COMMISSION STAFF WORKING DOCUMENT IMPACT ASSESSMENT

on the calculation methods and reporting requirements pursuant to Article 7a of Directive 98/70/EC of the European Parliament and of the Council relating to the quality of petrol and diesel fuels

Accompanying the document

COUNCIL DIRECTIVE ../.../EU

laying down calculation methods and reporting requirements pursuant to Directive 98/70/EC of the European Parliament and of the Council relating to the quality of petrol and diesel fuels

1............ Section: Procedural issues and consultation of interested parties. 6

1.1......... Background. 6

1.2......... Organisation and timing. 6

1.3......... Stakeholder views. 8

2............ Section: Problem definition. 10

2.1......... Introduction. 10

2.2......... Scene setter 10

2.3......... Underlying drivers. 14

2.4......... Who is affected by the implementation of greenhouse gas emissions methodology and reporting requirements?. 15

2.5......... What policies to regulate the GHG intensity of road transport fuels are there?. 16

2.6......... Baseline scenario for the assessment of options. 16

2.7......... The right to act 25

3............ Section: Policy objectives. 26

3.1......... General objective. 26

3.2......... Specific objective. 26

3.3......... Operational objectives. 26

4............ Section: Policy options. 28

Option A - No methodology to calculate greenhouse gas emissions of fossil fuels is established. 28

Option B - Methodology based on the non-disaggregated average default greenhouse gas intensity values by fuel type based on an EU (B1) or Member State (B2) fuel mix (“basic reporting approach”). 28

Option C - Methodology based on disaggregated average default greenhouse gas intensity values by main feed stock types with partial disaggregation into conventional and non-conventional feed stocks (“2011 proposal”) 29

Option D – Methodology based on the GHG impact of all feedstocks used in the EU represented with EU average (D1) or conservative (D2) default greenhouse gas intensity values per fuel types, while allowing all suppliers to report alternate, actual values (“hybrid approach”) 30

Option E - Methodology based upon separate greenhouse gas intensities for individual categories of feedstocks ("complete differentiation") 30

5............ Section: analysis of impacts. 32

5.1......... Assessment methodology. 32

5.2......... Option B1 - Methodology based on the average default greenhouse gas intensity values by fuel type based on an EU fuel mix level (“basic reporting approach”). 36

5.3......... Option C - Methodology based on the disaggregated average default greenhouse gas intensity values by main feedstock types (“2011 proposal”) 39

5.4......... Option D - Methodology based on disaggregated default greenhouse gas intensity, based on average (D1) or conservative (D2) values, while allowing suppliers to report actual values (“hybrid approach”) 40

5.5......... Option E - Methodology based upon separate greenhouse gas intensities for individual categories of feedstocks ("complete differentiation") 40

6............ Section: comparison of the options. 40

7............ Section: conclusion. 40

8............ Section: monitoring and evaluation. 40

8.1......... Core indicators of progress. 40

8.2......... Monitoring arrangements. 40

9............ Glossary. 40

10.......... Acronyms. 40

11.......... Annex I : Overview of the oil production process (Source: Europia) 40

12.......... Annex II : the EU crude oil supply chain (Source: various) 40

13.......... Annex III: Low Carbon Fuel Standards outside EU.. 40

14.......... Annex IV: information on industry sectors related to fuel suppliers. 40

15.......... Annex V: EU suppliers dataset (Source: ICF) 40

16.......... Annex VI: EU refinery capacity (Source: Vivid Economics) 40

17.......... Annex VII: Average GHG intensities by Member State (gCO2/MJ) (Source: ICF) 40

18.......... Annex VIII: Estimated GHG emission associated with fossil and biofuels. 40

19.......... Annex IX: Road Energy demand and related emissions in ILUC sensitivity scenario (Source: ICF) 40

20.......... Annex X: Intervention logic. 40

21.......... Annex XI: Assessment methodology. 40

22.......... Annex XII: Carbon abatement costs and potential (Source: ICF/Vivid Economics) 40

23.......... Annex XIII: Monitoring, reporting and verification actions. 40

24.......... Annex XIV: Screening of competitiveness impacts (Source: Vivid Economics) 40

25.......... Annex XV: Assessment of competitiveness impacts on EU refineries (Source: Vivid economics) 40

25.1....... Estimation of the marginal cost curves - exit and sustainable margins. 40

25.2....... Construction of marginal costs of compliance options. 40

25.3....... Explanation of modelling method. 40

25.4....... Establish where compliance costs fall, that is, see whether traders or refiners bear it 40

25.5....... Construct cost curves for each policy option. 40

26.......... Annex XVI: Summary of ILUC sensitivity assessment 40

27.......... Annex XVII: Projected road fuel mix 2020 for each option (non-ILUC scenario) (Source: Vivid Economics) 40

28.......... Annex XVIII: General considerations around environmental impacts associated with fossil fuel production (Source: JRC) 40

28.1....... Environmental impacts: general considerations. 40

28.2....... Air quality impacts. 40

28.3....... Pressures on biodiversity. 40

28.4....... Efficient use of resources: water 40

29.......... Annex XIX: Detailed information on administrative costs (Source: ICF) 40

30.......... Annex XX: Projected road fuel mix 2020 all options (ILUC scenario) (Source: Vivid Economics) 40

Executive Summary Sheet

Impact assessment on the calculation methods and reporting requirements pursuant to article 7a of directive 98/70/EC relating to the quality of petrol and diesel fuels as amended by 2009/30/EC

A. Need for action

Why? What is the problem being addressed?

Article 7(a) of Directive 98/70/EC requires the Commission to adopt inter alia an implementing measure establishing a calculation method for the GHG emissions from fuels, other than biofuels, and energy. This is so suppliers can monitor and report the GHG intensity of the fuels and energy they place on the EU market in order to achieve the mandated 6% reduction target. The different impacts associated with the options available for such a methodology for fossil fuels will be assessed

What is this initiative expected to achieve?

Establish a suitable methodology for fuel suppliers to accurately report the volumes, origin, place of purchase and the life-cycle greenhouse gas emissions of the fuels that they supply. The emissions associated with all relevant stages from extraction or cultivation, land-use changes, transport and distribution, processing and combustion, must be taken into account for the purpose of ensuring that a 6% reduction in GHG intensity of road fuels is achieved. Such a methodology should also result in a sufficiently accurate fossil fuel comparator, be as consistent as possible with that already established in the legislation for biofuels, be simple to verify and not lead to an unacceptable level of administrative burden.

What is the value added of action at the EU level?

Set into effect the obligations in FQD Art 7a by implementing a methodology to be used by suppliers for calculating and reporting on the lifecycle greenhouse gas intensity of fossil fuels. The power to adopt this through the regulatory procedure with scrutiny was specifically conferred to the Commission with the adoption of the FQD.

B. Solutions

What legislative and non-legislative policy options have been considered? Is there a preferred choice or not? Why?

The options assessed represent possible levels of disaggregation of information to be reported by fuel suppliers. These are, Option A - No methodology to calculate greenhouse gas emissions of fossil fuels is established Option B – Average default GHG values by fuel type (petrol/diesel) based on an EU (B1) or Member State (B2) fuel mix (“basic reporting approach”). Option C - Disaggregated default GHG values by main feedstock types (“2011 proposal”) Option D - Disaggregated default GHG average (D1) or conservative (D2) values, while allowing suppliers to report actual values (“hybrid approach”) Option E - Separate GHG values for individual categories of feedstocks ("complete differentiation") Options discarded include A (does not meet legal requirements) and B2 (internal market barriers). The remaining options allow for reporting at different levels of disaggregation by fuel type only (B1, D1, D2), by further disaggregation by feedstock type (C) or by even more detailed disaggregation by feedstock source (E), and so lead to trade-offs between the accuracy, environmental and economic impacts. In the hybrid option(s) D suppliers would need to provide their own actual GHG intensity calculation and so would need to rely on measurement or estimation methods, and while limitations on data availability exist. In conclusion, there would appear to be a series of issues that finely balance the choice between options C, D1, D2 and B1. The option B1 approach is expected to lead to the lowest administrative costs. While option E is attractive as potentially more accurate, it would be difficult to implement this option in the short term . That is why option B1 is preferred : Average default GHG values by fuel type (petrol/diesel) based on an EU fuel mix (“basic reporting approach”)

Who supports which option?

Option B1 is favoured by the sector (including oil majors, independents and traders), certain exporting oil countries and certain Member States. Option C was the option proposed as the implementing measure submitted to the Member States in October 2011. This option is favoured by environmental NGOs and certain Member States. Option D is favoured by environmental NGOs, and stakeholders from the bioenergy and agricultural sectors. Option E is not favoured by any specific stakeholder group, although it is seen by some Member States and certain oil exporting third countries as the fairest approach as it is based on full differentiation of all fuels.

C. Impacts of the preferred option

What are the benefits of the preferred option (if any, otherwise main ones)?

The shortlisted options allow for reporting at different levels of disaggregation by fuel type only (B1, D1, D2) or by feedstock type (C) or feedstock source (E), and so they lead to trade-offs between accuracy, environmental and economic impacts. Options C, D1, D2, and B1 have similar economic impacts. B1 provides for the simplest implementation and verification mechanism given that it does not require any additional data collection. However B1 is the simplest way forward but also entails certain inaccuracies in terms of reporting GHG intensity at supplier level and poses some risks in reporting the EU average, as best available data presents low coverage of the market, does not cover imported products and no market information is collected by suppliers under this option. In addition, it presents a worse environmental performance due to encouraging a greater consumption of unconventional energy sources in the final EU fuel mix. This approach is expected to lead to the lowest administrative costs In contrast, options C, D1 and D2 are similar in terms of providing an accurate methodology and present positive environmental impacts, although D2 is more burdensome. While option E is attractive, it would be difficult to implement this option in the short term.

What are the costs of the preferred option (if any, otherwise main ones)?

