The Renewable Energy Directive and the challenges for the Biodiesel Industry: Insigths into a dynamic and opaque industry

Table of contents

1. Introduction
1.1. Motivation and research objective
1.2. Methodological approach
1.3. Structure of the book

2. The Renewable Energy Directive (RED)
2.1. Background on the RED 2003/30/EC on commodity and biofuel trade
2.2. The Renewable Energy Directives 2009/28/EC and 2009/30/EC

3. The biofuel industry
3.1. An overview of the biofuel industry and its players
3.2. The biodiesel value chain and different types of feedstock
3.3. Feedstock production, crushing plant and oil production
3.4. Biofuel production and chemical background of transesterification
3.5. Trade flows and concrete example of a Supply Chain Manager
3.6. GHG emissions as main sustainability criteria for biodiesel
3.7. Criticism on criteria regarding GHG emissions and biodiversity
3.8. Crop rotation and Genetically Modified Organism
3.9. Direct (DLUC) and indirect land use change (ILUC)

4. Political frameworks and incentives for the biofuel industry
4.1. Argentinian’s export tax driven biodiesel industry
4.2. Splash and Dash - a US case study on import and tariffs
4.3. Sustainability certificates and voluntary schemes – 2BSvs case study
4.4. Criticism on sustainability schemes
4.5. An outlook into second and third generation biofuels
4.6. Price increases and price volatility cause food shortage and hunger

5. Conclusion

6. Bibliography

Appendix

Acknowledgements

List of Figures

Figure 1: Development of world biodiesel production between 2000 – 2010 (mmt)

Figure 2: Biofuels productions and their contribution to transport fuel consumption

Figure 3: Development of biofuels mandates in Europe

Figure 4: Legislation scheme based on EU Directives 2009/28/EC and 2009/30/EC

Figure 5: Share of renewable sources in final energy consumption

Figure 6: Consolidated forecast for biofuel production in the EU (mmt)

Figure 7: Types of biodiesel feedstock used in the EU27

Figure 8: Biodiesel consumption in the EU within the land transport sector (kmt)

Figure 9: Development of global financial new investments in RE excl. wind

Figure 10: German industry turnovers related to renewable energy facilities in 2011

Figure 11: Biofuels consumption in EU27 in 2010 (kmt)

Figure 12: Development of world biodiesel production between 2000 – 2010 mmt)

Figure 13: Soybean and soybean products production flow

Figure 14: Biodiesel blend feedstock, oil consumption and biodiesel use in Germany

Figure 15: Biodiesel Value Chain

Figure 16: Biodiesel production and production capacity in selected countries

Figure 17: Biodiesel and Bioethanol

Figure 18: Schematic biodiesel production

Figure 19: Schematic process flow for biodiesel production

Figure 20: Chemical equation of transesterification

Figure 21: Global soybean trade flows scheme in 2010 (mmt)

Figure 22: Major exports of oilseeds

Figure 23: Major imports of oilseeds

Figure 24: Major imports of vegetable oils and methyl esters

Figure 25: Average feedstock use in major European countries in 2011

Figure 26: Major exports of vegetable oils and methyl esters

Figure 27: EU 27 consolidated trade flow data

Figure 28: Soybean trade flows from a selected supply chain managing company

Figure 29: EU27 biodiesel imports 2010

Figure 30: Energy use in transport sector (million tons of oil equivalent)

Figure 31: Global Energy use in transport and biofuel use within the transport sector

Figure 32: CO2 emission abatement per ha rapeseed and corn (mt/ha)

Figure 33: Life Cycle energy equivalents

Figure 34 & Figure 35: Base case energy use for SME

Figure 36: Standard values for GHG emissions

Figure 37: Life Cycle GHG balance of advanced and first generation biofuels

Figure 38: Biofuels demand and resulting land demand of the IEA 2050 Scenario

Figure 39: Land use efficiency development for biodiesel in 2010-2050

Figure 40: Different types of land use change

Figure 41: Comparison of international market prices of diesel and vegetable oils

Figure 42: Example for export taxes for agricultural products

Figure 43: US foreign trade balance for biodiesel

Figure 44: Global biodiesel trade streams in 2008 (kmt)

Figure 45: Global biodiesel trade streams in 2011 (kmt)

Figure 46: Timeline of the sustainability certification project in Argentina

Figure 47: Sustainability aspects framework affected by biofuels

Figure 48: Commercialisation status of advanced generation biofuel technologies

Figure 49: Biofuel demand forecast by region 2010-2050

Figure 50: Global GHG abatement cost curve beyond business-as-usual (2030)

List of abbreviations and acronyms

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1. Introduction

The twenty-first century bears new social, economical and environmental challenges for the global community. Many of these are directly linked to the world’s resources, which have formed a profound basis for economic growth and development particularly in recent decades. Even though the demand for food, energy and electricity has been increasing, supply could be balanced through productivity enhancements mainly driven by technological development. This supply-demand equilibrium has become increasingly unstable and the era of cheap resources is coming to an end. As early as 1798, Thomas Malthus expressed his concerns about poverty and famine caused by the lack of food supply for an increasing world population in his famous “essay on the principle of population”.^[1] Nowadays, the extraction of resources or cultivation of agriculture is driven by price inflation, price volatility and environmental limitations so that a sustainable supply for the continuously rising world population cannot be maintained, and discrepancies between rich and poor on international as well as national scales will become even more dramatically recognizable.^[2] There has been unprecedented progress in fighting poverty and promoting development over the last two decades, but the shift in the priorities of developing and emerging countries away from climate change, represents a dramatic threat and jeopardizes further this progress.^[3] Furthermore, the apparent incompatibility between the need to reduce the impact of global warming and the resolution of the growing energy demand worldwide creates new pressure on governments to intervene politically, especially after the Stern Report^[4], published in 2010, and the United Nations Intergovernmental Panel of Climate Change (IPCC) confirmed that the increase of greenhouse gas (GHG) emissions is, with a 90 per cent certainty, produced by anthropogenic activities. Among other initiatives like Clean Development Mechanisms (CDM) and Carbon Emission Trading Schemes, alternatives to nuclear and fossil energy, such as biofuels, have been promoted with subsidies and regulations in the transport sector. Carbon emissions and global warming can thus be reduced, thereby mitigating the impact of GHG.^[5]

In 2011, the WWF published The Energy Report^[6], which stressed the possibility of having a realistic 2050 scenario in which 100 per cent of the energy supply stems from renewable resources. Without dramatic scientific improvements and current technologies the move from fossil fuel energy towards a sustainable energy solution would not be feasible. The public sector would need to provide certain frameworks to be complemented with private sector initiatives and considerable capital-intensive investments.^[7] During 2008-2010, US$ 400 bn was invested in clean energy^[8] including energy efficiency and transport-related energy initiatives by the private sector.^[9] Approximately 50 per cent of these investments have taken place in the developing world. Nevertheless, if the global community aims at a two degree world, that is, one in which global warming will be limited to an increase of two degrees Celsius,^[10] these efforts will have to triple in the upcoming years. In addition to the private sector, more than 100 public institutions commenced with precise regulations towards renewable energies in order to keep up with the rise of the other two to three billion more people that will shift into the demand function by 2020 and an additional two billion by 2050.^[11]

One of these actions is the 20:20:20 Energy Strategy initiated by the European Parliament which refers to improvements that are intended to be achieved by the year 2020: 20 per cent less overall GHG emission compared to 1990 levels; 20 per cent efficiency increase in the current energy use; and finally 20 per cent as a share of renewable energy within the energy mix used by the European Union.^[12] This ambitious energy strategy is directly linked to current forecasts for energy supply and demand.

Global energy consumption is predicted to increase by 30 per cent by 2030 due to the growing world population and strong economic growth in developing and emerging countries. Particularly notable will be the increase of energy consumption in China and India.^[13] Demand will be further driven by the rise of a considerable middle class in emerging countries such as Brazil, Colombia, South Korea, Thailand and Malaysia, and reinforced by urbanization and industrialization mainly in Asia and Africa.^[14] In 2007, China exceeded the United States in terms of industry size^[15], simultaneously became the largest emitter of carbon dioxide equivalent (CO2eq) in absolute terms. This demonstrates the continuously increasing pressure on the Earth’s eco-system.

