Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on the promotion of the use of biofuels for transport

(presented by the Commission)

EXPLANATORY MEMORANDUM

1. Introduction

In its Green Paper "Towards a European Strategy for Energy Supply" [1] the Commission highlighted the critical role of the transport sector, with respect to both security of supply and climate change:

[1] COM(2000) 769 final, 29.11.2000.

* The transport sector is practically 100% dependent on oil, the energy source of greatest concern from a security of supply viewpoint.

* CO2 emissions from transport are expected to keep rising, contrary to agreed objectives to reduce them. This make it more difficult for the Union to respond to the challenge of climate change and to meet its commitments under the Kyoto Protocol. Moreover, the commitments made in Kyoto Protocol must be regarded as a first step.

The Green Paper therefore proposed an ambitious programme for that sector to promote biofuels and other substitute fuels, including hydrogen, the aim being for these fuels to account for 20% of total fuel consumption by 2020.

With the Common Agriculture Policy (CAP) being refocused towards more emphasis on rural economy, the production of raw materials for biofuels would help to create new sources of income and to maintain employment in rural areas. This will have a general beneficial impact and also tie in better with enlargement.

Consequently, several Member States have already taken measures at national level, mainly in the field of taxation, to promote the production and use of biofuels. However, without coordinated decisions on fiscal, energy and environmental policies in this field and without clear prospects for the agricultural production and processing industry, it is doubtful whether biofuels will ever reach a substantial share of the total fuel consumption in the EU.

Actions at Community level in the field of biofuels, including taxation, are therefore needed in order to create the basis for the investment required to promote sufficient quantities of biofuels.

2. Objective and scope of the proposed Directive

The fundamental objective underlying the draft Directive is to provide for a Community framework that would foster the use of biofuels for transport within the EU. This proposal lays down an obligation on Member States to introduce legislation and take the necessary measures to ensure that as from 2005 a minimum share of transport fuel sold on their territory is occupied by biofuels, while leaving it to the Member States to decide how best to meet this aim.

The minimum percentage of biofuels of all fuels for transportation sold on the individual markets of the Member States, will be introduced on the basis of an agreed schedule. These minimum percentages and schedules should be adapted by committee procedure on the basis of experience, environmental evaluation, new technical developments and in conformity with other energy and environmental objectives undertaken at national as well as Community level.

The measures taken to reach the annual targets will be set out in an annual report to be submitted to the Commission by the Member States. On the basis of these reports, the Commission will then assess the action taken by Member States to meet their quotas for biofuels and, if appropriate, make proposals for amending the annex to the Directive.

To allow time to establish the necessary production facilities, a quantitative commitment should not be applied before 2005 when 2% biofuel substitution would appear to be a realistic target. Increasing the substitution by 0.75% per year will bring substitution to 5% in 2009.

Before the end of 2006 the Commission will examine the need for mandatory blending of biofuel into petrol and diesel in order to meet the targets for biofuel in the transport sector and will bring forward a proposal, amending Directive 98/70/EC as appropriate.

3. Current distribution of different types of fuels in the EU and potential for biofuels

3.1 Different types of fuels

Biofuels for transport could be marketed in the form of "pure" biofuels for dedicated vehicles or in the form of "blend" fuels in such a proportion that it does not affect the performance of motor vehicles engines. These biofuels are mainly biodiesel, bioethanol and ETBE (ethyl-tertio-butyl-ether) produced from bio-ethanol. Other possible biofuels are biogas, biomethanol, biodimethylether and biooils. Technically they can be used in conventional gasoline or diesel engines, but special containers may be needed for carrying these fuels.

Bioethanol can be used as automotive fuel by itself or it can be mixed with conventional engine fuels. Most vehicles registered in the EU can technically run on a blend of fuel of up to 15% bioethanol.

Biodiesel is currently used in pure form or blended with conventional diesel. Currently, Germany, Austria and Sweden use 100% pure biodiesel in adapted vehicles. In France biodiesel is blended at 30% in captive fleets and also used in blends of 5% in normal diesel fuel. In Italy it is blended at 5% in normal diesel fuel.

ETBE (ethyl-tertio-butyl-ether) is etherised bioethanol and can be used as a blending component in gasoline at a rate of up to 15%.

Biogas produced by the anaerobic fermentation of biomass and/or the biodegradable fraction of waste can be purified to natural gas quality and used in gas engines for transportation.

Biomethanol produced from biomass and/or the biodegradable fraction of waste is equivalent to fossil methanol and can be used in the same conditions as fuel for transportation.

Biodimethylether is a diesel quality fuel produced from biomass and/or the biodegradable fraction of waste, for use as biofuel.

Biooil is a pyrolysis oil fuel produced from biomass and can be used as a normal diesel fuel.

3.2 The current situation in Europe

The situation regarding biofuels varies enormously throughout Europe. Austria and France, for example, are the most active countries. A remarkable increase of 93% was recorded between the production of biofuels in 1997 and production in 1999. Only six Member States make any real contribution to the total European biofuel production.