The B1 option is expected to lead to the lowest administrative costs estimated to range between 2 to 3 million euros p.a. . Small differences in administrative and compliance costs have been found between the options, these represent very low overall costs and do not lead to different impacts on pump prices or competitiveness impacts.

How will businesses, SMEs and micro-enterprises be affected?

No significant impacts on businesses (including refineries) are expected as a result of the implementation of FQD. Expected pump price increases are very small and costs expected to be passed through. Although it has not been possible to categorise EU suppliers according to their size in a comprehensive manner, significantly lower administrative provisions for SMEs are reflected in the methodology.

Will there be significant impacts on national budgets and administrations?

No. Very small administrative costs may arise under some of the options as a result of the choice of methodology. The preferred approach B1 is expected to lead to the lowest administrative costs.

Will there be other significant impacts?

Observed variations in the fuel mix under the different options are small in the context of overall fuel demand and so should be interpreted with caution when assessing environmental, economic and social impacts. However, those options that provide differentiation at feedstock level (C and E) yield a fuel mix with a lower share of unconventional energy sources compared to option B1.

D. Follow up

When will the policy be reviewed?

The Commission will, monitor developments including based on the data provided by fuel suppliers to Member State authorities, with regards its proposed fossil fuel methodology on a) accuracy and reliability, b) its effectiveness, c) impacts on EU refinery sector and feedstocks, d) functioning and administrative burden, e) data availability and f) appropriateness of default GHG intensity values.

1. Section: Procedural issues and consultation of interested parties 1.1. Background

The Climate and Energy package adopted by the Council and Parliament on 22 April 2009 sought to achieve a 20% reduction in greenhouse gas emissions by 2020. It contained an amendment introducing an obligation on suppliers[1] to reduce by 6% the lifecycle greenhouse gas intensity (emissions per unit energy) of fuel and other (electric) energy supplied in the EU for use in road vehicles (and in non-road mobile machinery) by 2020, to the Fuel Quality Directive[2] (''FQD'')[3].

The FQD target is expected to be met by substituting fossil fuels with a) lower GHG intensity fuels including sustainable biofuels[4], Liquefied Petroleum Gas (LPG) and methane (Compressed Natural Gas, Liquid Natural Gas and bio-methane), b) with electricity and hydrogen, and c) by reducing upstream emissions of fossil fuels in and outside of the EU. While the methodology for calculating the greenhouse gas emissions for biofuels was included in the FQD at the time of adoption, the methodology to be used by suppliers for calculating the lifecycle greenhouse gas intensity of fossil fuels was left to be developed through comitology[5].

In this context, a draft[6] implementing measure harmonising the method for calculating greenhouse gas emissions from fossil fuels and electricity in road vehicles was submitted to the Fuel Quality Committee of the Member States[7] on 4 October 2011. The proposal was discussed on 25 October and 2 December 2011, and the Committee vote on the implementing measure held on 23 February 2012 resulted in a "no opinion", given that a number of Member States claimed to be unable to finalise their position in the absence of an assessment of the economic impacts of the proposed measures. In accordance with the relevant comitology procedure, the Commission is now required to submit a proposal to the Council. This impact assessment supports such a proposal to be presented to the Council.

1.2. Organisation and timing

The draft implementing measure, discussed with the Committee, had been prepared following input from stakeholders and Member States. This included a public consultation[8] launched in July 2009 which focussed on the issues to be addressed in the draft implementing measure; a follow up stakeholder meeting comprising the fossil and biofuel industries, Member States and NGOs in January 2010; and discussions on a concept paper with the Member States in March 2010. Moreover, the proposal presented in 2011 relies on a number of analytical studies including the work of the JEC and its "well to wheels" study[9], the Brandt study on natural bitumen[10], and the Brandt study on oil shale[11]. The work of Dr Brandt was subjected to an external peer-review process whose findings were discussed with stakeholders at a public meeting on 27 May 2011[12].

In addition, in order to evaluate the different options for a methodology, a study of their effectiveness in terms of achieving accurate and real greenhouse gas emission reductions in transport fuels consumed in the EU was commissioned in 2012 and interim findings were discussed with stakeholders at public meetings on 20 December 2012 and 15 April 2013. In additions, a number of stakeholders i.e. the governments of Alberta and Canada, Europia, Transport and Environment, and the Government of Estonia, accepted the offer from the Commission to present their views on the options under consideration including any relevant analysis that they had conducted[13]. An inter-service working group[14] focusing on the preparation of the impact assessment report was established in early 2012, with meetings of this Impact Assessment Steering Committee taking place on 25 April 2012, 3 December 2012, 25 January 2013, 27 February 2013, 25 April 2013 and 3 June 2013.

The present Impact Assessment takes into account the recommendations formulated by the Impact Assessment Board on 3 July and 30 August 2013[15]. They requested that a number of aspects of the Impact Assessment should be improved i.e. clarify the main drivers for the high greenhouse gas intensity of transport fuels and baseline scenario, including the role of high carbon conventional and unconventional oil sources; clarify the objectives of the intervention and related monitoring arrangements; improve the assessment and comparison of the options, including Member State specific impacts and impacts on relations with trade partners; and better integrate stakeholder views and explain how their concerns have been addressed.

These comments were taken into account in the resubmitted Impact Assessment as follows,

A new section describing stakeholder views in detail has been introduced and these have been integrated throughout the report;

The problem definition section has been shortened and the description of the baseline has been improved in a number of aspects (i.e. environmental impacts, detailed description of assumptions on biofuels and electricity, detailed description of fuel suppliers baseline, etc.);

More information has been provided with regards to the role of conventional and unconventional oil sources;

The policy objectives have been revised to include considerations around simplicity of implementation and verification arrangements of the different options, which are now included in the assessment of impacts chapter.

Description of the policy options has been improved to include associated data requirements.

Better description of Member State specific impacts have been included where appropriate, as well as impacts on trade relations and WTO compatibility issues;

Effectiveness of the options with regards to needed accuracy has been developed to highlight the strengths and weaknesses of each approach.

The monitoring and evaluation section has been developed to provide further detail on evaluation criteria and detailed monitoring arrangements.

The executive summary, executive summary sheet, the comparison of the options and conclusions sections have been modified accordingly to reflect key changes.

1.3. Stakeholder views

The Commission is aware of the views of the main stakeholder on the possible options for the implementation of the FQD through the different consultation exercises conducted over the last three years.

In this context, the governments of Alberta and Canada have expressed strong concerns against any implementing measure that would assign a higher carbon intensity to Canadian natural bitumen crude and derived products compared to conventional oil sources, which in their view would be incompatible with WTO rules. Although they recognise that natural bitumen inherently presents a higher carbon intensity than most conventional crudes consumed in Europe because of the more energy intense extraction and production methods, any measure that creates a separate category for natural bitumen would in their view unfairly discriminate natural bitumen oil against the utmost polluting types of conventional oil sources[16]. For this reason Canada has indicated that it would submit any such proposal to the WTO for review.

The Estonian Government has also expressed concerns about the potentially large economic impacts derived from any measure that would assign a differentiated higher carbon intensity value to Estonian oil shale and derived products given the important contribution of oil shale exploitation to the Estonian economy[17]. In addition, the results from a study from the Tallinn University of Technology suggesting that the typical carbon intensity value of Estonian oil shale production is lower than that included in the 2011 implementing measure were presented to stakeholders at the meeting of 15 April 2013.

The EU and US oil industry sector (including oil majors, independents and traders) oppose any measures that would require the development and implementation of a chain of custody for crude oil and derived products, given the complexity of the global fuel supply chain as well as concerns over quality of data available and risk of fraud. They have also expressed concerns about the impacts on competitiveness among crude producers and refiners related to the disclosure of commercially sensitive information under such system. In this context, a study commissioned by Europia[18] suggests that any methodology based on crude differentiation would lead to an increase in total compliance costs to EU refiners between $1.5 to $7 per oil barrel[19], as well as increasing the emissions associated with fuel transportation and leading to no global net greenhouse gas emissions savings, as higher carbon intensity crude oil and derived products would be consumed outside Europe where no such restrictions exist[20].

The bioenergy and agricultural sectors oppose any different methodological treatment for fossil fuels from that applied to the calculation of greenhouse gas emissions of biofuels on the grounds of fair treatment. In this context, biofuel producers already implement a chain of custody mechanism throughout the supply chain for each consignment of biofuel feedstock.

Environmental NGOs favour as disaggregated a methodology as possible in order to ensure that the carbon intensity of fuel suppliers is accurately measured and that the correct level of associated mitigation actions is undertaken. In this context, NGOs specifically favour assigning different values for unconventional oil sources, which they estimate could represent between 5.3% and 6.7% of all oil crude and transport fuels in EU by 2020[21], to reflect their higher carbon intensity. In addition, studies commissioned by NGOs suggest that a low administrative burden would be associated to such system being estimated at about 0.8-1.6 eurocents per barrel[22]. Although no assessment of the compliance costs to industry was included, a separate study from NGOs suggest that when the price of unconventional oils ranges from 30–90 $/bbl, a price differential ranging between conventional and unconventional sources of $0.5 to 3 per barrel may also have an impact on investments in extraction of unconventional oils, which could result in an additional 19 Mt CO2 savings from discontinuation or postponement of existing and planned projects[23].

2. Section: Problem definition 2.1. Introduction

The aim of Article 7a of the FQD is to reduce the lifecycle GHG associated with the production and use of fuels and electric energy used in road transport. This includes those GHG associated with the extraction of feed stocks used for their production[24], processing, subsequent transport and refining as well as their use in vehicles. Article 7a stipulates that:

– Fuel suppliers shall reduce the greenhouse gas emissions per unit energy of the fuels they supply by 6% by 2020 (Article 7a(2)(a)); and

– Fuel suppliers shall report annually to Member States on the greenhouse gas intensity of fuel and energy supplied by providing as a minimum,

– Total volumes of fuel types/energy supplied indicating its origin and place of purchase (Article 7a(1)(a));

– The life cycle greenhouse gas emissions[25] per unit of energy of the fuels supplied (Article 7a(1)(b)).

