Is Double Counting a Double Whammy?

By Robert Vierhout | February 22, 2012

The most popular take-away food in the U.K. is fish and chips. The frying of all this fish and fries requires quite a lot of vegetable oil. Collecting the used oil from restaurants, bars and cafes for the production of biodiesel has become big business. Between April 2010 and April 2011, the U.K. used 428 million liters of used cooking oil (UCO) for the production of biodiesel. It has become the primary source for biofuel used in U.K. transportation fuel. Of all biofuel used in the U.K., 30 percent is from UCO, 21 percent is from Argentine soy and 20 percent from sugar cane ethanol, according to the U.K. Department of Transport.

The big driver for using UCO biodiesel is the tax incentive of 30 U.S. cents per liter. It is costing the Exchequer £10 million per year (almost $16 million) but, according to the U.K. Sustainable Biodiesel Alliance, provides value in terms of employment and waste recycling. The tax measure ends April 2012, after which UCO biodiesel will receive two tradable certificates (the equivalent of the U.S.’s renewable identification numbers)—double that given first-generation biodiesel from soy or rapeseed. The UKSBA fears that counting UCO biodiesel twice is not adequate to compete with biodiesel from, for example, Argentina. Their concern is based on past experience with renewable fuel certificates that sometimes had a value of zero; and “double nothing is still nothing,” they say.

Their concern about the risk of too low a market value is justified. Why would a fuel distributor pay more for a double counting biofuel, if he doesn’t receive any benefit from it? The target set in the Renewable Energy Directive is mandatory for member states, not for fuel suppliers. A fuel supplier, therefore, doesn’t care if the volume is more on paper than the physical volume.

The whole concept of double counting has never been well-thought out. When included in the bill, it seemed a good measure to promote the production of biofuel from waste, residues and lignocellulose. There would be few land use concerns and greater greenhouse gas (GHG) emission savings and it would be a nice way to get to the finish more quickly in terms of volumes.

A full supplier will only pay more for a biofuel if it will give him a clear benefit. For example, if the GHG emission saving is the prime aim of using biofuels, then such a biofuel becomes interesting—the market will value these nonconventional biofuels more. We don’t have this situation yet, and consequently, the once most promising legal instrument to stimulate the development of lignocellulosic ethanol is not contributing to that aim. If today a lignocellulosic ethanol producer would offer his biofuel to the market, he would not see an acceptable return on the higher investment and production costs for making that biofuel.

Later this year, the European Commission will report on second-generation biofuels development.  It cannot be anything but disappointing, as there is little investment in new production capacity and hardly any market penetration. If the EU decisionmakers and regulators really want this type of biofuel to take off, a fundamental change in policy is needed. There are a few options: dedicated and mandatory targets coupled to a high noncompliance penalty and/or a tax incentive that is linked to a) GHG saving performance—the higher the saving, the more tax credit, and/or b) the higher the investment or production costs, the higher the tax credit.

If the double counting mechanism does not change, it will be a double whammy—no higher market value and no incentive to develop and invest in lignocellulose ethanol production.

Author: Robert Vierhout
Secretary-general, ePURE