The French oil and protein plants sector endeavoured to find new markets for rapeseed oils that were under-used in the fuel sector in Europe. In 1991, a major programme was developed to involve the main sectors concerned in biodiesel production: oilseeds manufacturers, oil producers, engine manufacturers, ADEME [2] and public authorities. As a result of this programme and the existing tax relief on pilot projects on rapeseeds and sunflowers esters, a 5% biodiesel was blended into diesel fuel by one oil company on a general basis. Total biofuels contribution in 1999 amounted to 0.7% of total oil products consumption, with approximately one third bioethanol and two thirds biodiesel.

[2] Agence de l'Environnement et de la Maîtrise de l'Energie.

Austria was one of the first countries to establish a bio-energy programme. In 1991, one of the world's first industrial biodiesel production plants started operation at Aschach (Province of Upper Austria).

An important part of the success of the Bioenergy programme in Austria is the integration of an energy policy in the diversification, reorientation and innovation of agriculture. In 1999, Austrian production of biodiesel was 18 kT. This production increased to 30 KT in 2000.

Germany is currently the second biggest biodiesel producer. Eurostat official statistics gave 130 kT produced in 1999, which amounts to 15% of total EU biofuel consumption. In 2001, production is expected to be 250 kT, rising to 500 kT by 2002.

Over the next 20-40 years, the Swedish scenario is to replace 25-50% of today's fuel use based on forest and agricultural residues. The Swedish National Energy Administration believes it is possible to attain a 10% market share for biofuel in ten years time.

Production of biofuels in Sweden in the year 2000 was about 50 kT. The available surplus of wheat in Sweden could in the future produce - with current yields - 500 000 m³ of bioethanol, meaning some 5.6% of the total annual consumption of gasoline and diesel oil in that country. There are around 300 ethanol fuel buses, most of them in the area of Stockholm, and approximately 600 biogas-fuelled cars and 100 heavy-duty vehicles. Wood chips and other ligno-cellulosic sources such as straw may be a raw material of the future, but for the time being conversion of cellulose into bioethanol is not yet competitive. The Swedish government supports research and development of ethanol from wood biomass, with the objective of making bioethanol from wood competitive in 2004.

Production in Italy was 96 kT in 1999. The national plan for the use of agricultural and forestry biomass anticipates production of bioethanol, biodiesel and ETBE of around 1 000 ktoe over the next decade.

Production in Spain was around 50 kT in the year 2000. Liquid biofuels are included in the national plan, [3] with a recognised value for rural development and job creation. Approximately 500 ktoe is anticipated in the year 2010 in the context of fiscal measures.

[3] Plan de Fomento de las energías renovables en España, December 1999.

The following table shows the relative share of only biodiesel in the EU Member States:

>TABLE POSITION>

Conversion factor for biodiesel is 0.812 ktoe/kT (Eurostat source) and 0.6 ktoe/kT for bioethanol (extrapolation).

* production in the year 2000

3.3 The potential for biofuel in Europe

The following factors will influence the potential breakthrough of biofuels:

* the primary biomass produced and process efficiency (there exist variations from 1 toe of biodiesel produced per hectare in the case of rapeseed to 5.6 toe of biofuel produced per hectare in the case of sugar beet);

* the economics of the main process and the production of by-products (secondary biomass);

* technology developments (e.g. the case of ligno-cellulosic crops).

To give some kind of magnitude, the total arable crop area under the CAP which can be used for the production of cereals, oilseeds, protein crops is limited to about 54 million ha. for EU-15. The obligatory set-aside for 2001/2002 amounts to about 4 million ha. in addition to voluntary set-aside of 1.6 million ha. i.e. in total 5.6 million ha. Given this surface of set-aside and considering only primary biomass as a function of the crop grown, between 4 and 15 Mtoe of biofuels would be supplied for transport uses, making for between 1.2 and 5% of total European petroleum products consumption. But the extent to which producers may choose to make use of set-aside for such production will depend upon price signals and, in any case, be limited by the Blair House Agreement's constraint on the use of by-products of non-food production on set-aside - namely 1 million T soya meal equivalent. Moreover, the Blair House Agreement also constrains oilseed production supported by a crop-specific aid to a maximum of some 5 million ha. Thus the decision, taken within the context of Agenda 2000, to align the oilseed aid upon the cereals aid - and so end the crop-specific aid for oil-seeds - created the basic condition for EU oilseed production to be able to respond significantly to such demand outside the context of set-aside since the possibility within set-aside is extremely limited. Other sources of production for biofuels such as cereals including maize, sugarbeet, or woody biomass are not covered by the Blair House Agreement and so are simply subject to normal rules of competition.

From the predictions of the Green Paper on security of supply [4], the transport sector would grow some 2% per annum over the coming decade. If no energy saving measures are applied, diesel and gasoline consumption for transport would be approximately 304 Mtoe in 2010 in the EU as a whole. The contribution of biofuels predicted in this proposal for 2010 should then be around 17.5 Mtoe.

[4] COM(2000) 769 final. Green Paper: "Towards a European strategy for the security of energy supply".