The purpose of the reporting mechanism is twofold, it aims to ensure both accuracy in respect to the greenhouse gas emissions reductions that need to be achieved (Article 7a(2)(a)) as well as to the actual average GHG intensity of fossil fuels consumed in the EU (Annex IV, C, 19).

The FQD delegates authority to the Commission to establish a robust methodology for the calculation of life cycle greenhouse gas emissions from fuels other than biofuels and from energy. The FQD also invites the Commission to establish guidelines in relation to the information to be reported by fuel suppliers. The problem to be addressed in this impact assessment is the appropriateness of the options for developing such a methodology and their associated environmental, economic and social impacts. In this context, this impact assessment aims to explore in detail key concerns raised by industry and certain Member States with regards to administrative burden and compliance costs imposed on fuel suppliers.

2.2. Scene setter 2.2.1. Transport emission reductions in the context of EU climate goals

The EU is committed to achieving, by 2050, an 80% to 95% reduction in greenhouse gas emissions economy wide compared to 1990 levels. The "A Roadmap for moving to a competitive low-carbon economy in 2050"[26] foresees that the transport sector needs to reduce its greenhouse gas emissions by around 60% compared to 1990 levels by 2050 to ensure a comparable cost-effective greenhouse gas emissions abatement in that sector. This objective has been confirmed in the Transport White Paper: "Roadmap to a Single European Transport Area – Towards a competitive and resource efficient transport system"[27].

Transport emissions can be reduced through measures which affect i) the amount of transport activity, ii) the energy efficiency with which that transport is carried out and iii) the greenhouse gas intensity of the energy used to perform the transport. Moreover, efficiency gains and greenhouse gas intensity reductions in fuels play a particularly important role in decoupling the effects of economic growth on emissions. Given the overall transport greenhouse gas reduction goals, the degree to which one of the three levers to reduce emissions is not deployed, the more action will be required from the other two, including through increased fuel efficiency from vehicles.

Policies aimed at reducing the greenhouse gas intensity of the energy used in the transport sector[28] will therefore play an important role in achieving climate goals, particularly as transport sector activity and the share of unconventional, more-energy intense, fossil fuel sources are expected to increase to 2050[29]. While the Commission prefers a more streamlined approach over the continuation of specific targets in the transport sector in its vision for the 2030 climate and energy framework[30], there is a need to establish a mechanism for reporting the greenhouse gas emissions of road fuels in order to improve data collection and monitoring of such emissions. Therefore, in establishing a solid regulatory framework for reporting of such emissions through the FQD, the EU is not only ensuring a contribution towards the 2020 emission reduction objectives, but also developing a system to assess the upstream emissions from oil production that is appropriate in the context of the long term commitment to decarbonisation of the transport sector.

2.2.2. EU trade in crude oil

Crude oil is a worldwide commodity, although logistics, product quality and geopolitical reasons heavily influence supply sources. In total, it is estimated that around 611 million tonnes of oil[31], around 15% of total global consumption, were consumed in the EU in 2012. Although some domestic production of North Sea oil is available, the crude oil consumed in the EU is mostly imported from the Former Soviet Union (FSU) and Norway, followed by the Middle East, and North Africa[32].

Figure 1: Major trade movements 2012 (million tonnes). Source: BP Statistical review 2013

Total EU consumption of crude oil has been decreasing slowly since 2005 and it is expected to continue decreasing to 2020, in part due to the increased share of renewable energy and implementation of energy efficiency measures. In the context of sourcing, North Sea production is expected to decline, leading to increased imports, even under such scenarios of reduced consumption. By contrast, global crude oil consumption is expected to increase during the same period of time.

2.2.3. EU trade in petroleum products[33],[34]

The EU is the second largest producer of petroleum products in the world after the United States. The two key trade petroleum products in the EU in terms of volume are petrol and middle distillates such as diesel and gasoil (including jet fuel and heating oil). A growth in demand for middle distillates (such as diesel, jet fuel and gasoil) between 1990 and 2008 resulted in a supply/demand imbalance in the EU with regard to such products which has led it to be dependent on trade in order to balance out demand and supply. If net imports of kerosene and jet fuels are taken into account, the EU shortfall in middle distillates amounts to upwards of 35 million tonnes of net imports per year, imports of kerosene and jet fuel coming mainly from several Middle Eastern countries.

More specifically, demand for petrol in the EU in 2011 was 89 million Tonnes (Mt) whilst exports to North America, Africa and Asia comprised 18, 10 and 8 Mt respectively which made the EU a net exporter of petrol (representing c.a. 30% of domestic EU production). However, the EU is net importer of diesel/gasoil with 15 Mt, 12 Mt and 8 Mt being imported from Russia, the USA and Asia respectively to help meet a demand of 279 Mt[35].

For road transport, the EU is also a net importer of intermediate products such as processed oil (e.g. straight run fuel oil or vacuum gas oil) and naphtha (feedstock destined for either the petrochemical industry “ethylene manufacture” or aromatics production). Historically, significant volumes of fuel oil and vacuum gas oil have been imported from the FSU and processed in the EU to supplement high quality road diesel demand that could not have been supplied by less technologically advanced Russian refineries, which are currently being upgraded and so trade on final products will increase. With regards to naphtha, little is thought to be used for diesel production as it is unlikely to comply with legally binding lower limits of aromatics permitted in diesel.

2.2.4. Conventional and unconventional petroleum sources and associated greenhouse gas emissions

The GHG intensity of fossil fuels is normally expressed as the sum of the upstream emissions associated with extraction and downstream emissions associated with transport, refining and combustion in the vehicle's engine. The average greenhouse gas intensity of transport fuels consumed in the EU currently is approximately 88.3g CO2/MJ[36]. The largest contributor to this figure (c.a 85%) are the tail-pipe emissions whilst upstream emissions and downstream emissions contribute approximately 5 and 10% respectively.

However, upstream emissions can be much higher and vary according to the source, type of feedstock and production method. Recent modelling suggests that upstream emissions could range between 0-50 g CO2/MJ with the overwhelming majority of EU conventional crude sources ranging between 0 and 10 g CO2/MJ.

In most simple terms, the greenhouse gas intensity of extracting and preparing any petrol/diesel feedstock for further refining is, inter alia, directly linked to the energy needed for extraction. Consequently, the greenhouse gas intensity of such activities is related to how immobile the feedstock is, as found in-ground, prior to extraction. Natural bitumen[37] feedstocks are generally more dense and viscous and do not flow freely under natural conditions[38]. The further differentiation of natural bitumen feedstock from conventional crude oil is linked to the extraction methods employed[39],[40],[41]. This also stems from its viscosity and density. Natural bitumen is extracted through mining or thermally enhanced gravity drainage where the fossil fuel deposit is heated with steam so as to lower its viscosity and where the thermal energy is mainly derived from sources other than the feedstock source itself[42].

It is important to note that the presence of natural bitumen is not unique to any one location. United States Geological Survey (USGS) reports the presence of natural bitumen in North and South America, Europe, Asia and Africa[43].

Figure 2: Typical GHG emission ranges for conventional crude oil and oil sands. Source: Brandt [44]

It is clear from the Brandt study on oil sands that some of the worst performing conventional crude feedstocks (i.e. high flaring emissions associated with certain Nigerian oil fields) and the best performing natural bitumen feedstocks (i.e. using natural gas for their extraction) present a similar level of greenhouse gas emissions, as shown in Figure 2. It is important to note that this overlap does not normally stem from the naturally occurring differences in physical properties of the respective feedstock sources but is mostly, for example, due to the flaring and venting emissions occurring during the extraction of oil and which result from the inappropriate management of the simultaneous extraction of two separate fossil fuels, crude oil and natural gas. In this context it is worth noting that while the amount of unconventional oil sources is expected to rapidly rise in the future as the exploitation of such feedstocks increases globally[45], greenhouse gas emissions associated with flaring and venting of conventional crude show a downward trend worldwide[46].

2.2.5. Information about petroleum feedstocks affecting their greenhouse gas intensity

There is currently a significant amount of information that is collected by economic operators along the oil supply chain because it is either required for production purposes (i.e. the chemical composition of crude oil is needed for efficient refining) or for compliance with specific legislation. This is particularly comprehensive for imported and exported goods as information about their origin, tariff classification (i.e. including differentiation between conventional and unconventional sources)[47], mass/volume and physical characteristics has to be recorded and reported to the competent authorities for compliance with customs legislation[48]. Nevertheless, there are gaps in the transfer of information for "finished" and "intermediate" products such as petrochemicals in need of further refining, which represent however only around a quarter of total EU oil consumption.

With regards to the reporting of the associated greenhouse gas emissions, conventional and unconventional feedstocks are already treated differently in the legislation. For example, the greenhouse gas emissions of natural bitumen (i.e. oil sands and tar sands) and oil shales are differentiated in Commission Regulation No 601/2012 on the monitoring and reporting of greenhouse gas emissions under the European Emissions Trading System (i.e. a higher CO2 emission factor for "oil shale and tar sands" than for conventional crude oil is stated on the basis of their energy and carbon content)[49]. Furthermore, many companies in the oil sector already voluntarily report on their greenhouse gas emissions, although no common methodology is being used.

Further detailed information on what information is currently available and where the key gaps and difficulties remain can be found in Annex II : the EU crude oil supply chain.

2.3. Underlying drivers

In the context of establishing a suitable methodology for the calculation of the lifecycle GHG emissions of fossil fuels, there are a number of underlying drivers that need to be considered. This is because the chosen method for obligated parties to calculate and report emissions of fuels derived from different crude sources, and the degree of differentiation applied to those, would play an important role in influencing the final mix and associated mitigation actions for the energy consumed in the EU.

