8 Options for addressing ILUC in Danish regulation
8.2 Hybrid LCA with GHG-based fuel supplier targets
The targets for renewable energy in transport in the RED II are framed in energy terms, but some Member States such as Germany have implemented support systems where levels of support are based on reportable GHG intensity (similar to the California LCFS system).
Under the Fit for 55 package a revision to the RED II has been proposed that would move the European-level requirements from an energy basis to a GHG basis. Under GHG-based support systems the contribution of a batch of fuel towards fuel supplier obligations is proportional to the calculated GHG saving delivered by that fuel (the amount of energy supplied multiplied by the difference between the fossil fuel comparator GHG intensity and the reportable GHG intensity of the fuel batch). This calculation allows compliance credit to be expressed in terms of tonnes of CO2 saved.
Currently, the EU Member States that apply GHG-based support systems base the level of support given on the GHG intensity score as calculated under the RED LCA methodology, but Denmark could in principle move to a GHG-based system of crediting for alternative fuels including ILUC emissions in the LCA requirement (requiring fuel suppliers to report their GHG intensity on a hybrid LCA basis rather than based only on the RED LCA methodology).
One advantage of introducing ILUC factors as part of a hybrid-LCA based performance metric is that it would help to put support for renewable fuels on a more technology neutral
basis again. As discussed in the introduction, when GHG-based support systems do not include any characterisation of indirect emissions this can be seen as distorting the level playing field between technologies.
The hybrid LCA requirement need not also be applied for assessment of compliance with the minimum GHG saving thresholds under Article 29 of RED. Batches of fuel would be eligible for support if the GHG saving on the RED methodology met the GHG saving thresholds in the Directive, but the level of support given would be determined by the hybrid LCA score. This is illustrated in Table 3 using some example fuel pathways and the ILUC values from RED II Annex VIII.
Table 3 Example of credit generation by various fuels under a GHG crediting system with hybrid LCA
Pathway GHG intensities based on examples taken from UK Department for Transport (2019), dates of first operation are dummy data used only to illustrate the interaction with the GHG saving threshold in Article 29. Pink highlights show pathways that would not meet the relevant GHG thresholds with ILUC included. Yellow highlights show which pathways would receive the most credit under the hybrid LCA approach.
It can be seen in Table 3 that the inclusion of ILUC values in a GHG crediting system could very significantly change the value proposition for food-based biofuels. Consider the rapeseed oil biodiesel and UCO biodiesel pathways in the table. Under the current Danish biofuel support system, the UCO biodiesel would be ‘double counted’ due to being listed as a waste feedstock in Part B of Annex IX of the RED, and therefore receive twice as much support per unit volume as the rapeseed biodiesel. Under a GHG crediting system excluding ILUC emissions, this difference would be narrowed. The UCO biodiesel in the example delivers 33% more GHG reduction than the rapeseed biodiesel, and therefore would get a third more support. Moving to a hybrid LCA basis, however, would result in the UCO biodiesel delivering thirteen times more reportable GHG reductions than the rapeseed biodiesel, and therefore receiving thirteen times more support. This large multiplier reflects the very limited GHG benefit calculated for the rapeseed biodiesel under the hybrid LCA system. This would provide a very firm signal in favour of a switch from food-oil feedstocks to alternative biodiesel and renewable diesel feedstocks.
This approach could also be expected to significantly advantage food-based ethanol over food-based biodiesel due to the difference in estimated ILUC emissions. The sugarbeet ethanol pathway in the example would receive six times as much support as the rapeseed biodiesel pathway. Introducing this value differential between food-based
Options for addressing ILUC in Danish regulation
ethanol and biodiesel could be expected to push up consumption of ethanol, although this shift would be restricted by blend limitations.
Within the ethanol market, the differentiation between food-based and other feedstocks under a hybrid LCA approach would be much less marked. In Table 3, consider the example pathways for ethanol from food waste and ethanol from sugar beets. If we assume that the food waste is gathered from industrial sources and is not fit for feed use, and therefore is consistent with the definition of the biomass fraction of industrial waste given in Annex IX Part A (d), then food waste ethanol would currently be double counted and could be counted towards advanced biofuel targets. This fuel would therefore receive at least double the support available to food-based ethanol. Under a GHG-based system on the RED methodology, however, it would only receive 16% more support than the sugar beet ethanol pathway (not considering support from any sub-targets). Under the hybrid LCA scheme, the food-waste ethanol pathway would receive 50% more support than sugar beet ethanol. We see then that in the ethanol market a GHG-based system with a hybrid-LCA would reduce the value difference between crop-based and waste-based fuels, unless coupled to an advanced biofuel sub-target.