Finally, it should be mentioned that biofuel production is not directly linked with agriculture surface area. In addition to the potential based on primary biomass, secondary biomass and residues or organic waste should be considered as an important, environmental-friendly, complementary resource for biofuels production. Examples of the potential of secondary biomass are waste vegetable oils and fats. Total consumption of oils and fats in the EU is about 17 Mt (with a rate of increase of 2% per year), three-quarters of which is vegetable oil. As part of its recycling policy, Austria estimates that 18.5% of the total amount of oil/fat is collectible. Extrapolation of this figure to the rest of EU would give a market size of up to 3 Mt of fats and vegetable oils. The use of these fats and oils would eliminate the need for dumping and its attendant environmental hazards. Recovery of oils also avoids the cost of drainage and landfill disposal.

4. Economic considerations

4.1. Extra production costs of biofuels

Against the backdrop of security of supply, reduced CO2 emissions and rural economy, biofuels would look to have a great future. The dramatic fall in oil prices in the early/mid 1980s and their persistently low level since then (even today's ± USD 30/barrel is less than half the price it was in 1980-82 in real terms) means, however, that biofuels are not competitive.

Biodiesel - currently the most used biofuel - has a production cost of approximately EUR 500/1 000-litre, against EUR 200-250/1 000-litre for traditional petroleum-based diesel including the refinery cost. The production cost of biodiesel depends on a number of factors, particularly the price of the raw material (usually rapeseed oil), the size and type of production plant, the yield and the value of by-products (protein, glycerol). The estimate of EUR 500/1 000-litre is based on average raw material cost, low production cost of large production plant and glycerine by-product price of EUR 50/1 000-litre biodiesel produced. In view of the fact that it takes 1 100 litres of biodiesel to replace 1 000 litres of petroleum-based product, the economic calculation shows an additional cost of at least EUR 300/1 000-litre of diesel replaced by biodiesel. This additional cost is highly dependent on the crude oil price and the volatility of market prices of petroleum products.

Crude oil price // "Extra cost" - 100% biodiesel

USD 20/barrel

USD 25/barrel

USD 30/barrel

USD 35/barrel // ~ EUR 350/1 000-litre

~ EUR 300/1 000-litre

~ EUR 250/1 000-litre

~ EUR 200/1 000-litre

It should be mentioned that the production of biodiesel from used fried oils gives a more positive picture, as the raw material is more or less free of costs and it forms part of a sound waste management policy. However, the quantity of biodiesel produced from that source is of course limited.

Bioethanol can be produced from different crops, normally sugar beets or cereals (wheat, barley). In the US, corn (maize) is the main raw material, and agricultural waste products can be used in some cases. The same considerations apply to bioethanol as to biodiesel. The production cost per 1 000 litres may be lower. On the other hand, it takes 1 500 litres of ethanol to replace 1 000 litres of gasoline.

How can the extra cost for the medium term production of biofuels be justified and which instruments can best offset this extra cost- Paragraphs 4.2 and 4.3 address the benefits that are most readily quantifiable while paragraph 5 looks at the qualitative impact on other policies.

4.2. The benefits of CO2 avoidance

Avoidance of CO2 emissions from biofuel depends on the way it is produced. CO2 emission from fossil diesel is around 3.2 tonnes CO2/1 000-litre (including CO2 emissions from production, transport, etc.) used. However, even though CO2 emission from biofuels is neutral in principle, actual CO2 avoidance is less than the 3.2 tonnes because of the emissions produced in the process of growing the crops and the conversion of raw material into biofuels. Realistic CO2 saving for biodiesel is around 2 to 2.5 tonnes CO2/1 000-litre. Replacement of gasoline by ethanol is put by ADEME at 2 tonnes CO2 /1 000-litre. If there were no other benefits, such as, for instance, in the agriculture sector and in the security of supply, this would mean that at current oil prices and biofuel production costs the cost of CO2 avoidance would be in the range of EUR 100 to EUR 150/tonne CO2, which is above the range for cost-effective measures to meet the EU's commitments during the first Kyoto commitment period. However, though the use of biofuels at this moment cannot yet be justified by the benefits alone of CO2 avoidance, it should certainly be considered as a strategic choice for future climate change policy.

4.3 The benefits of oil substitution for the security of supply

The strength of the oil substitution argument is difficult to quantify but nevertheless significant. It is clear that a vast number of energy policy measures (energy saving, oil substitution) in oil consuming countries put an end to the rising oil prices in the early 1980s.

It is difficult to predict the effect of a single marginal reduction of oil demand on world oil prices. However, for example, replacing 2% of EU diesel consumption with biofuel at an additional cost of EUR 250/1 000 litre would "cost" around EUR 1 000 million/year. The resulting 2% lower demand for OPEC oil would have a certain buffering effect on oil prices and the savings on the approximately 4 billion barrels of oil consumed annually in the EU could (partially) justify these additional costs.

Moreover, the introduction of biofuels could be expected to have a modest effect in dampening the effect of changes in crude oil prices on prices paid by consumers. For example, if a EUR 10 rise in the price of a barrel of oil results in an increase in the price at the pump of 10 cents per litre, blending in 5% biofuels could be expected to limit this price rise to 9.5 cents, assuming that the prices of biofuels themselves were not significantly affected by the rise in crude oil prices.

