking on indirect land use change (ILUC) is very much driven by negative perceptions. In the EU, the concern is that biofuel policy is counterproductive to what policymakers want to achieve in the first place: avoiding increases in greenhouse gas (GHG) emissions. Even though many will agree to the theoretic possibility that biofuel policy could cause unwanted changes in land use, it has not yet been proven.

For the sake of the argument, let’s assume the concern is justified and that promoting biofuels would cause ILUC. Should a policymaker in such situation not try to consider all options, instead of looking at negative measures only? Because, that is what is happening. The measures under discussion are very punitive, resulting in penalties instead of rewards. A penalty, however, will not necessarily lead to a change in behavior or prevent ILUC from occurring; it merely results in certain biofuels not being used in Europe. It certainly doesn’t prevent these biofuels from being used somewhere else in the world. In the end, preventing unwanted land use change is not achieved by the policy.

Assuming ILUC could occur, policymakers should go for measures that will not cause this leakage effect. They should go for a win-win situation and promote biofuels whilst, at the same time, adopting measures that promote only those biofuels without a high risk of unwanted land use changes.

A consortium of nongovernmental organizations and industry was formed earlier this year to confront policy makers with this more positive, incentive-based approach. The partners, including Shell, Neste Oil, Riverstone Holdings LLC, the International Union for Conservation of Nature, Partners for Euro-African Green Energy and ePURE, commissioned Ernst & Young to study a policy approach that incentivizes ILUC-mitigation practices and supports best practices in the production of biofuels and crops for biofuels.

All the policy options being studied by the European Commission have serious drawbacks. None encourage producers to adopt practices that reduce ILUC risks, nor do they improve investor confidence for biofuel development. By assigning a carbon credit to biofuels that prevent or reduce the risk of ILUC, Ernst & Young suggest, financial value can be created to incentivize the adoption of practices that prevent or mitigate ILUC.

The Renewable Energy Directive already has a model in place. One of the annexes contains a bonus mechanism for biofuels produced from feedstock grown on severely degraded or heavily contaminated land—a carbon credit of 29 grams of CO2 equivalent per megajoule. This instrument could be extended to provide a carbon credit to those biofuels that meet specified ILUC mitigation criteria. Examples include the use of biofuel coproducts to substitute animal feed, the production of biofuel feedstock crops on abandoned or degraded land, yield improvements and the use of wastes.

The ILUC mitigation credit would make qualifying biofuels worth more to fuel suppliers as they need less physical volume to meet mandatory GHG emission reduction targets, and so create financial value without the need for fiscal intervention.

Whether this fifth proposed option will be attractive to policymakers is still an open question. For now the European Commission does not want to look beyond the four policy options on the table. But there are good reasons for the member states to look at other options. After all, it doesn’t make a lot of sense to throw an ILUC penalty at an industry that is creating employment opportunities in times of economic crisis. If it is possible to develop a policy that would improve the GHG emission savings performance of biofuels and keep most of the industry up-and-running at the same time, EU member states might well sign up.

Author: Robert Vierhout
Secretary-general, ePURE