2.3.1. Increasing production of unconventional oil sources and need for greater differentiation between feedstocks

Vast unconventional oil reserves are concentrated in Canada, Venezuela and a few other countries. In Europe, exploitation of unconventional sources is mainly limited to Estonian oil shale production for export (80%) and represents a significant contribution to the Estonian employment and GDP[50]. However, although only a small fraction is used domestically in heat production in Estonia, plans for the production of transport fuels from 2016 onwards exist.

Whilst there are high costs associated with their production, exploitation remains economic with oil prices of around $65 to $75 per barrel[51]. As such, whilst unconventional oil feedstocks such as oil sands and oil shale do not currently represent a significant share of Europe's supply, their share is expected to increase in the future with some studies predicting that over 10% of global supply is expected to come from these sources by 2020, rising up to 15% in 2035[52]. In certain Member States where significant investments are being made by refineries to be able to process heavier crudes, the share of unconventional oil could increase very rapidly. For example, Spanish oil industry estimate that unconventional oil could represent 23% of the Spanish crude mix by 2020[53]. Nevertheless, replacement crudes of similar quality and a lower GHG footprint are available to offset this supply.

Although there is an overlap between the greenhouse gas emissions of some of the worst performing conventional and the best performing unconventional crudes, there is a significant deviation between the average greenhouse gas emissions associated with conventional oil and the average greenhouse gas emissions of unconventional oil sources. In this context, it is also important to note that while there is significant uncertainty inherent to measurements regarding flaring and venting[54] emissions released to the atmosphere, emissions associated with unconventional sources are related to their production methods and therefore more easily recorded.

The average production of unconventional oil generally emits more greenhouse gases per barrel than that of most types of conventional oil. In the absence of any mitigation being conducted, the foreseen amount of unconventional oil could result in significant upstream emissions amounting to around 2.8 billion metric tonnes of CO2 per year globally[55]. In addition, there are also some differences in the greenhouse gas intensity of similar feedstocks within the conventional category because of the differences in the way these feedstocks are produced (e.g. because of excessive flaring and venting).

As such, as much as possible differentiation between feedstocks is desirable in order to ensure that their emissions are accurately reported and monitored, and that appropriate mitigation measures are conducted. Possible mitigation measures are also applicable to reduce the emissions from unconventional oil production include more efficient extraction technologies and carbon capture and storage (CCS). For example, reducing the input of external heat to extract oil sands is possible from a technical point of view but is not widely practiced because revenues from selling the feedstock yields higher profit than optimising efficiencies[56].

2.4. Who is affected by the implementation of greenhouse gas emissions methodology and reporting requirements?

Regulations to estimate, report and monitor the greenhouse gas intensity of fossil fuels used in the transport sector may affect fuel suppliers, Member States, third countries exporting fuel to the EU, associated industries (i.e. biofuels) and consumers (i.e. through price impacts) in different ways according to the methodology being implemented. These impacts will be evaluated in more detail in chapter 5 in the context of the shortlisted options for implementing such methodologies. In particular, EU refiners are exposed to extra-EU competitive pressures and intra-EU greenhouse gas and environmental regulations that differ from those in the rest of the world (ROW). This is particularly important as EU refiners, to a larger extent maintain and invest in EU assets, unlike independent fuel traders who mainly import and trade petroleum products in order to balance marginal, aggregate and distribute refinery products, and are not affected by minor shifts in product movement.

2.5. What policies to regulate the GHG intensity of road transport fuels are there?

Similarly to the FQD's principles, a number of Low Carbon Fuel Standards (LCFS)[57] have been put in place or are being developed by different jurisdictions in North America. A short description of these regimes, as well as of their methodological choices, is included in Annex III: Low Carbon Fuel Standards outside EU.

2.6. Baseline scenario for the assessment of options 2.6.1. Overview of related industries

There are a number of industry sectors in the EU that are directly or indirectly associated with the production and consumption of road fuels. The industry sector most directly affected by the FQD are EU fuel suppliers, whether EU producers, who process crude oil into petroleum products or those that do not have EU based refining capacity but trade finished products, and as such are the main focus of the quantitative economic impacts in chapter 5. Information on other sectors closely related to the refinery sector such as the petrochemical industry and those directly involved in the production of renewable alternatives in road transport such as biofuel producers is included in Annex IV: information on industry sectors related to fuel suppliers.

2.6.1.1. EU fuel suppliers

The FQD defines a supplier as “the entity responsible for passing fuel or energy through an excise duty point or, if no excise is due, any other relevant entity designated by a Member State”[58]. Accordingly, this is the entity regulated by Article 7a and therefore the entity responsible for applying the required reporting/greenhouse gas emissions calculation methodology.

There are two main types of suppliers in the EU: producers who process feedstocks from within the EU or outside EU to produce fuels for the EU market, and fuel traders that do not have EU based refining capacity but trade finished products.

As there is no data at EU level on the number fuel suppliers, the Commission approached Member States in 2010 and fuel suppliers in 2012 with a questionnaire to collect key information on the sector[59]. Extrapolation of the answers received from 12 Member States was conducted to provide a representative baseline for Member States. Further detail on the approached followed for extrapolating fuel suppliers and the results are presented in the Annex V: EU suppliers dataset (Source: ICF)[60].

Given the limited number of responses received from Member States and the gaps in the information supplied, it was not possible to categorise EU suppliers according to their size in a comprehensive manner. In addition, subsequent attempts from the Commission to Member States and industry associations such as UPEI have failed to yield any useful information that could be used in providing a more disaggregated analysis of competitiveness impacts by company size accurately.

2.6.1.2. Current production and turnover of EU refining sector

The EU's crude refining capacity currently represents 778 million tonnes per year (or 15 million barrels per day), equivalent to 17% of total global capacity. The European refining industry consists of 101 refineries spread across 22 Member States. Turnover in 2012 was estimated to be around €419 billion with around €30 billion value added[61]. EU demand for refined products peaked in 2006, decreasing every subsequent year[62].

Italy, Germany, France and the UK have the largest refining capacity in the EU, accounting for around half of the total refining capacity. The refineries of Poland, Belgium and the Netherlands are the largest, whilst those in Romania and Sweden are the smallest. ANNEX VI: EU REFINERY CAPACITY, shows in more detail the refining sector across the different Member States. The average refinery utilisation rate in OECD Europe in 2011 amounted to 77%, compared to 85% in 2008[63].

In terms of the evolution of the petroleum product demand mix in the EU, the share of jet fuel and kerosene has increased between 1990 and 2008 from representing 5.5% to 9.4%; the share of diesel and gasoil together from 17.7% to 31%. Meanwhile, the share of petrol has decreased from 22.7% to 16.1% and the share of heavy fuel oil from 16.3% to 6.4%. It is estimated that of the refined products produced in EU refineries, 63% are used in transport, 22% are used in industry and 15% are used for heating and power.

There are an estimated 190,000 people employed in refineries in the EU[64]. Around €240 billion/year is collected in the EU through duties and taxes on oil fuels. The EU refinery industry invests on average €5 billion/year in refining, R&D, transport and distribution.

2.6.1.3. Outlook on EU refining sector

There are 101 refineries operating in all Member States with the exception of Cyprus, Estonia, Latvia, Luxembourg and Malta. These are typically located at sites with landing terminals for oil tankers, around key infrastructures such as major ports or pipelines, with around half of the total being situated in North West Europe (49), the largest of which is the Amsterdam-Rotterdam-Antwerp (ARA) market[65]. Additional capacity is allocated in the Mediterranean region (37) and Central and Eastern Europe (17).

The traditional ownership structure is changing. "Oil majors" have divested towards Indian, Chinese and Russian conglomerates or smaller independent refiners or have separated refining activity from upstream exploration and production.

Overall refining capacity in the EU has been relatively stable over the last twenty years (see figure 3 below), although there have been changes in ownership. The top six refinery players in the EU account for around 50% of capacity. The main players differ between the regions. Whereas the international oil companies (e.g. Shell, Total, BP, ExxonMobil) have a strong presence in the North West Europe market, they are less prominent in the Central, Eastern and Mediterranean markets. Here national oil companies, such as Repsol and ENI, are the major players. Across the EU, there is a large number of smaller refining companies, such as Orlen, Petrom, Cepsa, Eni, Galp, MOL, Omv, Lukoil, Neste and Statoil that operate entirely on the European market.

Figure 3: Global refinery production 1970-2012. Source (IEA)

Another difference between regions is in the type of refining capacity they have – simple or complex. Complex refining, while more capital intensive and more expensive enables higher yields of more valuable and marketable products – such as diesel. North West Europe has a higher proportion of simple refining capacity than either the Mediterranean or Central and Eastern Europe. In the longer term, possible reliance on heavier crudes and a continuing shift in demand towards higher value products such as diesel and away from petrol may require additional investment to increase the capacity of complex refining units. In this context, Spanish refineries report investments of 6 billion euro over the last few years to prepare the process units to adjust to a fuel mix with a greater share of unconventional oil[66].

Refinery economics are determined by two global commodity markets namely that for crude and refined products market. The margin between these two determines the potential profitability of the refinery once operating costs are taken into account. Refiners therefore try to optimise the costs of the crude oil they buy in light of relevant constraints such as the technological configuration/complexity of the refinery and physical supply constraints such as access to sea ports and pipelines. Changes to the cost of particular crude supplies may adversely affect refinery profitability in the EU because of the operational dependence on particular crude sources. For example, most of the oil consumed in Latvia, Lithuania and Estonia is imported from Russia via pipelines, as these countries are important transit points for exports of Russian oil.