In light of this, through the 20:20:20 strategy, Europe aims to set a new global benchmark for sustainable energy policy.^[16] Its strong encouragement of innovation and promotion of alternative energy sources also aims to reduce dependency on fossil fuels in the EU27^[17], which is a particular concern given the aforementioned volatility in oil and energy prices. These alternative energy sources would, in theory, contribute to a more balanced energy security and less dependency on Middle Eastern oil and Russian gas.^[18]

In line with the third objective of the 20:20:20 Energy Strategy regarding energy mix, the EU27 uses one measure to reduce carbon emissions within the transport sector. Transport has demonstrated the fastest GHG increase in Western countries including the USA, Japan and Europe.^[19] It now accounts for 20 per cent of global GHG emissions and is expected to further grow by 55 per cent by 2030.^[20] Thus the European parliament passed within the RED clear instructions to increase the share of biofuels up to ten per cent within this sector in order to foster cleaner energy alternatives in non-fossil fuel sources.^[21] In recent years, biofuels have become a feasible alternative to oil within the transport sector and in countries like Brazil the public transport sector already runs on almost 100 per cent biofuels successfully.^[22] In contrast to alternative technologies such as hydrogen, biofuels are easily adaptable to existing infrastructure, so that flexi-fuel technology^[23] has become increasingly available. Finally, Brazil and the United States – the most efficient producers as in terms of biodiesel and bioethanol respectively – have competitive prices relative to the oil industry on the global energy markets.^[24]

There are different generations of biofuels and first-generation biofuels comprise among others bioethanol and biodiesel, which are made with agricultural feedstock such as corn and sugar cane as well as soybean oil (SBO), rapeseed oil (RSO), sunflower oil (SFO) and palm oil (PO). These are then processed into liquid fuels. Despite maturing and having reached a developed stage in recent years, the international biofuels trade will continue to increase heavily in the medium term. An even more elevated volume of international trade in biofuels is expected to follow rising blending requirements, which are set by politicians. These blending margins are targeted to be elevated in order to secure as well as raise demand on a continuous basis. Henceforward, production supply can keep pace with demand in domestic and international markets. However, international trade will remain a major role for countries which are not able to cover blending targets with their own production in terms of capacity or costs. Export possibilities for the most efficient producers of either biofuels or feedstock are created, for example biodiesel, SBO and PO from Brazil, Argentina and Indonesia respectively.

The European market will be of increasing importance since the EU27 on a consolidated and national level will increase their blending margins and introduce requirements, such as the nine billion Euro European Industrial Bioenergy Initiative^[25] or the ethanol blending margin of E10 introduced in Germany. The European market therefore significantly affects the growing feedstock and biofuel industries in the southern hemisphere on a short- and medium-term basis.^[26] This said, demand from Europe will be comparatively small with possible upcoming large-scale imports to China and India in the long run. Other Southeast Asian countries – especially Indonesia and Malaysia, which are the leading palm oil producing economies – will cover the main vegetable oil flow into the tiger and dragon economies. By the same token, Europe’s share in biofuel imports in the global market is comparative small due to enormous investments in refining capacity in the past and a protected market. European import demand will be met by South American producers, as they have comparative advantages versus local producers, including land availability, right climate and soil conditions, longer growing seasons and lower cost of production.^[27]

Figure 1: Development of world biodiesel production between 2000 – 2010 (mmt)^[28]

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Generally over the last decade, biofuel markets have been developing in size and complexity. Through strong policy intervention in terms of regulations, subsidies and other frameworks, these have been more closely bound together in the global biofuel market, especially in the energy and agricultural sectors. In comparison to 1990, where world fuel-ethanol production amounted to about 12 million metric tons (mmt) and biodiesel production was marginal, in 2011 world fuel-ethanol production amounted already up to 80 mmt^[29] and biodiesel up to 16mmt (Figure 1).^[30] Ambitious future biofuel targets as stated for example by RED,^[31] which set the target of 10 per cent energy from renewable sources in total European transport energy consumption in 2020, indicate that this trend will continue up to a combined global biofuel demand of 700-800mmt by 2050.^[32] While Europe is currently the most important biodiesel producer with a share of almost 56 per cent, the production of ethanol takes place mainly in America, especially in the U.S. (approximately 58 per cent) and Brazil.^[33]

In addition to positive economic and environmental effects triggered by the substitution of fossil fuels with biofuels, discussions on possible negative – or at least uncertain – indirect effects of growing biofuel markets arise. These effects are often associated with rising food prices and price volatility, which result in unsecured food supply or accessibility by lower classes, leading to hunger, malnutrition and conflicts among other issues.^[34] At present the vast majority of biofuels, which are globally produced are first generation processing technologies, are based on agricultural feedstock, that is, commodities like grains and oilseeds as well as sugar crops. Hence, the biofuels generation is directly connected to commodity markets, its prices and their implicit volatility as well as depending on global demand and supply models. Furthermore, an increasing supply of biofuel by-products such as DDGS^[35] on global feed markets can be seen as a result of the growing biofuel production.

Regarding feed markets the long-term impact of biofuel production is ambiguous. On the one hand, increasing prices of agricultural products used as feed components can lead to increasing feed prices and thus to shifts within the meat supply chain. On the other hand, growing supply of biofuel by-products, which can be used as feed substitutes, may cause opposite effects. The development of advanced biofuels could reduce the interconnectedness between agricultural markets and the energy demand. Considered as the second generation of biofuels technologies, their feedstock are based on non-agricultural food crops, such as cellulosic biomass including agricultural residues or algae oil.^[36] As long as a marketable production of this second generation biofuels is only marginal due to an insufficient technological progress, large-scale biofuel production will continue impacting agricultural products, food markets and land usage. While looking at two markets that both have been of significant importance, the food and energy markets and at their corresponding prices, it becomes clear that changes to food prices are essentially local, whereas the oil price moves on a global scale. Nonetheless, a global integration of resource systems have been developed over the last decade and in particular the link between food and energy. Even though energy markets are 10 times the size of food markets, the volatility washes over from the energy market to the agriculture industry and from there to the related food market, especially affecting the grains and oilseed and meat markets. These issues concern governments, so regulations need to be taken on both, national and international levels.^[37]

The consideration of biofuel trade is crucial to the evaluation of different political actions taken in the biofuels context. As biofuels can be transported at relative low costs per unit and production costs vary strongly between countries, it is probable that the relevance of biofuel trade will further increase. Besides the economic impacts of biofuel production, environmental aspects have recently dominated the political scene. The reduction of GHG emissions by increasing biofuels usage and therefore substituting the use of fossil fuels is an opportunistic move in the fight against global warming. Nonetheless, the GHG emissions of biofuels and their impact, in particular along the entire supply chain including the feedstock production and refinery process, raise critical questions. Based on those, politicians are meant to set certain frameworks and standardizations to form a smooth transition and guarantee a sustainable development from which all stakeholders can sustainably benefit.

1.1. Motivation and research objective

This work aims to assess and evaluate such an implementation of biofuels regulation, that is, the introduction of a certification scheme by the European Parliament, which has been introduced in line with the targets of the RED until 2020. As the book will analyse the EU27 regulation, the main focus will be on biodiesel and its corresponding feedstock source material as well as its effects on global biofuel and agricultural markets. In general, the commodity markets as well as the supply chain management industry are very opaque and certification schemes are only recently established. Thus, these circumstances create a very dynamic and entrepreneurial environment so that business patterns as well industry structures have not emerged yet. Current trends will be outlaid demonstrating a real-case scenario as being directly related and supported by the publicly-listed company Noble Group. Finally, the book should provide on the one side concrete industry insides and hands-on experience as well as on the other side convey a bigger climate change related picture and serve as a complementary education to the theory carried out during the lectures within the Master programs in Sustainable Development or International Supply Chain Management.