5. Impact on other policies

5.1 Agriculture

Rural development is an increasingly important part of the Common Agriculture Policy. An essential facet of the European agricultural model, which aims to put in place a consistent and lasting framework for guaranteeing the future of the rural community, is the creation of employment.

Increased production of raw materials for biofuels will contribute to the multi-functionality of agriculture and provide a stimulus to the rural economy through the creation of new sources of income and employment.

Agricultural policy should encourage sustainable farming and afforestation and the avoidance of negative environmental impact. Biomass can be directly processed from raw material or be the residue of another process (secondary biomass). The overall impact will depend on how the raw material is used and disposed of, and what the possible by-products and residues are. In many cases in the agri-food and forestry industry biofuels could turn problematical waste production into a sustainable product.

The present proposal is compatible with the Common Agricultural Policy management and should not give rise to distortions.

5.2 Employment

Biofuels are relatively labour-intensive, especially in rural areas during the exploitation phase. Although precise numbers of job creation are difficult to evaluate, different studies agree on the scale. The German study performed by the Fraunhöfer Institute [5] showed the rate of economic impact to be 16 employees per ktoe/year. The Spanish national plan for biofuels puts the figure at 26 employees per ktoe/year of biofuels produced (source: IDAE).

[5] Volkswirschafttliche Aspekte einer Herstellung von Biodiesel in Deutschland. IFO-Institut für Wirtshaftsforchung - 2nd EU Motor Biofuels Forum/September 1996.

Extrapolation of these results would lead to the conclusion that a biofuel contribution of around 1% to total EU fossil consumption would create between 45 000 and 75 000 new jobs. Most of these jobs would be located in rural areas.

The employment impact can be calculated in different ways with different results. For example, the EUR 2 000 million production cost of 4 million m3 of just biodiesel will generate some 50 000 man-years in direct and indirect employment. Employment engendered by refining of the same amount of conventional diesel is around 2% of that figure.

5.3 Fiscal policy

The fragmentation of fuel tax systems in Europe, with different countries adopting specific tax exemptions on different fuel specifications, creates a barrier to the development of the sector and of European trade. A new legislative instrument in favour of tax differentiation is proposed as a package with this proposal in order to give stability to the market through greater European approximation. Therefore, in parallel to the present proposal, a Commission proposal for a Council Directive amending Council Directive 92/81/EC is presented.

5.4 Environmental considerations

As regards the environmental impact of the production of biofuels, a number of studies on the energy and environmental efficiency of alternative fuels have been carried out since the beginning of the 1980s. Most of these studies gave rise to animated discussions among advocates and opponents, both experts and the general public alike. An analysis of the most important studies shows that the results only differ slightly. The studies confirm a positive energy balance, stating that with one unit of fossil fuel energy, two to three units of renewable fuel can be produced. The reduction of greenhouse gas emissions is also confirmed. The differences in the CO2 reduction depend on farming practices and the chain of production. Apart from the impact on CO2 emissions, the production of crops for biofuels, conversion of the raw materials and subsequent use of biofuels have a number of effects on the environment that could be relevant to the attractiveness of replacing conventional motor vehicle fuels with biofuels.

When assessing these effects it is important to be aware that in principle what matters is the difference between the overall impact of fossil fuel production, refining and use versus biofuel production, conversion and use rather than the impact as such of the biofuel life cycle.

5.4.1 Vehicle exhaust emissions

It has been claimed that biofuels are attractive because they generate fewer "conventional" car emissions (CO, NOx, VOC, and particulate). With conventional gasoline and diesel becoming virtually sulphur and lead-free and with emission norms being tightened to more than 90% reduction of most conventional emissions, biofuels will offer in theory little, if any, emission advantage over gasoline and diesel in the future. For this reason it is important that any future mandatory blending of biofuels into petrol and diesel should be considered within the framework of Directive 98/70/EC, EN 228 & EN 590 and Community type-approval legislation. Directive 98/70/EC is based upon Article 100a (new 95) of the Treaty and establishes harmonised environmental specifications for all petrol and diesel marketed in the Community. Moreover, Article 5 of this Directive prevents any Member State from preventing the placing onto the market of petrol and diesel fuel which comply with the specifications contained in the Directive.

5.4.2 Groundwater contamination

The use of biofuel components such as ETBE could lead to the occurrence of groundwater contamination as has been observed in some Member States by MTBE due to the leaking of petrol from underground storage tanks at service stations. ETBE has very similar physical and chemical properties as MTBE and therefore could creates the same risk for groundwater contamination. After a thorourough risk assessment for MTBE, undertaken within the framework of the Existing Substances Regulation (EEC) No 793/93), it has been concluded that Member States should apply widely best available techniques for the construction and operation of underground storage tanks at service stations. These measures will work on ETBE as well.

5.4.3 Land use agricultural practice

It is clear that the three crops (colza, cereals and sugar beet) are normally grown by relatively intensive farming, but at the same time relevant EU legislation on pesticides, biodiversity and nitrate leakage require Member States to install safeguards against any unacceptable negative impact. Should bio-diversity be an important factor, growing sugar-beet would be a good option since the area required for the production of a given quantity of biofuel is less than half the area required for cereals. On the other hand, cereals produce big amounts of additional biomass in straw, which makes for a better CO2 balance if used for energy generation.