Overall, the commercial environment facing the EU refining industry is difficult, primarily as demand in Europe is expected to be lower in the future. This is because of:

- the on-going shift from petrol to diesel[67] has led to an excess petrol production capacity in the EU. The excess petrol production is currently being exported to the US market but this trend is not expected to continue beyond 2020 given expected market developments;

- in addition, demand for petrol in Europe is also being reduced through the increasing use of bioethanol and energy efficiency measures in the transport sector, while the demand for middle distillates such as jet fuel, road and marine diesel is growing;

- at global level, refiners in Asia and Middle East are developing additional capacity and entering the EU market.

Due to excess capacity and low economic margins associated with production of petrol, some EU refiners will struggle to maintain their operations unless new export markets are found to absorb increasing EU petrol surplus. This may translate into a reduction in petrol production through restructuring or by shutting down entire refineries. The IEA reports that capacity equivalent to 1.5 million barrels a day have shut down or have been scheduled to shut down since 2008[68] Such recent developments have yielded a return to improved margins not seen since 2006 reflecting the resilience of the refinery industry to the EU-wide economic recession[69]. To 2020, work conducted for the Commission estimates that a number of additional refinery closures, ranging between 18 and 23 depending on the total biofuel consumption, will be needed to achieve sustainable utilisation rates regardless of the chosen FQD methodology[70].

2.6.2. Overview of road fuel consumption out to 2020

Table 2 below shows the 2010 fuel consumption levels in road transport in the EU-27, as well as 2020 projections. In this context, it is expected that the on-going downward trend in consumption will continue to 2020, with an overall decrease of approximately 1841 PJ, being more pronounced for petrol than diesel as trends on increasing dieselisation of the car fleet are expected to continue to 2020. This is driven by a combination of increased energy efficiency measures and an increased consumption of renewables (i.e. biofuels and electricity).

Fuel || 2010 consumption (PJ) || 2020 consumption (PJ) ||

Petrol || 4002 || 2958 ||

Diesel || 8532 || 7590 ||

Electricity || n/a || 87 ||

Hydrogen || 0 || 0 ||

LPG || 219 || 208 ||

CNG || n/a || 44 ||

LNG || 0 || 0 ||

TOTAL || 12753 || 10886 ||

Table 2: EU-27 Fuel mix consumption (PJ). Source: ICF from EUROSTAT 2010 and WEO Scaled Projections for 2020

Although exact amounts are not being reported, only very limited quantities of petrol and diesel currently consumed in the EU in 2010 are believed to come from unconventional oil sources such as oil sands[71]. These quantities mostly relate to imports of refined products, as with the exception of small volumes of Estonian oil shale used outside the transport sector, no other feedstocks from unconventional sources are currently being extracted or produced in the EU. In addition, all the crude imported from Nigeria, some of which may come from high flaring oil fields, represents a small part of total crude being consumed in the EU (4.1%)[72].

The amount of renewable electricity in transport and biofuels consumed in 2020, as reported by the Member States in their National Renewable Energy Action Plans[73] and adjusted to forecast total fuel consumption, is included in the table above (overall numbers for petrol and diesel include total biofuel volumes). In order to provide a more disaggregated biofuel baseline into the specific feedstocks, the 2020 biofuel mix in the EU as estimated for the preparation of a different impact assessment by the International Food Policy Research Institute (IFPRI) was used and is presented in table 3 below[74].

Biofuel Feedstock || Baseline 2020 (PJ)

Corn (maize) || 29

Sugar beet || 40

Sugar cane || 103

Wheat Process fuel not specified || 15

Wheat Natural gas as process fuel in CHP plant || 15

Wheat Straw as process fuel in CHP plant || 15

2G ethanol - land using || 10

2G ethanol - non-land using || 10

2G biodiesel - land using || 15

2G biodiesel - non-land using || 15

Waste 1st. Gen. diesel || 31

Palm oil || 82

Palm oil with methane capture || 82

Rapeseed || 385

Soybean || 105

Sunflower || 40

TOTAL || 991

Table 3: EU-27 2020 biofuel consumption (PJ) [75]. Source: EC calculations based on IFPRI feedstock projections

2.6.3. Baseline disaggregated fuel consumption 2020, associated GHG and wider impacts

To better understand the different fossil fuel feedstocks that may be consumed in the EU in 2020 before the FQD is applied, the overall estimated demand detailed above was modelled using the WORLD linear program, through combining this information with bottom up detail in a number of areas[76],[77]. Subsequently, the greenhouse gas emissions associated with the consumption of these fuels in the baseline were calculated by applying the GHG intensity values used in the 2011 proposal for the Article 7a fossil fuels' methodology[78]. With regards to biofuels, the estimated GHG intensity values presented here take into account their expected improvements in greenhouse gas emissions performance towards 2020, based on estimates from COWI[79]. However, those values do not take into account more recent developments (such as the ETS proposals for ammonia and nitric acid plants in EU), and do not cover improvements for all biofuel feedstocks. As such, these have been adjusted by JRC to allow for comparison across all biofuels[80]. The results of this analysis are shown in table 4 below[81]. Further information on the assumptions is included in Annex VIII: Estimated GHG emission associated with fossil and biofuels.

The carbon intensity for electricity is assumed to be 130gCO2e/MJ for 2010 as calculated by the JRC[82], and reduced by 13% based for 2020 taking into account an increase in the production of renewable energy[83]. Adjustments to account for the increased efficiency of the powertrain by a factor of 0.4 were also made[84].

A number of key conclusions can be drawn from these results. Overall, that the FQD 6% greenhouse gas emission reduction target, requiring the average greenhouse gas intensity of all fuels to be reduced to 83gCO2/MJ, would not be achieved through the increased deployment of biofuels and electric vehicles driven by the Renewable Energy Directive targets as reported by the Member States (i.e. corresponding to a 83.8gCO2/MJ), but would need an additional 0.8 percentage point reduction (i.e. corresponding to a reduction of 7.8 Mt over a total of 913.8 Mt emissions) to come from other technologies such as reductions in upstream emissions.

With regards to the final fossil fuel mix, most of the diesel and petrol consumed in the EU in 2020 in energy terms is expected to be produced from conventional sources. All Nigerian crude, some of which may come from high flaring oil fields, continues to represent a small part of the total crude being consumed in the EU (7%)[85]. In addition, small amounts of fuel being produced from high GHG intensity unconventional crudes such as Canadian and Venezuelan natural bitumen. In this context, most of the unconventional sources will come in the form of Venezuelan natural bitumen to be refined in the EU into petrol and diesel, followed by diesel from Canadian natural bitumen refined in the United States, where most of the excess capacity for supplying and processing these types of crude exists. It also appears that small amounts of other high greenhouse gas unconventional products (e.g. oil shale, gas-to-liquid, coal-to-liquid) will also enter the market in 2020. In total, it is estimated that 345PJ, or 3% of all the energy used, would come from unconventional sources.

It is worth noting that although the energy share of high GHG intensity unconventional oil remains comparatively low at 3%, their associated greenhouse gas emissions at 3.48 gCO2e/MJ are significant in terms of the 6% reduction target as they alone represent 4% of the 2010 fossil fuel GHG intensity levels and thus equivalent to more than half of the desired reduction in GHG intensity of the fuels used in the EU in 2020[86].

In addition to the GHG impacts, the production of fuels can have a negative impact on the environment as a result of the sum of upstream activities (extraction, including exploration and production, followed by transportation by tanker or pipeline); mid-stream activities (refining), and downstream activities (transportation by tanker, pipeline or rail to marketing terminals and bulk plants and eventually service stations and commercial accounts). These activities can lead to negative air quality impacts, biodiversity impacts and the consumption of large amounts of resources (i.e. land use, water, energy input, etc…).

These impacts are much greater when they involve the production of unconventional energy sources such as natural bitumen, as the impacts on air quality, biodiversity and land use change, energy and water requirements are greater. This is of particular importance when its production leads to significant surface disturbance that could lead to significant impacts on primary forests and wildlife, or when aquifers are affected through mining affecting downstream water supply.

2.6.4. Sensitivity analysis of fuel mix consumed in the baseline

In the context of mitigating against the indirect land use change impacts of biofuels, the Commission has recently proposed to limit the contribution of conventional crop based biofuels towards the Renewable Energy Directive targets to 5%[87].

It is not clear at this stage what would be the final measure adopted, but any of the options under consideration is likely to impact on the final fuel mix for 2020 presented in this impact assessment. In order to better understand the possible impacts of a reduced contribution from conventional biofuels to the FQD target, a sensitivity scenario, where the estimated indirect land use change emission factors are taken into account in the sustainability criteria for biofuels is included here. This is because this option would lead to the largest reduction in the consumption of conventional biofuels, and almost double that expected to result from the Commission’s proposal, and as such the final outcome will be somewhere between the business as usual scenario and this extreme sensitivity case.

Under such a scenario, it is assumed that suppliers would no longer blend those biofuel feedstocks that do not provide at least a 50% GHG reduction benefit compared to petrol or diesel, once the estimated indirect land use change emissions[88] have been taken into account. This leads to the elimination of the least efficient wheat bioethanol pathways and all biodiesel pathways from conventional oil crops (i.e. biodiesel from rapeseed, sunflower, soy and palm oil), with the gap in demand (724PJ) being met with fossil petrol and diesel at 87.5 gCO2/MJ and 89.1 gCO2/MJ[89]. The revised emissions for the fuel forecast out to 2020 after displacing the selected biodiesel pathways are shown in Annex IX: Road Energy demand and related emissions in ILUC sensitivity scenario (Source: ICF)

A number of key conclusions can be drawn from these results. Overall, that the FQD 6% greenhouse gas emission reduction target, requiring the average greenhouse gas intensity of all fuels to be reduced to 83gCO2/MJ, would not be achieved in the baseline scenario, needing an additional 4.5 percentage point reduction (i.e. a total 951.7 Mt of emissions translate into 87.2gCO2/MJ) to come from other available tools such as reductions in upstream emissions and advanced biofuels[90].