1.2. Methodological approach

The basis of this work is fundamental theoretical research of industry documents and academic works published over the last decade as well as the direct relationship with companies being active in the biodiesel and commodity trading industry, including Louis Dreyfus Commodities, ADM, Cargill and Noble Group among others. The book has been elaborated within the academic double degree program Master of Science in Sustainable Development at the French Univeristy Ecole des Hautes Etudes Commerciale (HEC) Paris and the MBA em Gestão de Sustentabilidade at the Brazilian University Fundação Getulio Vargas Sao Paulo during the academic years of 2010/11 and 2011/2012. Furthermore, the general macroeconomic and microeconomic knowledge supporting this work has been gained during economics, strategy and business degrees at the Spanish Universidad Pontificia Comillas (ICADE) in Madrid (2006/08), the American Harvard University (2008) as well as the German ESB Business School in Reutlingen (2008/10). Finally the academic knowledge is completed with industry expertise gained as a trader trainee at Noble Brasil in Sao Paulo, Noble Argentina in Buenos Aires and Rosario and Noble Resources in Geneva. Noble Group is a Supply Chain Manager and reaches a global scale with its operations encompassing a total of 150 offices in 38 countries. As a Fortune 500 company based in Hong Kong (China) and listed in Singapore, the firm operates regional headquarters in Geneva (Switzerland), London (UK) Stamford (USA), Sao Paulo (Brazil) and Buenos Aires (Argentina). Currently the company employs around 12,000 employees and generates an annual turnover of US$60 billion with a net profit of approximately US$500 million whereas the agriculture products segments represent approximately one third of their business activity besides other sectors such as energy and logistics.^[38]

1.3. Structure of the book

After an introduction providing a big picture of biofuels markets within the climate change context, the European Regulation in form of the RED will be presented (Chapter 2). Definitions and background information on the regulatory framework as part of the European Energy Strategy will be given so that the reader will easily be able to follow the methodology of these political objectives. Henceforward, background information on biofuel industry regarding the value chain and market participants will be presented (Chapter 3). Furthermore, commodity trade flows including biofuels and feedstock are illustrated in order to better understand the global interconnectedness of the market. In reference to the RED, sustainability characteristics of biofuels including greenhouse gas emissions and land use change as well as complementary issues like genetically modified organisms and biodiversity are critically discussed. Additionally to the RED, general political interventions in biofuel markets are outlined in Chapter 4, which will be complemented with a case study of Sustainability Certification schemes. Challenges for market participants and criticism on policy frameworks as well as an outlook into advanced generation biofuels and food markets complete the fourth chapter. Finally, the conclusion will critically oversee the European regulation and convey general recommendations to relevant stakeholders in order to pave the way for a sustainable biofuel story in the future.

2. The Renewable Energy Directive (RED)

In the following chapter, a historical background on European policy-making for biofuel will be presented. A general overview of the introduced regulations as well as a more detailed explanation of corresponding contexts will be provided so that a sound basis on the European framework can be gained. This knowledge will serve for a better understanding of the sustainability contradictions and consequences on the biofuel industry that will be outlined and discussed in the following chapters.

2.1. Background on the RED 2003/30/EC on commodity and biofuel trade

The first serious step regarding a common biofuel policy in the EU27 legislation was the Directive 2003/30/EC, which entered into force on 17 May 2003 and the Member States (MS) had to translate into their national legislation by 30 December 2004. The Directive aims to promote the use of biofuels or other renewable fuels for transport. The rationales to bring the Directive into force were the fact that the European transport sector accounts for more than 30 per cent of final energy consumption and keeps expanding as presented in Figure 2.^[39] Moreover, an increased use of biofuels for transport is a significant tool among others, which reduces the dependence on imported energy and hence secures a certain energy supply in the medium and long term within the EU27.^[40]

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Figure 2 : Biofuels productions and their contribution to transport fuel consumption ^[41]

Additionally, the continuous promotion of biofuels in transport constitutes a step towards a wider application of biomasses which is in line with innovation and research intentions of the EU27 and therefore enables a further development in next generation biofuels^[42]. Moreover, by the end of 2005, the European Parliament and the Council of the European Union adopted the proportion of biofuels and other renewable fuels, which had been fixed to two per cent based on the energy content of all petrol and diesel for transport purposes offered in the MS markets. This indicatory blending margin was supposed to be raised to 5.75 per cent by all MS in 2010 and nowadays varies between 2.5 and seven per cent as in Figure 3.^[43] In compliance with the aforementioned blending targets, MS are eventually responsible for the execution within their national legislative programs. Though, a yearly report to the Commission^[44] about nationwide implementations regarding the Directive 2003/30/EC has to be elaborated by all MS.

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Figure 3 : Development of biofuels mandates in Europe ^[45]

2.2. The Renewable Energy Directives 2009/28/EC and 2009/30/EC

Based on the RED 2003/30/EC, a new legislation aiming at the GHG reduction and the promotion of renewable energy was adopted by the European Union in 2009. Twenty days after it had been published in the Official Journal of the European Union, the Climate Action and Renewable Energy Policy Package including the Directives 2009/28/EC and 2009/30/EC, under the names Renewable Energy Directive (RED) and Revised Fuel Quality Directive (RFQ) entered into force. This new legislation^[46] aimed at the decrease of the EU27 energy dependence as well as a set up of sustainable production practices in agriculture and energy generation with the overall intention to avoid adverse effects of global climate change. In accordance with these directives, MS must commit to the declaration of how they will achieve their targets by December 2010.

This new legislation has become the European 20:20:20 Renewable Energy (RE) Strategy including the following overall targets at the consolidated EU27 level, which are to be achieved by 2020 as summarized in Figure 4:^[47] i) a twenty per cent reduction in energy consumption compared to projected consumption for 2020, ii) a twenty per cent share of renewable energy by 2020; iii) twenty per cent reduction of the GHG emission in the EU27 compared to 1990 levels. Within the second target, a ten per cent share of energy from renewable sources in land transportation so that, the new legislation raises challenges and opportunities particularly for stakeholders in the European biofuel sector for the next ten-years. In the biofuel industry there is an urgent need to work out how to cope with new requirements that have been established within the RED and RFQ. Quick reaction by the biofuel producers’ side is essential to gain bigger market share offered by the ten per cent target. However the future perspective in biofuel production really depends on how MS implement the new EU27 policy on a national level. So, most MS set out national targets and a roadmap of renewable energy shares to be achieved within energy consumption in transport, electricity as well as heating and cooling by 2020.

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Figure 4: Legislation scheme based on EU Directives 2009/28/EC and 2009/30/EC^[48]

The new legislation requires changes in the behaviour of market actors along the biofuel supply chain to meet the concerning targets. In addition to overall targets set at the consolidated EU27 level, individual objectives have been defined at MS level, where the latter take into consideration the current situation and the growth potential within MS. These Directives set measures, which have significant effects on fuel and energy, supply in land transport, consequently on biofuel production. As aforementioned, one of the targets set by EU indicates a 10 per cent share of renewable energy in land transport, which will inevitably result in increasing demand for renewable energy sources, such as first generation biofuels, next generation biofuels and electric vehicles charged with “green electricity”.^[49] This target makes the transportation fuel selection more fragmented and result in a competition between different alternatives to fossil fuels. In particular, the second and third targets of the Directive mostly affect stakeholders of the biofuel industry. On the one hand, the ten per cent target of renewable energy in land transport bears an enormous potential for the biofuel sector. On the other hand there is also a certain pressure on the global biofuel market and its actors given that alternative ways to achieve the desired target scenario can be met including electric cars as a renewable energy source. In general, various stakeholders on diverse levels imply the passed legislation in different ways. The first target aims at the achievement of a 20 per cent improvement in overall energy efficiency by 2020 at the consolidated EU 27 level.

Additionally the second objective comprises a 20 per cent share of RE in total energy consumption, which has to be reached at EU level by 2020 as well. In Figure 5 the current as well as the aspiring RE shares are outlined so that the consolidated EU27 percentage will reach 20 per cent within the next decade. Nevertheless, various MS contribute with different weights as well as higher or lower targets than the 20 per cent of renewable energy in order to achieve this overall goal.^[50]. The RED set the national objectives based on historical and current situations as well as potential growth. As in Figure 5, there have been extreme differences for example between Malta (ten per cent) and Sweden (49 per cent). In addition to Sweden, Latvia (40 per cent), Finland (38 per cent), Austria (34 per cent), Portugal (31 per cent) and Denmark (30 per cent) will have to provide a significant contribution to the overall EU 27 goal.