Colza or other oil seed crops require even bigger areas for a given quantity of biofuel, but in this case the value of the protein from the crops is important in addition to the potential energy value of the plant residues.

The potential to produce biofuels from either ligno-cellulosic or thermo-chemical conversion of biomass in the medium term can only be achieved if traditional forestry, short rotation forestry and/or other ligno-cellulosic crops (such as miscanthus) provide the bulk of the raw material. Such crops have a significantly lesser impact on the environment as they are not based on intensive farming and therefore hardly need any fertilisers, pesticides, weed-killers or irrigation.

Environmental advantages from growing crops for biofuels should be promoted through sustainable farming and afforestation.

Conversion of crops into biofuels is not subject to EU environmental legislation, unlike oil refining. Nevertheless, some Member States, generally believed to apply strict environmental legislation, have recently authorised plants for the production of both bioethanol and biodiesel. This is a strong indicator that it is perfectly possible to convert crops into biofuels in environmentally acceptable production plants.

In the case of the use of secondary biomass and waste products for the production of biofuels the environmental impact is positive.

Apart from the obvious CO2 reduction advantage, any other environmental effects would appear to be insignificant, either positive or negative providing a proper implementation in the Member States and compliance with other Community legislation. The Commission will therefore monitor developments closely and take additional measures where necessary to ensure that future reviews of the Common Agricultural Policy increase sustainable practice in the production of biofuels. Technical progress in the production of biofuels from ligno-cellulosics could alleviate most of the negative environmental impact of crops.

5.5 Opportunities for Third and developing countries

Biofuel development and their use offer an opportunity for trade to promote sustainable development. The need for biofuels in the EU, and subsequently in other countries, could open a new market for innovative agriculture products. In particular, this new market could benefit developing countries strongly dependent on agriculture.

Furthermore, the development and use of biofuels would create a spillover effect of new innovative technologies. For example, the leadership EU has had in the use of renewable energies for electricity production - and the innovations linked to it - has resulted in a set of technology transfers all over the world. A similar effect could arise from the biofuel initiative.

However, in short term, we expect that benefits arising from technology innovation and spill-out will be more important than market creation and imports in EU for agriculture products as dependency on oil on oil will continue to be is an universal situation. Even so, in some cases, countries like Ukraine with big cereal production could see rapid benefits arising from the new market.

Before 1 January 2007, the Commission shall report to European Parliament and to the Council, in order to asses the trade effects of the proposal and take into account the relevant international obligations taken by the Community, especially those under the WTO agreement on technical barriers to trade.

6. Justification for action at Community level

6.1 Current political context

Article 2 of the EC Treaty calls for sustainable development of the economy of the Community.

Article 6 of the EC Treaty reinforces these objectives of sustainable development by integrating environment policy into other Community policies. The Cardiff European Council in 1998 reaffirmed the need for integration of the environment into energy policy. Article 175 set the framework for adopting measures with environmental objectives.

The EU strategy for sustainable development, recently presented by the Commission to the Gothenburg European Council of 15/16 June 2001, identifies as key priorities:

* Limiting climate change and increasing the use of clean energy

* Addressing threats to public health

* Managing natural resources more responsibly

* Improving the transport system and land use.

One of the main challenges in implementing the strategy will be the development of renewable energy sources, including for transportation. The present Directive intends to address some of these challenges by promoting the use of biofuels.

At international level the UN Framework Convention on Climate Change of 1992 requires the parties to adopt policies and to take measures to reduce and limit greenhouse gas emissions consistent with the objectives of the Convention. This commitment has been quantified by the Community by way of the 8% reduction commitment laid down in the Kyoto Protocol of 1997. Greater use of renewable energy sources can already substantially contribute to the Community efforts to meet the Kyoto target in the relatively few years left before 2012. Nevertheless, their role will be even more important in the period beyond 2012, where the Commission's proposal for a Sixth Environmental Action Programme foresees a 20-40% reduction by the year 2020.

The expected increase in CO2 emissions if no further measures are taken, and the difficulties that the majority of Member States may face in meeting their commitments under the EU burden sharing agreement, call for the reinforcement of policies and measures at EU level within the overall EU climate change strategy.

On 26 November 1997, the Commission adopted the Communication entitled "Energy for the future: Renewable Energy Sources" [6]. This White Paper identified bioenergy and transport as those fields where more targeted actions should be taken to help counter the above problems. A progress report on the White Paper adopted by the Commission [7], concluded that, firstly, the rather low contribution of 452 ktoe of biofuels registered in 1997 was due to the fact that only four Member States had by that time taken specific measures and, secondly, that the production of energy crops should be given more encouragement and energy taxation revised to favour biofuels.

[6] COM(97) 599 final, 26.11.1997.

[7] COM(2001) 69 final, 16.2.2001.

In response to this White Paper, the European Parliament and the Council adopted two resolutions on 17 June 1998 [8] and 8 June 1998 [9] respectively, whereby the Commission was invited to undertake initiatives, notably in the biofuels sector.