Fuel || Feedstock || GHG Emissions || Energy Consumption

(MMT) (PJ)

Petrol || Conventional crude || 232.3 || 2652

Natural bitumen (Venezuela to EU) || 7.2 || 68

Oil shale || 0.2 || 2

Subtotal || 239.7 || 2722

Diesel || Conventional crude || 586.2 || 6559

Natural bitumen (Venezuela to EU) || 18.4 || 170

Natural bitumen (Canada to USGC) || 2.3 || 21

Oil shale || 0.6 || 4

CTL || 3.2 || 19

GTL || 6.0 || 62

Subtotal || 616.7 || 6835

LPG || || 15.3 || 208

CNG || || 3.4 || 44

Electricity || EU-average || 3.9 || 87

Ethanol || Corn (maize) || 0.9 || 29

Sugar beet || 1.1 || 40

Sugar cane || 2.1 || 103

Wheat Process fuel not specified || 0.7 || 15

Wheat Natural gas as process fuel in CHP plant || 0.7 || 15

Wheat Straw as process fuel in CHP plant || 0.4 || 15

2G ethanol - land using || 0.2 || 10

2G ethanol - non-land using || 0.1 || 10

Subtotal || 6.1 || 236

Biodiesel || 2G biodiesel - land using || 0.1 || 15

2G biodiesel - non-land using || 0.1 || 15

Waste 1st. Gen. Diesel || 0.3 || 31

Palm oil || 4.2 || 82

Palm oil with methane capture || 2.4 || 82

Rapeseed || 15.4 || 385

Soybean || 4.9 || 105

Sunflower || 1.3 || 40

Subtotal || 28.7 || 756

Total || 913.8 || 10886

Table 4: EU-27 2020 fuel consumption (PJ) and associated GHG emissions[91]. Source: ICF

2.7. The right to act

Following the adoption of the amendment to the FQD in April 2009, an obligation on suppliers to reduce by 6% the lifecycle greenhouse gas intensity (emissions per unit energy) of fuel and other (electric) energy supplied for use in road vehicles (and in non-road mobile machinery) by 2020 was introduced. In this context, the power to adopt a methodology to be used by suppliers for calculating the lifecycle greenhouse gas intensity of fossil fuels through the regulatory procedure with scrutiny was specifically conferred to the Commission[92]. Establishing this methodology through an implementing act is essential in order to make the 6% target effective. Furthermore, due to the inconclusive deliberations in the Fuel Quality Committee in February 2012, according to the provisions of the comitology decision, the Commission has now an obligation to submit a proposal to the Council.

3. Section: Policy objectives

The Commission is evaluating a number of different options for a fossil fuel calculation methodology. To enable the assessment of the options, it is necessary to establish the general, specific and operational objectives. The relevant FQD provisions under which such methodology should be developed are described under section 2.1.

3.1. General objective

Following from the above, the general objective reflecting the importance of establishing a methodology to ensure that the FQD aims are met is,

To ensure that the greenhouse gas intensity of road transport fuels is accurately measured and reduced by at least 6% compared to 2010. 3.2. Specific objective

In line with the specific goals of the policy intervention, the general objective can be translated into the following specific objective:

To establish a suitable methodology for fuel suppliers to accurately estimate and report the volumes, origin, place of purchase and the life-cycle greenhouse gas emissions of the fuels that they supply. 3.3. Operational objectives

The desired characteristics of a methodology can be captured in a number of operational objectives. Primarily, the methodology needs to be as accurate as possible to allow fuel suppliers to enact their reporting obligations and for the Commission to maintain the fossil fuel comparator up to date.

To establish a methodology for fuel suppliers to report as accurately as possible[93] the life-cycle greenhouse gas emissions, covering all relevant stages including extraction, land-use changes, transport and distribution, processing and combustion, irrespective of where those emissions occur, of the fuel and energy other than biofuels that they supply. To ensure that the methodology results in as accurate as possible fossil fuel comparator.

Given that the methodology for biofuels is already included the legislation, the design of the fossil fuel methodology should be as consistent as possible with that for biofuels,

To ensure that the reporting methodology is as consistent as possible with that already established in the legislation for biofuels.

Once the operational objectives above have been satisfied, the methodology should be kept as simple as possible as to avoid any unnecessary additional burden on industry and authorities,

To ensure that such methodology enables Member States to verify compliance by fuel suppliers with their obligation in a way which does not lead to an unacceptable level of administrative burden for suppliers and competent authorities.

The evaluation of the effectiveness of the policy options will focus on how well these operational objectives are achieved, while considering wider environmental, economic and social impacts in line with the Commission’s impact assessment guidelines. In this context, special attention will be paid to the impacts that these options may have on the competitiveness of the domestic EU refinery sector and on the administrative burden that may result on fuel suppliers in terms of the information that they may be required to collect, store and report. The intervention logic is described in the pictogram in Annex X: Intervention logic

4. Section: Policy options

The Commission wishes to consider the effectiveness of a number of options for establishing a methodology for the calculation of greenhouse gas emissions from fuels and energy other than biofuels consumed in the EU, as well as for the reporting of information regarding their volumes, origin and place of purchase. In addition to the methodology proposed in the draft implementing measure submitted to Member States in October 2011[94], a very large number of additional options can be developed according to the different possible levels of disaggregation (e.g. product or feedstock), and whether actual calculations of greenhouse gas emissions or established default values are permitted. This impact assessment focuses on the key options that have been proposed by stakeholders. These are:

Option A - No methodology to calculate greenhouse gas emissions of fossil fuels is established

This option would assume that the Commission did not propose a methodology to give effect to Article 7a of the FQD. As a methodology is required for Member States to implement the FQD, this would mean the Commission failing to act according to its legal obligation. As such, this option is discarded without any further analysis.

Option B - Methodology based on the non-disaggregated average default greenhouse gas intensity values by fuel type based on an EU (B1) or Member State (B2) fuel mix (“basic reporting approach”).

Under this approach, a representative lifecycle greenhouse gas intensity would be established in grams CO2 per Mega Joule ("average default greenhouse gas intensity") for each of the four main road fossil fuel types consumed in the EU (i.e. petrol, diesel/gasoil, liquefied petroleum gas and compressed natural gas). This would include upstream emissions from the exploitation of feedstocks as well as the processing, transport and combustion of feedstocks and finished fuels. Suppliers would need to determine their annual volumes and energy content of each fuel type produced or imported, information which is already being collected by suppliers. The lifecycle greenhouse gas emissions attributed to the production of these fuels would be based on default values derived from industry data on EU refined crudes[95]. Within this overall approach, the lifecycle greenhouse gas emissions can be attributed to each fuel type based on the EU (option B1) or Member State (option B2) crude mix. The ability for fuel suppliers to provide actual values is not allowed under any of these two options[96].

This approach would represent the simplest methodology as it involves the least possible level of disaggregation, i.e. it does not differentiate between conventional and unconventional fossil fuel sources in the reporting of their specific carbon intensities towards achieving the 6% FQD reductions, as these are instead integrated in the EU or MS average for the respective fuel types, and it does not require suppliers to report the greenhouse gas emissions specific to each fuel consignment. Therefore, no difference between fossil fuel suppliers according to the feedstocks that are included in their fuel mix would be reported[97].

However, there are significant concerns specific to the potential distortions in the correct functioning of the internal market that may arise as result of the implementation of option B2. This is because the introduction of different default values at Member State level under this option would effectively impose different requirements to fuel suppliers depending on which Member State the fuel is supplied to and so it may lead to barriers to internal market trade. In this context, it is worth noting that the fundamental objective of the FQD was to establish harmonised fuel quality rules to reduce environmental impacts from vehicles and to ensure vehicles operate correctly everywhere in the EU. As the implementation of option B2 is counterproductive to the aim of the FQD, this option has been discarded and only option B1 has been further assessed in chapter 5.

Option B1 is favoured by the oil industry sector (including oil majors, independents and traders), certain exporting oil countries and certain Member States.

Option C - Methodology based on disaggregated average default greenhouse gas intensity values by main feed stock types with partial disaggregation into conventional and non-conventional feed stocks (“2011 proposal”)

This option was proposed as part of the implementing measure submitted to the Member States in October 2011. The methodology would separate non-conventional feed stocks and conventional feed stocks so that the greenhouse gas intensity of petrol and diesel made from oil (comprising a range of different crudes), natural bitumen, oil shale, coal to liquid, gaseous fuels and electric energy, etc. would be distinguished. However, petrol and diesel made from different conventional petroleum feed stocks would not be treated separately i.e. all conventional petroleum feed stocks would be treated identically with a single default greenhouse gas intensity value. The lifecycle greenhouse gas emissions attributed to the production of these fuels would be based on default values derived from public data[98].

This option would require fuel suppliers to report information on the feedstocks that are included in their fuel mix. This methodology would require fuel suppliers to collect information beyond their existing data collection mechanisms (i.e. suppliers already report volumes of products, and refiners' internal monitoring systems already track the crudes that are being used). Additional requirements would be needed for the refiners' tracking system to comply with this methodology and for the data on the feedstock split associated with each batch of product trade to be passed on. The ability for fuel suppliers to provide actual values is not allowed under this option [99]

This option is favoured by environmental NGOs and certain Member States.

Option D – Methodology based on the GHG impact of all feedstocks used in the EU represented with EU average (D1) or conservative (D2) default greenhouse gas intensity values per fuel types, while allowing all suppliers to report alternate, actual values (“hybrid approach”)

As per option B1, under this option, suppliers’ compliance would be based on the GHG impact of all feedstocks used in the EU (e.g., petrol and diesel/gasoil from oil, natural bitumen, oil shale, coal to liquid, gaseous fuel and electric energy, etc.). Suppliers would report default values based on average (option D1) or conservative, higher than average, GHG intensity values (D2).[100]. The latter one being the same approach as the one laid down in the Directive for biofuels.