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Figure 5: Share of renewable sources in final energy consumption^[51]

This target can be met either through the use of biofuels and alternative fuels or reductions at the according non-renewable energy production sites. In addition, the FQD set two intermediary targets including a two per cent reduction by end of 2014 and a four per cent one by 2017^[52]. Out of these total four per cent, two per cent reduction can additionally be reached with the introduction of environmentally friendly carbon capture and storage (CSS)^[53] technologies as well as electric vehicles. While the first technology has not reached a mature enough level to be introduced into markets,^[54] the electric vehicles will play a major role within the upcoming years.^[55] That is why at the 82nd Salon international de l’auto et accessoires in Geneva, Switzerland, in 2012, most car manufacturers presented their electric, flex-fuel^[56] and hybrid vehicle models. This exposition provides usually the status quo of the industry so that upcoming trends can be identified. The other two per cent reduction can be realized with Clean Development Mechanisms (CDM).^[57] In order to obtain the six per cent mandatory target only those biofuels can be taken into account, which are produced in a sustainable way as per RED 2009/30/EC^[58]. Thus, fuel distributors aim to purchase biofuels that comply with sustainability criteria; and therefore, biofuels refiners require sustainable feedstock. This interconnectedness and complexity of the fuel and biofuel supply chain will be explained in more detail in Chapter 3.2. In Figure 6, a consolidated forecast for total biofuel production within the EU27 shows that the increase from 15 mmt to 35 mmt will cause solid basis for the achievement of the three RED targets. While bioethanol and electricity remain at stable levels, the biodiesel sector will expand at a continuous pace so that this sector will increase in importance for the EU27.

Figure 6: Consolidated forecast for biofuel production in the EU (mmt)^[59]

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For these sustainability criteria, the EU Commission also defined a sustainability framework setting criteria for biofuel feedstock. Therefore, biofuels in the EU27 cannot be made from raw material obtained from land with levels of high biodiversity. These areas are primary forests, designated for nature protection purposes or protection for rare, threatened or endangered ecosystems or species and grasslands that represent a high value of biodiversity. Furthermore, neither raw materials obtained from land with high carbon stock, that is wetlands, nor continuously forested areas, “land spanning more than one hectare with trees higher than five meters and canopy cover between 10 per cent or 30 per cent, or trees able to reach those thresholds in situ”,^[60] nor peat land can be considered for biofuel production. According to the RED, voluntary schemes have been established to which stakeholders along the biofuel supply chain can commit and get a certification. These voluntary schemes have to be accepted by the European Commission in order to enable the market participant to label their material as sustainable. At present, there are seven approved schemes with different levels of commitment that can be chosen by market players, which will be presented in more detail in Chapter 4.3. These sustainability labels or certificates focus on biodiesel and bioethanol exclusively and enable these products to be traded at the European market. In the case of biodiesel, Figure 7 demonstrates what type of feedstock is used for the production in Europe. Especially the increasing shares of PO and SBO represent a thread for the local agriculture industry that depends on the rapeseed oil production. Due to the oil imports from South America and South East Asia triggered by very competitive prices, the European production of vegetable oil has been recently stagnating. Regarding the vegetable oils, only SBO is covered with sustainable certificates whereas for the other oils, the European commission has not approved one yet.

Figure 7: Types of biodiesel feedstock used in the EU27^[61]

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Nonetheless, this stagnation of biodiesel production is not driven by a lower demand. As Figure 8 indicates, the EU27 consumption has been rising over the last decade and is predicted to increase up to approximately 22 mmt by 2020. That is why, demand and supply have to be analysed and evaluated separately. In Chapter 3.5, the commodity trade flows including import and export of major oilseeds, vegetable oil and biodiesel products will be explained in more detail.

Figure 8: Biodiesel consumption in the EU within the land transport sector (kmt)^[62]

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By 2020, the ten per cent target of the RED will serve as key instrument within the EU climate change mitigation strategy. Transport is indeed the only EU economic sector where GHG emissions are growing unabated. Additionally, the target will reduce the EU’s dependency on fossil fuel sources and oil imports, therefore contributing to strengthening the EU energy security. In this perspective, it is significant to guarantee the full efficiency and scope of the ten per cent is maintained. This means that the objective should incentivize the consumption of those technologies that will make a significant contribution to an increased use of renewable energy in the transport sector by 2020. Any diverging approach would not be compatible with the overall RED objective.^[63] As Figure 8, MS have clearly indicated in their National Action Plans that biodiesel will contribute the largest part of the ten per cent target for 2020 at the EU27 level (66 per cent of the target should come from biodiesel, 23 per cent from bioethanol). Electricity and biogas are expected to represent only a marginal contribution.

In order to verify biofuels’ compliance with sustainability criteria a mass balance system method (MBS)^[64] is applied. The use of MBS allows the European Commission to create more transparency as market players must track the quantity of sustainable materials and products proving the fulfilment of the sustainability criteria. However, thanks to the MBS, feedstock and different sorts of biofuel can be easily identified, for instance a B100 biodiesel that is made from 40 per cent RSO, 40 per cent animal fats and 20 per cent from waste/used cooking oil. Therefore only biofuel or a proportion of feedstock actually meeting the sustainability threshold value^[65] can be taken into account of the MBS. Crucial for the biofuels and the emission targets to be achieved by MS are the overall GHG emissions. Each biofuel possess a specific GHG emission values collecting all the GHG emissions occur during their life cycle. The European Commission provides data about GHG emissions of different biofuels depending on their individual feedstock and production processes in the RED Annex.^[66] Chapter 3.6 will particularly explain how GHG emission savings are calculated based on a lifecycle assessment (LCA).^[67]

3. The biofuel industry

In this chapter, a general overview of the industry and the role of different participants along the biodiesel supply change will be presented, including crop producers, crushing plants, biodiesel refineries, and fuel suppliers before the focus will be laid on more detailed insight into different feedstock and biodiesel production. Thus a profound basis will be granted leading to a sound understanding of the sustainability criteria related to climate change and policy making that will be covered in Chapter 4. In order to finally grasp the interconnectedness of the biofuel industry and worldwide networks of supply chain management, global commodity trade flows will be outlined as well as the effects caused by the RED.

3.1. An overview of the biofuel industry and its players

There are a number of different actors involved in the value chain promoting biofuels. According to McKinsey, these actors are asset owners, general market participants and product and service providers. Whereas these asset owners are usually agribusinesses, petrol industries, gasoline blenders, chemical industries, plant operators and farmers, market actors invest in the biofuel industries. The product and service providers involve seed and fertilizer suppliers as well as engineering and agriculture equipment companies.^[68] The biofuel industry is accelerated by a large wave of investments from different business sectors. Some of the main investments come from multinational agricultural commodity companies as Archer Daniels Midland (ADM), Glencore, Cargill and Noble Group, who are making rather substantial investments into agrofuels as well as companies that have an interest in sugar trade, palm oil and forestry.^[69] From the energy sector large corporations as Beyond Petrol and Mitusi are investing in biofuels. There are also the investments from oil companies that have direct relations to the national governmental agendas as Petrobrás in Brazil and Petrochina or Philippine National Oil Company.^[70] The most substantial investments in biofuels are believed to come from the financial sector, some of the main sources of globalized capital as banks, such as Barclays, Morgan Stanley and Goldman Sachs are investing in biofuel industries. Investments into biofuel industries are also coming from some of the wealthiest individuals in the world, billionaires such as George Soros, Vinod Khosla and Bill Gates. Richard Branson is the owner of Virgin Group and therefore directly connected to Virgin Fuels. They all have large investments into biofuels.^[71] Governments and international monetary institutions including the World Bank and regional development banks also provide support to this industry in terms of subsides, tax releases, carbon-trading schemes and soft loans-to sustain the economic viability of biofuels. In general, these investment flows are a restructuring effect on agribusiness, which re organize and strength transnational structures, connecting the land owning elites of the South “with the most powerful corporations of the North”. It seems that biofuel industries are “being managed by transnational corporations and absorbed into their profit strategies and expansion plans”.^[72] The politically set targets for blending requirements are guaranteeing a demand for business, that in addition to governmental subsides make it an interesting business opportunity. The most crucial factor is the price for feedstock as the major production cost driver arising to 60 per cent.^[73] The feedstock price “can make or break a biofuel production”.^[74] Prices for the biofuel industry is competing with other markets, in particular the food market, as one is using the same crops and lands. In Chapter 4.6, the focus will be expanded on food price volatility and hunger. When the use of biofuels will increase, feedstock prices will also increase and have an impact on supplies. High feedstock prices are risky for any business. Therefore there are many options to lower production costs. In order to ensure low costs many commodity companies are controlling both the production and supply of the feedstock through integrated supply chains of biofuel networks that integrate the whole production process from seeds to shipping and distribution. Another strategy for keeping down production costs is relocating facilities to cheaper countries or via enhanced biotechnology. Genetic Modification or improvement of Organisms (GMO) is attractive in terms of yield increases and reduction of agricultural inputs.^[75]