[8] Resolution of the European Parliament of 17 June 1998 (A4-0207/98).

[9] Council Resolution of 8 June 1998 on renewable sources of energy, OJ C 198, 24.6.1998, p. 1.

The Council noted that Member States should choose the most appropriate means of promoting the use of renewable energy sources from, among other, fiscal measures. The Council also noted that, given the important role to be played by biomass, full account should be taken of renewables in the development of Community policies on agriculture and waste management, inviting the Commission to consider the need for proposals to remove obstacles to the greater use of renewables.

The European Parliament called on the Commission to include in the Action Plan the promotion of the use of biofuels, with the aim of increasing the market share to 2% over five years, either through financial aid for the processing industry or through an obligation on the oil companies to produce a minimum proportion of fuel from biomass. It also considered that there should be additional exemption from mineral oil taxes for mixed fuels to aid entry into the market.

At its meeting on 9 September 2000 the informal ECOFIN Council stressed the need for faster implementation of EU action plans in the field of energy-saving and diversification in order to reduce the oil dependency of our economies.

In its "Green Paper on the security of energy supply" [10], the Commission outlines the prospective energy situation in the EU for 2010 and beyond. One of the essential observations in this Communication is that the EU will in the short and medium term have a limited possibility to influence the supply side of energy. However, as the EU is one of the main consumer areas it should do its utmost to reduce its heavy dependence on external suppliers.

[10] Green Paper 'Towards a European strategy for the security of energy supply", COM(2000) 769 final. Op. Cit.

6.2 Additional impact of action at Community level

There is no doubt that promotion of the use of biofuels in the EU is desired at political level for the reasons of sustainable development, CO2 reduction, security of supply and the additional positive influence on rural development and agriculture policy. These are all issues of interest and responsibility at Community level, as borne out by the numerous statements and acts at political level highlighted under 6.1.

The dramatic fall in oil prices in the early/mid 1980s and their persistently low level since then (even today's ± USD 25/barrel is less than half the price in 1980-82 in real terms) mean that biofuels are not competitive. Bio-diesel - currently the most used biofuel - has a production cost of approximately EUR 500/1 000 litres, as against EUR 200-250/1 000 litres for conventional petroleum-based diesel. This means that promotional measures involve costs such as reduced tax revenue, higher price at the pump, etc., and it is only fair that those costs should be borne to the same extent by all Member States.

However, Chapter 3 highlights the substantial differences in performance between the Member States concerning the use of biofuels in transport. In addition, there is evidence that progress in some countries is mostly due to the impact of proactive measures, both fiscal and promotional, rather than specific circumstances or resource availability in those countries.

The Commission also considers that the current situation in the EU shows that the overall effort in terms of economics and research is provided by only a few Member States, whereas the benefits from promoting biofuels in terms of the environment, security of supply, emerging technologies and markets profit the Union as a whole.

Therefore, the proposal for a new legally binding instrument must be seen in the light of the common objective of increasing the use of biofuels for transport in all Member States in the European Union. The proposal also would lead to an increased demand for biofuels in the internal market, which will provide EU-wide market opportunities for companies.

Nevertheless, the proposal should at the same time safeguard the internal energy market by ensuring that promotional measures will not prohibit trade in fuels that meet the specifications on fuel quality of Directive 98/70/EC. The proposal therefore requires that as from 2005 a certain percentage of the fuel sold in each Member State is biofuel, although it does not impose any particular method of how to meet such an objective. This flexibility means that Member States can leave the choice to the companies concerned of how to meet their quotas, taking account of local circumstances. This could be done by blending diesel or petrol with biofuel products or by promotion of 100% biofuel in captive fleets. It also means that there will be no legal barriers to the trade of pure fossil fuel in the internal market. However it is considered to be unlikely that a percentage of biofuels above 4 to 5% can be reached in any Member State without a systematic blending into all ordinary transport fuels. Therefore the Commission will study this issue and if appropriate propose an amendment to Directive 98/70/EC to require a mandatory blending of a certain percentage biofuels in gasoline and diesel.

The percentages proposed for the total biofuel sold can be adapted to the situation in the Member States by a Committee procedure.

This Community approach will give a better guarantee of a level playing field for the agriculture and forestry sectors, consumers, fuel producers and distributors, and the car industry in the internal market.

7. Relevance of the initiative to Accession Countries

Agricultural activity per capita in accession countries is double the level in EU-15. There is therefore potential for sustainable farming of biofuels in these countries. Biofuel production could contribute to agricultural diversification, help to meet the environmental challenge and form part of job creation policy.

Examples of a developing biofuel industry are in the Czech Republic and in Slovakia. The Czech Republic has already completed a programme for establishing 16 biodiesel plants and is the world leader in the number of plants per country. It already has some 70 000 t production capacity, the biggest single plant, with 30 000 t capacity, being located in Olomouc. There is also full tax relief for biodiesel granted for environmental reasons. Additionally, the level of VAT on biodiesel is reduced to only 5%.

8. Contents of the proposal

Article 1 defines the purpose and scope of the proposal.