These options would require suppliers to report information on the feedstocks that are included in their fuel mix. However, this information will not influence suppliers’ compliance with the reduction target. Alternatively, suppliers may wish to provide actual values. This methodology implies the same data collection and traceability requirements as option C, the compliance effort of option B1, and additional efforts for those suppliers choosing to report actual values. But it is expected that only suppliers whose fuel mix yield a lower greenhouse gas intensity than the default value would opt to provide actual values[101] and hence, this option would lead to a significant inaccuracy or under estimation.

This option is favoured by environmental NGOs, and stakeholders from the bioenergy and agricultural sectors who asked for a coherent approach with the methodology applied to biofuels.

Option E - Methodology based upon separate greenhouse gas intensities for individual categories of feedstocks ("complete differentiation")

This option would require upstream greenhouse gas emissions estimates for individual categories of feedstocks within those types described under option C to be calculated and reported (e.g. field level, trade name, Marketable Crude Oil Name, etc.) by suppliers. In addition, similar information would need to be available in respect of intermediates and refined products which are purchased by refiners and or fuel suppliers.

As such, this option should provide the most accurate reporting of the GHG intensity of fuels consumed in the EU. This is because it would provide differentiation not only between the main feedstock categories (i.e. petrol and diesel/gasoil from oil, natural bitumen, oil shale, coal to liquid, gaseous fuels and electric energy, etc.), but also within these categories (i.e. oil based fuel with higher and lower upstream emissions). This is the option with the most complex reporting system[102].

In practice, suppliers would need to provide their own actual GHG intensity calculation and so would need to rely on measurement or estimation methods, while limitations on data availability exist. With regards to feedstock characterisation, data availability is high for EU and North American feedstocks and refineries but more challenging for other regions. In contrast, suppliers that need to draw on data from other companies, little data is publically available and so there may be difficulties in providing such information due to commercial sensitivity reasons. With regards to estimating the associated GHG intensity, lifecycle emission models with default data already exist but these would need to be tailored, either unilaterally, or by each supplier, in order to reflect EU specifics. In this context, the level of disaggregation required would be critical[103].

This option is not favoured by any specific stakeholder group, although it is seen by some Member States and certain oil exporting third countries as the fairest approach as it is based on full differentiation of all fuels.

5. Section: analysis of impacts 5.1 Assessment methodology 5.1.1. Introduction

The baseline estimated 2020 fuel mix, and its associated greenhouse gas emissions, are outlined in chapter 2. In the context of the evaluation of the effectiveness of the different policy options, the assessment will focus on how the accuracy of the supplier and EU level greenhouse gas intensity and the final fuel mix in 2020 may be influenced by the choice of methodology, as well as looking at potential scenarios on the mix of technologies and tools required to achieve the FQD 6% greenhouse gas emissions reduction. Any wider environmental, economic and social impacts in the categories listed below associated with that technology and tool mix will also be explored.

In so far as possible, the economic impacts that the different options may have on the competitiveness of the domestic EU refinery sector, the additional administrative burden associated with the implementation of the respected methodologies, and the overall compliance costs with the FQD reduction target, will be quantified. For the remaining cases and categories where this has not been possible, the assessment of the impacts is of a qualitative nature. Further detail can be found in Annex XI: Assessment methodology.

5.1.2. Development of scenarios

The options provide for different possible levels of disaggregation of information to be provided by fuel suppliers when reporting on the GHG intensity of the fuels under the FQD. These range from option B1 which relies on suppliers using a single EU GHG intensity average for each product, to option E under which suppliers can develop their own specific carbon intensities. The choice of methodology will influence for each fuel supplier,

· the complexity of the reporting requirements and associated administrative burden (i.e. less data intensive options require more easily available aggregated data) ; and

· the range of attractive abatement options to reduce greenhouse gas intensity of fuels supplied (and compliance costs) and their reported GHG intensity ;

Policy option || Additional biofuel blending || Upstream emission reductions || Crude switching || Product switching

EU refinery switch feedstock types || EU refinery switch among any crude feedstock || Import products refined from other feedstock types || Import products refined from any crude feedstock

Option B1 || ü || ü || || || ||

Option C || ü || ü || ü || || ü ||

Option || D1 || ü || ü || || ü || || ü

D2 || ü || ü || || ü || || ü

Option E || ü || ü || ü || ü || ü || ü

Table 6: Abatement choices for suppliers per option included in the assessment

In addition, the number of abatement choices available is also influenced by the type of methodology, as some tools (i.e. the possibility to switch to lower carbon fossil fuel feedstocks), would not be desirable to fuel suppliers under some of the less specific options.

Although electric vehicles as a compliance measure are available under all policy options, it has not been assessed further as a realistic option beyond levels in the projected 2020 energy demand due to the low perceived cost effectiveness compared to alternatives and associated technological constraints.

It should also be noted that options related to switching from one type of road fuel to another (e.g. CNG and LPG over diesel or petrol) are not considered because the carbon price premium needed to induce GHG reductions in a given year would not bring about such switching which generally responds to longer-term changes to vehicle fleets and/or taxation regimes.

The role of switching from low to high GHG savings biofuels may also be a way to help suppliers to comply with the FQD. Given that this would also be strongly influenced by other variables outside the scope of this study such as trade tariffs, the proximity of biofuel production facilities and technical compatibility issues, this option has not been included in the assessment. In addition, for those policy options in which the supplier is reporting actual supplier specific intensities[104], any measure that reduces the GHG intensity of that supplier’s product would be available to the supplier. This could include for example refinery optimisation or changes to transport/distribution efficiencies. Such measures are not considered further here because the measures listed in the table above are considered those likely to be most attractive to suppliers, and further that refinery emissions intensity reduction is already covered within the scope of the EU ETS and that transport/distribution emission reduction projects are likely to affect total lifecycle intensities only marginally. The emission intensities assumed for supplier specific emissions methods do not assume any specific refinery emission savings.

5.1.3. Assessment of effectiveness

The main measure of effectiveness of each policy option is the accuracy of the resulting greenhouse gas intensity estimate for each supplier’s fuel mix and of the overall average EU emissions of fossil fuels. Upon revisiting the descriptions of the proposed options in Chapter 4, it is self-evident that options are most accurate when the greenhouse gas values (default or actual) used in the calculation reflect as closely as possible, the supplier’s fuel mix.

In the interest of measuring the accuracy of each methodology, a comparison was made between the 2020 projected GHG intensity reported for each fuel supplier under each option against their actual emissions as calculated under option E which is expected to produce the most accurate results. The second measure of effectiveness pertains to the accuracy of the policy options to estimate actual average EU emissions from the aggregated, supplier reported values compared to that based on EU default values. In both cases, the respective per cent error was calculated and reported under each option (positive and negative per cent errors indicates overestimation and underestimation of emissions respectively).

5.1.4. Assessment of compliance costs

In order to conduct the assessment of the options described in chapter 4, the estimated available potential and corresponding pre-tax costs associated with each of the carbon abatement options have been developed for the Commission[105]. Assuming that fuel suppliers will be mainly driven by seeking lowest cost in their choice of abatement option[106], the estimated changes in fuel mix, the range of options and associated costs compared to the baseline fuel mix have been calculated and are reported under each policy option as compliance costs. Moreover, the total size of the CO2 abatement market will determine the ultimate market costs, defined as the required CO2 abatement at the highest marginal cost. These are also reported under each option. Further information on the availability and marginal abatement costs associated with each technology can be found in Annex XII: Carbon abatement costs and potential (Source: ICF/Vivid Economics).

In this context, it is noted that the baseline fuel mix already includes the levels of renewable energy (i.e. biofuels and electricity) required to achieve the Renewable Energy Directive targets as reported by the Member States. As such, it is only the additional carbon abatement effort required above those levels that is being considered in this impact assessment[107].

5.1.5. Assessment of administrative costs

The FQD creates new reporting requirements for fuel suppliers in the European market. The methodological options described in chapter 4 present different levels of complexity depending on the level of data disaggregation that is required by fuel suppliers in reporting the GHG intensity of the fuels they supply on an annual basis to the relevant public authorities.

In order to evaluate these costs, the contractors have identified and analysed the potential costs associated with the monitoring, reporting and verification incurred by the different policy options. Given that a certain level of reporting requirements already exist, only the additional actions needed to fill any data gaps specific to the FQD and the associated costs are reported here. Further information on the methodology used can be found in Annex XIII: Monitoring, reporting and verification actions.

5.1.6. Assessment of competitiveness impacts

The contractors conducted the competitiveness analysis in accordance with guidance set out by the Commission[108]. In this context, a number of sectors have been identified as possibly being affected (i.e. refining industry, fuel traders, biofuel producers, vehicle manufacturers, public transport and the petrochemical sector) by the FQD and qualitatively screened accordingly. Following from the results of this screening[109], only the competitiveness impacts on the refining industry have been further analysed as impacts on other sectors are not expected to be significant enough to warrant further investigation.

With regards to the refining industry, the analysis of the competitiveness proofing of the policy options under consideration has been conducted focusing on a number of key aspects and potential resulting impacts such as,

– the ability for refineries to choose lower over higher intensity crudes and products as a way to comply with the FQD reductions,

– the potential changes in the mixture of sources of finished and semi-finished diesel and gasoline imported into Europe

– the ability of industry to pass on any resulting increase of fuel prices, and estimation of impacts on pump prices (pre-tax), taking into account cost pass-through;

– closure of refineries to maintain margins in response to expected reductions in demand in Europe;

The question relevant to this impact assessment is to what extent any additional burden arising from compliance with article 7a of the FQD may impact the petroleum industry sector, and in particular EU refineries. In this context, it seems reasonable to assume that producers will be able to pass through most of the costs to consumers. Based on a literature review, it seems reasonable to assume a pass through cost rate of around 90-100% so long as they possess some degree of market power[110]. Moreover, it is worth noting that the implementation of the FQD does not lead to significant reductions in total fuel consumption from the baseline scenario[111].