All over the globe, governments are re-examining their energy alternatives, in particular in search for lower carbon emissions in terms of cleaner fuel alternatives and technologies. Peaking oil prices as they have developed during the last decade, the expected depletion of fossil fuels, concerns for global warming and subsequent climate change are some of the main reasons that explain the growing global biofuel industry. A concrete picture and clear indication of the interest in cleaner energy is provided by the amount of investments generated. During the past five years, worldwide investments in renewable energies (RE) have been particularly occurred within the biofuel sector as shown in Figure 9. Over US$70 bn have contributed to an enormous increase in global biofuel expansion. Furthermore, the United States has been investing over US$ 100 bn in clean energy by end of 2010, compared to US$38 bn in 2005 or even to US$5 bn ten years ago.^[76] Another major influential power, China, seems to follow in the same direction, as it has announced that it will invest US$ 187 bn in clean energy by 2020.^[77]

Figure 9: Development of global financial new investments in RE excl. wind (bn USD)^[78]

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Biofuels have become an integral part of this shifting investment environment, driven by the growing number of governments worldwide that implement regulations and frameworks such as blending targets and by the estimated future investments in renewable energies.^[79] Moreover, triggered by heavy private sector investments and favourable regulations, Germany has for instance developed a particularly strong biofuel sector that generates a yearly industry turnover of over US$ 4.5 bn (Figure 10). Therefore, this industry partially driven by capital intensive assets and high inventories in Germany is approximately 40 per cent larger than the comparatively established wind and photovoltaic (PV) ones. During the last decade, biofuels generally have become viewed as a serious alternative to conventional fossil based fuel for transport thanks to the simple adaptability of motors and existing distribution infrastructure. Furthermore, the most efficient producers have even prices competing with the oil industry as in the case of Brazil and Argentina.^[80]

Figure 10: German industry turnovers related to renewable energy facilities in 2011 (in million EUR)^[81]

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Generally, to a certain blend, both bioethanol and biodiesel can be used in conventional engines. Since an engine modification is required for pure biodiesel (B100), diesel mixtures work up in form of biodiesel blends as for instance five (B5) and ten per cent (B10) biodiesel are added to conventional crude oil based diesel.^[82] That is why most of the biodiesel distribution is through blends, which are encouraged by government regulations as aforementioned in the RED overview.^[83] Moreover, the Brazilian president plans to increase the margins up to ten per cent by 2015 as well and therefore, it would be in line with European regulation. The general trend over the last decades represented an increase in both bioethanol than biodiesel production. Bioethanol is mostly produced and consumed in North and South America, whereas the European market is the world-leading producer of biodiesel and consumes most of it domestically. Focusing on the European Market, Figure 11 provides a big picture of biofuel consumption; Germany, France and Spain represent currently the major producers. This hegemonic position will probably move towards South America, in particular driven by Argentina and Brazil where biodiesel production has still a huge potential to expand and which have been catching up recently due to strategic capital investments by the private sector.^[84]

Figure 11: Biofuels consumption in EU27 in 2010 (kmt)^[85]

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As Figure 1 demonstrates, more biodiesel than ever before in history is sourced from abroad so that global trade spans a global network, so that global biodiesel production grew exponentially and surpassed 16 mmt in 2010 compared to less than one million metric ton ten years ago. As aforementioned in Figure 1, biodiesel production is mainly concentrated in Europe with over 9mmt as well as in Latin America, where Argentina produces around 2.3mmt and Brazil 2.2mmt as well as Colombia and Peru with 0.4mmt and 0.1mmt respectively.^[86]

Figure 12: Development of world biodiesel production between 2000 – 2010 mmt)^[87]

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3.2. The biodiesel value chain and different types of feedstock

Generally biofuels can be broken down into three different types; in liquid form there is bioethanol and biodiesel and in gas form there is biogas. All three fuels are made of biological and agricultural resources characterizing them as first generation biofuels. Bioethanol is mainly produced with sugar plants and cereal crops, mainly corn and sugar cane, but also beet, cassava, wheat and sorghum. Raw materials used for biodiesel production are oilseeds, for example rapeseed, sunflower, soy, palm, coconut or jatropha. In detail, bioethanol in North America is mainly produced with corn while in South America the major feedstock stems from sugar cane. Biodiesel in South America is mainly produced with SBO whereas in Europe, and in particularly, in Germany and France, the refineries operate with RSO as principal feedstock (65-75 per cent market share of RSO).^[88]

There is quite a great difference in oil yields of the different plants. The most oil producing plant is palm oil (PO), which yields 5,550 l/ha,^[89] in comparison to soybean oil (SBO) that reaches only 420 l/ha. The mainly in south east Asia, and especially Indonesia and Malaysia, produced PO is the largest existing source of vegetable oil globally and yields about 13 times more than soybeans. The variations between oil yields depend on the content of oil that a plant generates and not by how much volumes can be produced per hectare. On average one litre of vegetable oil produces approximately one litre of biodiesel.^[90] For instance, a comparison between soybeans and sunflower seeds in Argentina leads to the result that soybeans generate higher yields with approximately 2,200kg/ha compared with 1,700 kg/ha for sunflower seeds. However, sunflower generates almost double the amount of yield in litre per hectare. This is due to the difference of oil content in the plants. The oil content for soy is estimated to be 19 per cent of the plant, whereas the sunflower seeds’ oil content is between 30-40 per cent. The choice of feedstock is primarily determined by the climate and cropping conditions of the region as well as being a function of the prevailing agricultural production of a country and its vegetable oil industry, as an established production chain, infrastructure and markets for vegetable oil production already exists.

As aforementioned, several feedstock serve for the biodiesel production, including more than 350 oil-bearing crops identified that contain fatty acids, such as soybean, sunflower, rapeseed, cottonseed, castor beans and peanuts. Nonetheless, animal fats and tallow, especially recycled greases and used cooking oils have gained increasing attention in recent years, in particular because of the regulation and GHG emission calculations.^[91] Most common feedstock for biodiesel production are rapeseed in the EU, soybeans in South America^[92] and palm oil in South East Asia.^[93] In the EU over 60 per cent^[94] of biodiesel is produced from rapeseed oil, in the US, Brazil and Argentina SBO dominates, and regarding Southeast Asia palm oil is the main source of the production.^[95] Rapeseed produces about 1,100 litters of biodiesel per hectare, and in case of high-yield rapeseed the yield can reach 1,400 litters per hectare while soybeans have lower oil content than rapeseed. Therefore soybeans produce about 400 litters biodiesel per hectare. Moreover, sunflower generates approximately 700 litters whereas the potential biodiesel yield of palm oil is 2,409 litters per hectare.^[96]