Article 2 concerns biofuel definitions.

Article 3 obliges Member States to establish a minimum percentage by volume of biofuels to be sold in their respective markets.

Article 4 concerns reporting by the Member States and the Commission.

Articles 5 and 6 concern the committee procedure for adapting the annex of the proposed Directive to technical progress.

Articles 7, 8 and 9 concern the administrative provisions of the proposal.

The Annex to the proposal contains a list of liquid tha are considered to be biofuels and the schedule for the share of biofuels in the total fuel market.

2001/0265 (COD)

Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on the promotion of the use of biofuels for transport

THE EUROPEAN PARLIAMENT AND THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community, and in particular Article 175(1) thereof,

Having regard to the proposal from the Commission [11],

[11] OJ C

Having regard to the opinion of the Economic and Social Committee [12],

[12] OJ C

Having regard to the opinion of the Committee of the Regions [13],

[13] OJ C

Acting in accordance with the procedure laid down in Article 251 of the Treaty [14],

[14] OJ C

Whereas:

(1) The European Council meeting at Gothenburg on 15 and 16 June 2001 adopted a Community strategy for sustainable development consisting in a set of measures, which include the development of biofuels.

(2) Natural resources, and their prudent and rational utilisation as referred to in Article 174(1) of the Treaty, include oil, natural gas and solid fuels, which are essential sources of energy but also the leading sources of carbon dioxide emissions.

(3) The transport sector accounts for more than 30% of final energy consumption in the Community and is expanding - a trend which is bound to increase, along with carbon dioxide emissions.

(4) Greater use of biofuels for transport forms a part of the package of measures needed to comply with the Kyoto Protocol, and of any policy package to meet further commitments.

(5) Increased use of biofuels for transport is one of the tools with which the Community can influence the global fuel market for transport and hence the security of energy supply in the medium and long term.

(6) Promoting the use of biofuels in keeping with good farming practices will create new opportunities for sustainable rural development in a more market-orientated Common Agriculture Policy.

(7) In its resolutions of 8 June1998 [15] and of 5 December 2000 the Council endorsed the Commission's Strategy and Action Plan for Renewable Energy Sources and requested specific measures in the biofuels sector.

[15] OJ C 198, 24.6.1998, p. 1.

(8) In its resolution of 18 June 1998 [16] the European Parliament called for an increase in the market share of biofuels to 2% over five years through a package of measures, including tax exemption and the establishment of a compulsory rate of biofuels for oil companies.

[16] OJ C 210, 6.7.1998, p. 215.

(9) The optimum method for increasing the share of biofuels in the national markets depends on the availability of resources and raw materials, on national policies to promote biofuels and on tax arrangements, and should therefore be left as far as possible to the policies of the oil companies and other parties concerned.

(10) National policies to promote the use of biofuels should not lead to prohibition of the free movement of fuels that meet the harmonised environmental specifications as laid down in Community legislation.

(11) However, it will be difficult to increase the proportion of biofuel sold above a certain level without measures to blend it in fossil fuel. Therefore, Member States should aim at a minimum blending of 1% of biofuel into the mineral oil marketed in the Community. This percentage will be adapted on the basis of the shares obtained by biofuels among the various fuels marketed in the Member States and based on further detailed studies.

(12) Since the objective of the proposed action, namely the introduction of general principles providing for a minimum percentage of biofuels to be marketed and distributed, cannot be sufficiently achieved by the Member States by reason of the scale of the action, and can therefore be better achieved at Community level, the Community may adopt measures, in accordance with the principle of subsidiarity as set out in Article 5 of the Treaty. In accordance with the principle of proportionality, as set out in that Article, this Directive does not go beyond what is necessary in order to achieve that objective.

(13) Provision should be made for the possibility of rapidly adapting the list of biofuels, the percentage of renewable contents, and the schedule for introducing biofuels in the transport fuel market, to technical progress and to the results of an environmental impact assessment of the first stage of introduction.

(14) Since the measures necessary for the implementation of this Directive are measures of general scope within the meaning of Article 2 of Council Decision 1999/468/EC of 28 June 1999 laying down the procedures for the exercise of implementing powers conferred on the Commission [17], they should be adopted by use of the regulatory procedure provided for in Article 5 of that Decision,

[17] OJ L 184, 17.7.1999, p. 23.

HAVE ADOPTED THIS DIRECTIVE:

Article 1

This Directive sets a minimum percentage of biofuels to replace diesel or gasoline for transport purposes in each Member State.

Article 2

1. For the purpose of this Directive, the following definitions shall apply:

(a) "biofuels" means liquid or gaseous fuel for transport produced from biomass;

(b) "biomass" means the biodegradable fraction of products, waste and residues from agriculture (including vegetal and animal substances), forestry and related industries, as well as the biodegradable fraction of industrial and municipal waste;

(c) "energy content" means the lower caloric value of a fuel.

2. The products listed in Part A of the Annex shall be considered biofuels.

Article 3

1. Member States shall ensure that the minimum proportion of biofuels sold on their markets is 2%, calculated on the basis of energy content, of all gasoline and diesel sold for transport purposes on their markets by 31 December 2005 and that this share increases, aiming towards a minimum level of blending, in accordance with the schedule set out in Part B of the Annex.