8.2.1 Compatibility with the RED II
In section 6.3, we have argued that Article 26(1) provides a broad flexibility for Member States to adjust the level of financial support available to biofuels from food and feed crops informed by best available evidence on ILUC emissions. The use of a hybrid LCA value to set the level of support clearly implies a more complex regulatory framing than simply limiting the quantity of food-oil based fuels that can be supported, but we believe that it is consistent with the Directive as written. An argument against allowing a hybrid LCA system can be found in Recital 81 of the RED II, which states that,
“The level of greenhouse gas emissions caused by indirect land-use change cannot be unequivocally determined with the level of precision required to be included in the greenhouse gas emission calculation methodology.”
This recital is included to provide context for the decision in the RED II to manage ILUC risk via the use of the food-cap and the high ILUC-risk designation, but it does clearly signal a concern from the European Institutions about giving ILUC factors direct regulatory application. The European Commission can be expected to give considerable weight to this recital and would be likely to challenge any Member State proposing to introduce ILUC factors as part of a GHG-based support system. As with other policy options, the Commission could also be expected to be more cautious of a hybrid approach based on ILUC estimates from new bespoke research for the Danish Government (treated as ‘best available evidence’, cf. chapter 7) than if such an approach relied on the values already included in Annex VIII of the RED II, or directly on the MIRAGE and GLOBIOM modelling work.
The recitals in European Directives have a primarily interpretive role (Baratta, 2014), and cannot create additional legal obligations on Member States that are not present in the articles of a Directive, but they can be invoked in the case of legal dispute as indicative of the intention of the articles. While this recital does clearly present an argument against the use of ILUC factors in the LCA requirements set by the RED II, a clear legal argument could be made that Article 26(1) takes precedence. Article 26(1) clearly gives Member States the prerogative to take estimated ILUC impacts into account in ways that go beyond the requirements for a food cap and the phase out
of high ILUC-risk fuels. Recital 81 confirms that the European Institutions have determined that the use of ILUC factors in the GHG calculation should not be imposed on Member States, but it is our opinion that it should not be interpreted as constraining the scope for Member State action under Article 26(1).
If hybrid LCA were to be used in this way, one important implication would be that the sum of the GHG savings delivered by any given fuel supplier as assessed under the hybrid LCA system would not be equal to the sum of the GHG savings delivered as calculated by the RED methodology (more specifically, if any food-based fuels with positive ILUC factors are used, then the sum of GHG savings calculated under the hybrid LCA approach would always be less than the sum as calculated under the RED methodology). There is precedent under the first RED for Member States setting targets for fuel suppliers on a different basis than the energy targets in the Directive. Some Member States have set targets based on volume of fuel supplied – when converted to energy terms, this results in ethanol being supported more generously than biodiesel.
Other Member States have set GHG reduction targets, although to date these have not included ILUC factors. In these cases where fuel supplier targets are set in units other than energy supplied, the Member States were required to set them at a level that could reasonably be expected to deliver compliance with the renewable energy use target set in Article 3 of the RED I. Similarly, if Denmark were to adopt a hybrid-LCA-based support system it would need to set fuel supplier GHG intensity reduction requirements that would be consistent with achieving the RED II targets (whether the current target for 14% renewable energy in transport or a revised target under the Fit for 55 package).
8.2.2 Administrative burden
Introducing a hybrid LCA system would represent a greater additional commitment for both Danish regulators and Danish fuel suppliers than simply imposing limits on vegetable oil use. Firstly, the DEA would need to identify, propose and justify a set of ILUC factors to be used. Unless simply using the values already included in Annex VIII of the RED II this would be likely to require some form of consultative engagement with the stakeholder community. Secondly, some form of impact analysis would be necessary in deciding the appropriate level for a GHG target under a hybrid LCA system.
Once the basic structure of the obligation was determined, ILUC factors could be added to a GHG-based accounting system relatively easily by adding an additional term to the LCA requirements. Fuel suppliers should be able to take advantage of experience gained in delivering compliance with the 2020 FQD 7a target, but may still require operational support to deal with the slightly more complex LCA requirement.
Excluding any resources invested in developing ILUC estimates, we would expect that moving to a hybrid LCA-based system of GHG targets would impose at most modest overheads on the regulator.
Options for addressing ILUC in Danish regulation