Going back in history, soybeans are originally from Southeast Asia and had been imported to America where most production takes place. Nowadays up to 90 per cent are mainly produced in the US, Brazil and Argentina, which are the three world leading soybean producers whereas the US is the largest producer, Brazil the largest soybean exporter and Argentina the largest Soybean complex, i.e. soybean meal and soybean oil exporter. Soybeans are grown for its oil and meal that contains a high level of proteins. Thus, soybeans have become a major commodity over the last decades supplying numerous different industries as demonstrated in Figure 13. After harvesting the soybean, the beans are crushed so that three different products can be gained. First the soybean meal (SBM) which contains a high protein level, second soybean pellets, which basically contain the hulls of the soybean and compose of a high level of fibres and third the soybean oil that is extract from the soybean. While the oil can be used for various industry destinations, the meal and the pellets are mainly used for animal feed.^[97] Nowadays, 85 - 90 per cent of the total soybean production is crushed while ten per cent are used by the food and feed industry as whole beans. An inconsiderably small part of the total crop is consumed by people as whole soybeans, in particular non-genetically modified organism (GMO), for instance in Japanese or organic cuisine. Depending on the origin of the soybeans and on the technology of the crushing plant vary the yield of oil content gained by the crushing process. On average, crushed soybeans provide approximately 79 per cent soybean meal and 18 per cent of soybean oil whereas the latter one is the much more valuable product.^[98]

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Figure 13: Soybean and soybean products production flow^[99]

Figure 13 provides an overview of the corresponding use in industries worldwide. Especially, in the food industry soybeans are used to produce soy sauce, tofu and other kinds of meat substitutes. SBO is mainly used as table oil, but also as an ingredient in mayonnaise, margarine, pastries and snacks. In general, the main driver for crush is the SBM demanded by the feed industry to produce primarily compound feed for the livestock industry.^[100] As it is rich in proteins and low in raw cellulose, it is especially suitable for single stomached animals such as hogs, broiler and hatches.^[101] Additionally, SBO is also connected to the cosmetic industry as ingredient for beauty care products, detergents and soap. Finally it is the chemical industry that purchases vegetable oil for multiple purposes including paint and lacquer production as well as for soy diesel and soy ink.^[102] As Figure 14 illustrates a concrete example in Germany, RSO is the major feedstock for biodiesel production and generally the refinery facilities demand approximately 55 per cent of total vegetable oil consumption while the food and oleochemistry industry represent comparatively minor shares.

Figure 14: Biodiesel blend feedstock, oil consumption and biodiesel use in Germany in 2011^[103]

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The SBO continues as major feedstock along the biodiesel supply chain towards the biodiesel refinery. There are different steps along the biodiesel value chain starting from the farmer that produces the crop as feedstock and sells it to the exporter either via direct sales to the exporters or through elevators, which are mainly larger corporations collecting the physical material and storing it in order to resell it. These elevators either purchase the merchandise or only provide a storage service so that the ownership of the soybean does not necessarily changes. With or without elevators, the beans are mainly sold through broker houses that consolidate offer and demand within the national and international market, that is, the physical goods for instance will be sold either to local crushers or export companies being the main actors along the biodiesel value chain (Figure 15).^[104] There are various companies searching for an integrated approach within the Supply Chain including big agriculture commodity trading companies like Cargill, ADM,^[105] Glencore or Bunge. Heavy investments or combined oil extraction plants with biodiesel refineries (transesterification facilities) so that companies can become vertically integrated, achieving higher profit margins. Below average market conditions, the transesterification, i.e. the biodiesel production provides higher margins in comparison with the vegetable oil export so that a crushing plant’s capacity can reach higher utilization.^[106] Moreover, vertical integration along the value chain provides necessary market presence leading to increased information about current trends and trade flows as well as creates flexibility on the supply side. The company itself can decide upon market prices whether to produce oil or biodiesel and in which proportion depending on current market levels. This flexibility also provides bargain power not only towards farmers and suppliers that are usually much smaller players in the market but also towards other actors along the supply chain including shipping agents, ship owners and surveyor companies.^[107]

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Figure 15: Biodiesel Value Chain

The crushers and refiners are directly linked to farmers and the agricultural sector as most of them grant credits to farmers to cover their cost during production periods. For a soybean farmer, more than 40 per cent of his operating costs are fertilizers so that usually most of these credits are not in monetary terms but in physical form such as fertilizer or seeds.^[108] Thus, firms engaged in the vegetable oil extraction make sure that through these state of dependences, they secure their steady supply in the following harvest season.^[109] Particularly at low prices, farmers tend to be reluctant to sell the beans and can cause pressure to the market in form of origination shortages. These shortages can be dangerous for crushing plants as they rely on a high utilization rate in order to cover immense fix and operating costs. Over the last decade, the vegetable oil industry has experienced a continuous increase in milling capacity and vegetable oil extraction especially in Argentina as well as the expansion of biodiesel refinery capacity in Europe, and particularly in Germany and Spain as in Figure 16.^[110] As raw material in terms of soybeans is available and remains comparatively cheap^[111], and there are enhanced milling capacities, vegetable oil producing companies have a strong interest in large scale production of biodiesel and therefore a secured demand. In Latin America and in particular Argentina, their current crushing activities are already export oriented, e.g. strategically located milling facilities at the riverside or even soybean crushing and transesterification which are integrated into port facilities in order to directly load the processed oil into oil tankers that leave mainly for European and southeast Asian markets. This export orientation also allows the vegetable oil producers to preserve a strategic position in the value chain because biodiesel could be exported as a neat fuel for blending and distribution abroad, i.e. serves as a direct supply for petrol companies.

Figure 16: Biodiesel production (PROD) and production capacity (CAP) in selected countries^[112]

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3.3. Feedstock production, crushing plant and oil production

The quantity of oilseeds, which crushing plants are able to process, highly depends on the type of seeds as well as the facility itself. In particular in Argentina where the crushing industry is mostly export oriented, the crushing capacity reaches up to 6,000 to 10,000 tons of soybeans per day. Moreover in Germany there are huge discrepancies between enormous industrial plants on strategic places like the ADM crushing plant in Hamburg that is specialized on feedstock imported from overseas and has a six kmt per day capacity,^[113] while smaller family owned crushing plants in the south cannot compete regarding volume with these big ones. These have far smaller capacities, between 30 and 300 tons per day and are flexible in terms of feedstock.^[114] In general, most of the crushing plants in Europe are capable to produce multiple feedstocks given that the seed-to-oil conversion ratio ranges between 0.19 tons of oil per ton of beans (soybeans) and 0.44 mt of oil per metric ton (mt) of seeds (SFS).^[115] Nevertheless, the proportion of various oilseeds in terms of capacity utilization is hard to track as the industry is quite fragmented and non-transparent. The big players and integrated supply chain manager operating large crushing plants will run the crushing plants non-stop as the fixed costs are very high and the margins are generally low so that the high volume provides the satisfying economic result. In contrast to soybeans, rape and sun seed, palm oil can only be transported as oil and has to be crushed immediately so that the two major producing areas, Indonesia and Malaysia export the liquid oil in huge volumes. There is an elevated potential for palm oil as biodiesel feedstock due to a comparatively high yield per hectare.^[116] Furthermore, the rapeseed is the most prevalent feedstock for biodiesel production in Europe, it has the largest stake in the crushing with over 21 mmt of RSS, twelve mmt of SB and around seven mmt of SFS were crushed in 2011.^[117]

As part of most of the crushing plants, an oil extraction refinery facility produces edible oil for food and industrial purpose as well as feedstock for biodiesel production.^[118] Refined vegetable oils provide the best raw material to produce biodiesel since the conversion ratio of pure triglyceride into fatty acid methyl ester (FAME) is elevated and reaction time is comparatively short. Nevertheless, waste or used cooking oil (UCO) can also be suitable for biodiesel production, particularly when it is properly collected in terms of GHG emissions of collection logistics.^[119] However, UCO requires a pre-treatment before it can be used as feedstock which includes filtering and heating processes.^[120]

3.4. Biofuel production and chemical background of transesterification

Biofuels are produced in two phases. First there is the cultivation of feedstock by conventional agricultural production as well as the extraction of either vegetable oil via crushing and extraction plants or the fermentation of sugars. Second, after having the raw material, it is converted to biofuel in a refinery, whereas in the case of biodiesel via transesterification and for bioethanol through a distillation processes.^[121]