2. Biofuels may be made available in any of the following forms:

(a) as pure biofuels;

(b) as biofuels blended in mineral oil derivatives taking into account the appropriate European norms describing the technical specifications for transport fuels (EN 228 and EN 590);

(c) as liquids derived from biofuels, such as ETBE (ethyl-tertio-butyl-ether), where the percentage of biofuel is specified in the Part A of the Annex.

3. Member States shall monitor the effect of the use of biofuels in diesel blends above 5% by non-adapted vehicles and shall, where appropriate, take measures to ensure compliance with the relevant Community legislation on emission standards.

Article 4

1. Member States shall report to the Commission, before 1 July each year, on the total sales of transport fuel and the share of biofuels in such sales for the preceding year.

2. By 31 December 2006 at the latest, the Commission shall report to the European Parliament and to the Council on the progress made in the use of biofuels in the Member States, on the economical aspects and on the environmental impact of further increasing the share of biofuels. On the basis of this report, the Commission will propose, where appropriate, an adaptation of the system of targets as laid down in Article 3.

Article 5

The Annex may be adapted to technical progress in accordance with the procedure referred to in Article 6(2).

The schedule of Part B of the Annex may be adapted in accordance with the procedure referred to in Article 6(2), on the basis of technical development of biofuel technologies, market penetration and applications in means of transport.

Article 6

1. The Commission shall be assisted by the committee instituted by Article 4(2)of Council Decision 1999/21/EC Euratom [18].

[18] OJ L 7, 13.1.1999, p. 16.

2. Where reference is made to this paragraph, the regulatory procedure laid down in Article 5 of Decision 1999/468/EC shall apply, in compliance with Article 7 and Article 8 thereof.

3. The period provided for in Article 5(6) of Decision 1999/468/EC shall be three months.

Article 7

1. Member States shall bring into force the laws, regulations and administrative provisions necessary to comply with this Directive by 31 December 2004 at the latest. They shall forthwith inform the Commission thereof.

When Member States adopt those provisions, they shall contain a reference to this Directive or be accompanied by such reference on the occasion of their official publication. Member States shall determine how such reference is to be made.

2. Member States shall communicate to the Commission the provisions of national law which they adopt in the field covered by this Directive.

Article 8

This Directive shall enter into force on the twentieth day following that of its publication in the Official Journal of the European Communities.

Article 9

This Directive is addressed to the Member States.

Done at Brussels,

For the European Parliament For the Council

The President The President

ANNEX

A. List of biofuels and percentage of renewable contents

"Bioethanol": ethanol produced from biomass and/or the biodegradable fraction of waste, to be used as biofuel;

"Biodiesel": a diesel quality liquid fuel produced from biomass or used fried oils, to be used as biofuel;

"Biogas": a fuel gas produced by the anaerobic fermentation of biomass and/or the biodegradable fraction of waste that can be purified to natural gas quality, to be used as biofuel;

"Biomethanol": methanol produced from biomass and/or the biodegradable fraction of waste, to be used as biofuel;

"Biodimethylether": dimethylether produced from biomass and/or the biodegradable fraction of waste, to be used as biofuel;

"Biooil": a pyrolysis oil fuel produced from biomass, to be used as biofuel.

"BioETBE (ethyl-tertio-butyl-ether)": ETBE produced on the basis of bioethanol.

The percentage of volume bioETBE that is calculated as biofuel is 45%.

B. Minimum amount of sold biofuel as a percentage of sold gasoline and diesel

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IMPACT ASSESSMENT FORM THE IMPACT OF THE PROPOSAL ON BUSINESS WITH SPECIAL REFERENCE TO SMALL AND MEDIUM-SIZED ENTERPRISES( SMEs)

Directive of the European Parliament and of the Council on the promotion of the use of biofuels for transport

Document reference number

The proposal

1. Main aims of the proposal is to promote an increased use of biofuels in transport in the European Union in order to contribute

* to security of supply of transport fuel;

* to a reduction of CO2 emissions;

* to rural development and maintenance of employment in the rural community.

Community legislation is necessary to increase the use of biofuels and the investments in this sector in all Member States, as benefits of such an increased use are also for the Union as a whole.

The impact on business

2. Who will be affected by the proposal -

* Oil companies;

* Biofuel producers;

* Farmers;

* Vehicle manufacturers;

* Consumers.

Next to Oil companies and vehicles manufacturers, mainly the small and medium-sized producers especially in rural areas of the Community will be affected.

3. Oil companies will have to ensure that a share of their total gasoline and diesel sold will be biofuels.

4. What economic effects is the proposal likely to have-

* on employment: positive

* on investment and the creation of new businesses: positive

* on the competitiveness of businesses: neutral

5. Does the proposal contain measures to take account of the specific situation of small and medium-sized firms (reduced or different requirements etc)- No

Consultation

6. Organisations which have been consulted about the proposal:

* Oil companies;

* Car manufacturers;

* Biodiesel producers;

* Trade organisations.

* Agriculture organisations.