As explained in section 2.6.1.1, given the limitations on EU supplier data availability despite requests to Member States and relevant industry associations such as UPEI, it has not been possible to categorise EU suppliers according to their size in a comprehensive manner, although some of those classified as fuel traders[112] in the baseline would be expected to fall under the SME definition. As such, it has not been possible to determine what proportion of the fuel suppliers in the baseline would fall under the SME category and whether they would be significant differences in terms of SME specific impacts by any of the options being considered in this impact assessment.

Nevertheless, modelling results indicate that trade volumes are only marginally impacted as reductions in trade of fossil fuel are partially offset by an increase in trade of biofuel volumes. In addition, net decreases in total fuel volumes are broadly equal for refiners and traders because these are linked to the overall reduction in demand. Since these effects are too small to produce changes in market structure and since cost is expected to be passed through almost completely, no significant differences in the cost of capital (associated with changes in margin volatility), employment (associated with plant closure or large changes in output), value added (associated with changes in margins or wages) and capacity to innovate (associated with profitability) between traders and producers are expected regardless of the implementation option considered. However, uniform government reporting requirements tend to have an over-proportionally large cost burden on smaller players[113].

5.1.7. ILUC sensitivity scenario

As explained in section 2.6.4, on-going discussions on a legislative proposal for mitigating against indirect land use change emissions may lead to a reduction in the consumption of biofuels in 2020 which could have significant impacts on the assessment of the options. To better understand these impacts under the most extreme option (i.e. the inclusion of the ILUC estimated emissions in the greenhouse gas emissions performance of biofuels), further analysis has been conducted and is presented in Annex XVI: Summary of ILUC sensitivity assessment.

5.2 Option B1 - Methodology based on the average default greenhouse gas intensity values by fuel type based on an EU fuel mix level (“basic reporting approach”).

Option B1 is the option with the simplest methodology as it only involves disaggregation between the main four fuel types consumed in the EU (i.e. petrol, diesel/gasoil, liquefied petroleum gas and compressed natural gas), for which an average default value would be developed. The lifecycle greenhouse gas emissions attributed to these fuels would be based on the EU feedstock mix.

With regards to the abatement options available to fuel suppliers for complying with the FQD objective, it is worth noting that this is the only approach that does not allow for switching to lower GHG intensity fuel feedstocks, or improving the GHG intensity of the fuels supplied through actions other than upstream emission reductions.

The modelled fuel mix to 2020 under this approach and corresponding abatement measures are shown in Annex XVII: Projected road fuel mix 2020 for each option (non-ILUC scenario) (Source: Vivid Economics). The key changes compared to the baseline should be interpreted with caution as these are very small in the context of the overall energy demand. These are,

- a negligible increase in the consumption of petrol (~5PJ, 0.05%) against fossil diesel, given that it has a better greenhouse gas emissions performance than fossil diesel.

- in addition, a small amount of fossil diesel (~32PJ, 0.29%) is replaced by biodiesel from waste (i.e. used cooking oil or animal fats), which provides a small contribution towards the required greenhouse gas emissions reductions (2.5Mt CO2).

- there are no changes in the feedstock mix with consumption of unconventional fuels being unaffected.

- the bulk of the abatement measures come in the form of reductions in upstream emissions (7.8Mt CO2).

- a negligible reduction in total transport fuel demand (<0.1%).

5.2.1. Effectiveness in achieving policy objective

This approach will provide for the least degree of accuracy in its reporting of the greenhouse gas intensity associated with the fuels being supplied. This is because given the simplicity of the methodology (i.e. 4 broad fuel categories), neither the variations in GHG intensity between (i.e. conventional vs. unconventional) or within (i.e. higher intensity conventional vs. lower intensity conventional) broad feedstock categories would be captured[114]. In addition, no opportunity for suppliers to report the actual values of the fuels supplied would be allowed[115]. This yields a percentage error ranging between -1.6 to 0.7 percentage points of the FQD target in the reporting of the GHG intensity of the fuel put in the market by suppliers compared to their actual values, a significant share in the context of the overall 6% target (a potential underestimation of emissions up to 27%)[116]. In this context, it is worth noting that the actual GHG intensity of fuels supplied in the Eastern and Northern European countries, that are expected to be lower than the EU average, would be overestimated, and that of those in the Southern European countries underestimated.

Figure 4: Assessment of option B1’s reporting accuracy at fuel supplier level

Despite the significant inaccuracies in the reporting of the GHG intensity at fuel supplier level, the reported average EU emissions may not be affected as long as the average default values used are based on robust data and capture variations in the feedstock mix in a timely manner. However, the fact that this option does not lead to the collection of real detailed market information by suppliers neither for reporting purposes nor for checking of compliance in 2020, poses a risk with regards to the accuracy of the reported average EU emissions as well as for the accuracy of the development of the fossil fuel comparator values. This is because, the best available data at EU level[117] is based on voluntary provided data by members of the industry organization Oil and Gas Producers (OGP). Historically, the data reflected approximately a limited 30% of the crude oil refined in the EU. However, this system provides no information on imported products, which are expected to increase. In addition, the bulk of unconventional sources entering the European market are expected to be refined outside the EU and so this method will provide poor coverage, unless the reporting mechanism is significantly strengthened.

This approach is also the least consistent with the biofuels methodology, under which those suppliers blending biofuels can make use of conservative default greenhouse gas emission values disaggregated by feedstock and technological pathway, and best performing producers are given the opportunity to provide actual values over all steps of the value chain. Moreover, this option would not require fuel suppliers to put together any type of chain of custody mechanism, unlike for biofuel producers, as the GHG intensity of the fuels supplied would be based on the EU average fuel mix and not specific to the fuel consignment.

These issues around accuracy in option B1 are balanced by the fact that this methodology is least cost and would enable Member States to verify compliance by fuel suppliers with their obligation in the simplest possible way. This is because this methodology only relies on one piece of data from suppliers, quantities of product supplied, which is the most straightforward to verify. Validation of correctly applied factors (i.e. default unit GHG intensities) could also be undertaken but is straightforward and would not entail excessive administrative burden. The risk of fraud is therefore considered to be low.

5.2.2. Environmental impacts

In so far as this approach would lead to reductions in the consumption of fossil fuels[118], increased waste biodiesel and increased reductions in the emissions associated from flaring and venting as outlined above, it will lead to positive environmental impacts compared to the baseline scenario. In addition, as the level of mitigation effort required to achieve the 6% target is directly related to the accuracy of each methodology, there is a risk that this approach could lead to less mitigation actions being undertaken, given its lack of real monitoring of market information and that the share of imported products and unconventional sources is projected to increase[119].

On the other hand, the lack of differentiation between fossil fuel feedstocks neither discourages the consumption of more resource intense and more polluting unconventional sources, nor rewards those suppliers that have invested in lowering the carbon footprint associated with the production of their fuels as they would not be allowed to use actual calculations. The lack of such an incentive runs counter to the achievement of the key general objective of the Directive, i.e. the achievement of the 6% reduction target by fuel suppliers.

5.2.3. Economic impacts

With regards to additional costs for suppliers to comply with the FQD, the additional reductions required in upstream emissions and waste biodiesel result in compliance costs of 6 million euros. Given the simplicity of the methodology, and particularly the lack of a traceability mechanism needing to be implemented, this approach is expected to lead to the lowest administrative costs estimated to range between 2 to 3 million euros[120]. While these costs reflect total administrative costs to suppliers and national authorities, the estimated burden on national authorities is negligible.

In determining the overall impacts on pump prices, it is important to consider that the market costs will be higher than those reported as compliance costs above. This is because in reality, the actual market impact will be closer to that of the marginal abatement cost under each option being applied to the whole of amount of CO2 needed to be abated[121]. In this context, option B1 is reported to lead to increased market costs of 79 million euros, or estimated pump price increases up to 0.03 cents per litre (0.04%)[122]. These costs are considered to be too small to lead to any significant changes in market structure, value added, capacity to innovate or competitiveness of EU refiners vis a vis international competitors.

Trade in crude oil and petroleum products would be largely unaffected compared to the baseline, with only a very small decrease of refined products being imported from the Former Soviet Union (~11PJ, 0.10%). The small increased amount of biofuel used may also lead to a decrease in the amount of products being refined in the EU (~32PJ, 0.29%)[123]. As a result, impacts on security of supply are also expected to be small, although it is worth noting that the share of imports in the final mix may increase under this option[124]. As the ability for fuel suppliers to switch from higher to lower carbon intensity fossil fuel feedstocks is not a compliance option available to fuel suppliers, this option does not lead to any changes in the consumption or trade of unconventional fossil fuels in the EU. As such, the risk of a WTO challenge is low.

5.2.4. Social impacts

The market costs outlined above are considered to be too small to lead to any significant changes in market structure. As they are assumed to be passed almost in full to consumers, no significant differences in employment are expected[125].

In so far as this approach would lead to reductions in the consumption of fossil fuels, and increased reductions in the emissions associated from flaring and venting as outlined above, it will lead to positive air quality impacts compared to the baseline scenario, due to reduced emissions of particulate matter and methane), and thus positive effects on public health.

5.3 Option C - Methodology based on the disaggregated average default greenhouse gas intensity values by main feedstock types (“2011 proposal”)

Option C is the option described in the proposal submitted to the Member States in 2011. Under this option, the GHG intensity of all feedstocks used in the EU would be reported separately (i.e. petrol and diesel/gasoil from oil, natural bitumen, oil shale, coal to liquid, gaseous fuels and electricity, etc.) based on default values derived from public data.

This option would require differentiated reporting by fossil fuel suppliers of the specific fossil fuel feedstocks they supply. Therefore, differences between suppliers according to the feedstocks that are included in their fuel mix would be reported.

The modelled fuel mix to 2020 under this approach and corresponding abatement measures are shown in Annex XVII: Projected road fuel mix 2020 for each option (non-ILUC scenario) (Source: Vivid Economics). The