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Figure 17: Biodiesel and Bioethanol^[122]

After crushing the oil seeds physically and separating the hulls from the meal that is pressed in into flakes, a chemical solvent is used, as for instant, hexane to extract the oil from the soybean flakes. Usually, the soybeans are cracked, checked for moisture content, pressed into flakes and then treated with hexane as the chemical solvent within the extraction process. The resulting crude soybean oil product is degummed, refined, blended depending on what kind of application and in some cases hydrogenated.^[123] The SBM, the larger part of the production, is sold as animal feed.^[124] After the extraction of the oil, the valuable hexane will be separated again from the oil in order to be reused. Then, methanol is added in order to chemically react with the oil to generate biodiesel and glycerine. Finally, there must be only a separation of the two by-products to isolate the biodiesel. After the crush and oil extraction, the vegetable oil is converted into biodiesel within the biodiesel plants in which the high viscosity of vegetable oils are reduced in order to use the fuel in common diesel engines without operational difficulties. Of the four common practices to decrease viscosity, namely blending with petro diesel, pyrolysis, micro emulsification, and transesterification^[125] only the last one is appropriate for biodiesel production.^[126] Figure 18 below shows the simplified input-output scheme of biodiesel applying the transesterification process.

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Figure 18: Schematic biodiesel production

Furthermore, Figure 19 illustrates a schematic overview of the biodiesel production in more detail referring to a basic biodiesel plant consisting of reactors, pumps, settling tanks, centrifuges, distillation columns, and storage tanks. In the reactors, the transesterification takes place in which the reactants are combined and agitated for one hour at approximately 60° Celsius.^[127] Plants with lower capacity are constructed with batch reactors whereas larger plants are equipped with continuous flow processes. In a batch reactor reactants are added in one step so that the chemical reaction can occur in a closed space.^[128] Moreover, an excess of methanol, with a 20 to one ratio, is necessary given a water accumulation. This amount of additional methanol is required to meet the glycerine standard^[129] for fuel-grade biodiesel. Then the unused alcohol has to be recovered and recycled back into the process in order to economize operating costs and limit overall environmental impacts in terms of GHG emission values. In contrast to the batch reactor, the continuous reactor can either be a Continuous Stirred Tank Reactor (CSTR) or a Plug Flow Reactor (PFR). CSTR allow operating with less alcohol within two steps. First, approximately 80 per cent of the methanol and catalysts are added to the oil, and then the stream flows from the reactor to the glycerine removal while most of the water content is removed during the first step.^[130] In this second stage, the remaining 20 per cent of the alcohol and catalysts are removed.^[131] In a PFR, reactants are introduced from one side so that the composition changes given that the stream moves in plug flow through the reactor.^[132] Then, glycerine is separated from methyl esters, which normally occurs either through settling within the tank or by centrifuging. An excess of methanol slows down the separation process. The addition of water improves the separation step so that finally two product outputs, in form of fatty acid methyl esters (FAME) and glycerine are generated. The FAME continue with a neutralization step, during which acids are added to the biodiesel to neutralize any residual catalyst and split up soapy substances that have been formed during the chemical reactions. These acids then form soluble salts and free fatty acids (FFA).^[133] After the neutralization, the methyl esters pass through a so-called methanol stripper, in form of either a vacuum flash process or a falling film evaporator, during which salts are removed by water washing. This washing intends to separate remaining catalysts, soaps, salts, methanol or free glycerine from the biodiesel. The FFAs remain and a vacuum flash process removes the water used for the washing so that biodiesel production reaches the final process step. As the glycerine obtained within the separator represents approximately 50 per cent of the total glycerine, further filtering is required. So, the biodiesel is usually sold to a glycerine refinery in order to achieve a purity of 85 per cent and commonly even reaches up to 99.7 per cent. Furthermore, the methanol removed from glycerine and methyl ester output, has a significant value and can only return to the process after passing through the distillation columns in which the remaining water content is extracted. During the aforementioned pre-treatment processes, acid catalysts are added to feedstock with higher FFA levels in order to reduce FFA level down to five per cent content maximum. On average, up to five per cent FFAs, the chemical reactions can still be catalysed with an alkali catalyst; nonetheless, additional catalysts might be required. Especially in case of higher FFAs, soapy substances hinder the separation process and contribute to emulsion formation during the water wash.^[134]

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Figure 19: Schematic process flow for biodiesel production^[135]

The core reaction within the biodiesel production is the transesterification, which is a chemical reaction of vegetable oil or animal fat with a monohydric alcohol like methanol or ethanol in order to form methyl-esters and glycerine. The transesterification aims to lower the viscosity of the oil or fat. This reaction depend on different circumstances such as reaction temperature and time as well as the molar ratio of glycerides to alcohol, FFA, the water content of vegetable oils or animal fats and finally the type and amount of catalysts.^[136] In the “Handbook of Biodiesel”, van Gerpen outlines that a reaction can vary in terms of time between one hour at approximately 60 grad Celsius or four hours at a lower temperature of approximately 30 grad Celsius.^[137] Furthermore, FFAs and the water content inhibit the reaction so that it is of utmost importance that feedstock complies with industry quality standards. The average yield of methyl esters amounts approximately 67-86 per cent for crude vegetable oils and 93-98 per cent for refined oil, particularly caused by FFAs representing up to 7 per cent within crude oils. Moreover, crude oil comprises other substances such as phospholipids that further lower the quality of the oil.

Generally, commercial biodiesel producer apply a base-catalysed reaction using sodium or potassium hydroxide. In spite of the acid-catalysts utilization that pre-treats feedstock, converting the higher FFA values into esters, the reaction rates for the triglycerides conversion into methyl esters are comparatively slow.^[138] Finally, the transesterification process can be summarized in form of the chemical equation below (Figure 20). R1, R2, and R3 are longer hydrocarbon chains or so called fatty acid chains.^[139] Depending on the feedstock, different types of oils or fats are represented with distinctive sorts of fatty acids so that the difference among the chains lies in their length, degree of unsaturation or presence of other chemical functions.^[140]

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Figure 20: Chemical equation of transesterification^[141]

In contrast to petro diesel, biodiesel possess various advantages. Additionally to being technically competitive, biodiesel is directly derived from a renewable (domestic) resource so that there is less dependence on petroleum producing countries. Furthermore, the fuel is absolutely biodegradable and reduces therefore GHG emissions to which aspect Chapter 3.6 will present a more detailed overview. Moreover, a higher flash point allows a safer handling and storage of the fuel as well as better lubricity levels can improve the quality of your diesel blend by adding biodiesel.

3.5. Trade flows and concrete example of a Supply Chain Manager

In the following section current oilseed and vegetable oil as well as the biodiesel trade flows will be presented in order to provide an overall view of the interconnectedness of this global market. After outlining the principal flows of oilseeds and oilseeds products including meal and oils, a major focus will be laid on soybean-based biodiesel (soybean methyl ester – SME). On the origin side, Argentina and Brazil as well as the US will be relevant countries, while on the demand side; the major markets are China, Europe and India as demonstrated in Figure 22. Moreover, Figure 22 and Figure 23 demonstrate the main importing and exporting countries of selected oilseeds including soybeans (SB), rapeseed seeds (RSS) and sunflower seeds (SFS), whereas Figure 24 and Figure 26 summarize the vegetable oil and methyl ester flows referring to soybean- (SBO), sunflower- (SFO), rapeseed- (RSO) and palm oil (PO) as well as palm- (PME) and soybean methyl ester (SME).

As aforementioned, Brazil and Argentina together export over 80 per cent of worldwide SB flows while Argentina mainly processes the SB to SBO and SME and then operates as biggest exporter of SBO (58 per cent) with almost four mmt within a global vegetable oil market of approximately 52 mmt of trade flows per year. Besides SBO, Argentina also exports 100 per cent of the SME while over 80 per cent of PME is exported from Indonesia. In contrast to exporting countries, major importing ones are the EU27, India and China.^[142]

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Figure 21: Global soybean trade flows scheme in 2010 (mmt)^[143]

The EU27 imports basically all the major seeds and oils and additionally produces locally an increased amount of rapeseed, particularly in France and Germany. While the oils go directly to biodiesel production and the food industry, the seeds are destined to the 500-plus European crushing plants which amount to an overall capacity of over 100 mmt. At present, most of these crushing plants cannot compete with South American and Asian plants so that the current utilization rate is much lower as well as 40 mmt of oilseeds are processed to gain the meal and oil products. In contrast to the EU27, China basically imports almost two thirds (62 per cent) of global SB for the local crushing industry which developed a total capacity of approximately 120 mmt per year in order to produce SBO and SBM in order to mainly produce protein-rich animal feed for the Chinese livestock industry. Out of these 120 mmt, less than 50 per cent has been crushed (55 mmt of SB).^[144] Therefore, the Chinese market currently remains with a large overcapacity that pushes the profit margins down reducing the overall crush activity and further investments. Thus, a considerable amount of SBs are directly transported to the Chinese State Reserve (CSR) and are kept as inventory. Given the massive volumes China purchases, the State Owned Enterprises (SOE) possess an enormous bargain power within the market and can literally influence prices to a certain degree. In addition to SB, the major exporters for SBO are Argentina and Brazil (Figure 26). Whereas both countries are major producers of SB, Brazil differs from Argentina in terms of export tax incentives as described in Chapter 4.1. Most of the SB are directly exported to Europe or China while Argentina’s crushing and refining industry enjoys taxes incentives on SBO and SME, that is, it is more attractive to export the SB complex in the form of oil, methyl ester and meal, versus the initial seed. Figure 24 and Figure 26 show the vegetable oil and methyl ester flows.

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Figure 22: Major exports of oilseeds^[145]

[...]

^[1] Malthus, 1970.

^[2] Dobbs, 2011.

^[3] Steer, 2011.

^[4] Stern, 2010.

^[5] European Parliament and Council, 2001 and 2003.

^[6] WWF, 2011.

^[7] WWF, 2011.

^[8] excluding wind power investments.

^[9] REN21, 2010 and UFOP, 2011

^[10] Alcamo, 2009.

^[11] WWF International, 2011 and United Nations Department of Economic and Social Affairs, 2006..

^[12] Shane, 2012.

^[13] EC, 2006.

^[14] IADB, 2007.

^[15] That is Industrial sector that contributes to the GDP

^[16] EC, 2010.

^[17] EU27 refers to the European Union with its 27 Member States

^[18] Mathews, 2007

^[19] Fitzgerald, 2012.

^[20] EC, 2006.

^[21] IADB, 2007

^[22] USDA, 2010 and 2011b.

^[23] Explain this technology

^[24] Dufey, 2006

^[25] Energy 2020, p. 19

^[26] Verdonk, 2007

^[27] IPC, 2006.

^[28] Own demonstration based on European Biodiesel Board and Ufop

^[29] Global Renewable Fuels Alliance(2011)

^[30] ENERS Energy Concept, 2010

^[31] European Commission, 2009

^[32] IEA, 2010.

^[33] EBB, 2010

^[34] In chapter Fehler! Verweisquelle konnte nicht gefunden werden., the biofuels market and global trade flows will be presented

^[35] Dried Distillers Grains with Solubles (DDGS) is a co-product, rich in cereal and yeast proteins, energy and vitamins that is produced along the ethanol distillation process and has an elevated nutrient (animal) feed value.

^[36] Will be outlined in chapter 4.5

^[37] Nussbaum, 2011.

^[38] See Appendix for Noble Company presentation

^[39] European Parliament and Council, 2003.

^[40] European Parliament and Council, 2003.

^[41] EREC, 2008.

^[42] European Parliament and Council, 2003.

^[43] European Parliament and Council, 2003.

^[44] European Parliament and Council, 2009.

^[45] UFOP, 2011.

^[46] European Parliament and Council, 2003 and European Parliament and Council, 2009.

^[47] European Parliament and Council, 2009.

^[48] Own demonstration based on European Parliament and Council, 2003 and European Parliament and Council, 2009

^[49] National Grid, 2011

^[50] UFOP, 2011.

^[51] EREC, 2008

^[52] European Parliament and Council, 2009

^[53] WRI, 2012

^[54] REN21, 2011.

^[55] Lausanne, 2012.

^[56] EERE, 2012.

^[57] Quelle zu CDMs

^[58] EC, 2009.

^[59] UFOP, 2011.

^[60] FAO, 2007.

^[61] AEBIOM, 2011.

^[62] UFOP, 2011.

^[63] EBB, 2011.

^[64] The mass balance system method will be explained in detail in chapter 4.3.

^[65] The minimum GHG reductions are 35 per cent until 2017, 50 per cent between 2017 and 2018 and 60 per cent after the year 2018.

^[66] USDA, 2009.

^[67] Teulon, 2011.

^[68] McKinsey Global Institute, 2011.

^[69] ADM, 2012 and Noble group, 2012a.

^[70] petroliumfirmen, etc sourcen

^[71] Daab, 2012.

^[72] GRAIN, 2007b.

^[73] McKinsey Global Institute, 2011.

^[74] GRAIN, 2007a.

^[75] Editora Gazeta, 2011.

^[76] IAB, 2007

^[77] IAB, 2007

^[78] Own demonstration based on REN21, 2011, UFOP, 2011 and Ragwitz, 2005.

^[79] IADB, 2007.

^[80] Dufey, 2006 and USDA, 2011a.

^[81] BMU, 2012.

^[82] ESMAP, 2005.

^[83] ABIOVE, 2012a.

^[84] Dufey, 2006.

^[85] EurObserv’Er, 2011a.

^[86] BioDieselBr.com, 2011.

^[87] Own demonstration based on EBB 2010, 2011 and UFOP, 2010, 2011a.

^[88] Noble Group Research, 2012b.

^[89] Mukhtar and Singhal, 2012.

^[90] Depending on the quality, temperature and biodiesel feedstock, SBO’s average density is 0.93 t/m3, RSO: 0.92, Gasoline 0.75, Diesel: 0.83 and B100 0.82-0.9,that is, RME 0.88 based on Kaltschmitt, M, 2009.

^[91] European Parliament and Council, 2009.

^[92] Van Gerpen, 2004.

^[93] Vasquez, 2012.

^[94] Oil World, 2009.

^[95] De Ridder, 2005.

^[96] Monsanto, 2012 and Vasquez, 2012.

^[97] Editora Gazeta, 2011.

^[98] Industry consensus, Oil World 2009 and WWF, 2003.

^[99] Own demonstration based on WWF, 2003 and Noble Argentina, 2011.

^[100] BELV, 2012.

^[101] Noble Group Research, 2012a.

^[102] WWF, 2003.

^[103] Own demonstrations based on Noble Group Research 2012b, UFOP, 2011b and FNR 2011a.

^[104] Simantob, 2011.

^[105] ADM, for instance, operates as part of their global commodity activity in Germany three biodiesel plants with approximately 1 mmt per year refinery capacity as of EurObserv’ER, 2011a and ADM, 2012.

^[106] Noble Group Research, 2012c and Gallo, 2011.

^[107] Montenegro, 2011 and Noble Argentina, 2011.

^[108] The value chain could be extended to seed or fertilizer producers such as Monsanto and Bayer Crop Science

^[109] De Souza, 2011.

^[110] Noble Group Research, 2012c.

^[111] Almada, 2006

^[112] Own demonstration based on EBB, 2011.

^[113] ADM, 2012.

^[114] Hass, 2011 and FO Licht, 2010.

^[115] Gallo, 2011.

^[116] Noble Group Research, 2012b.

^[117] Numbers based on Oil world, 2009 Noble Group Research 2012b and industry consensus.

^[118] Knothe, 2005.

^[119] Demirbas, 2008.

^[120] Pazouki, 2010.

^[121] Knothe, 2005.

^[122] Dufey, 2006.

^[123] Noble Argentina, 2011 and Montenegro, 2011.

^[124] IADB, 2006.

^[125] For the purpose of simplification, the four different transesterification: Base-catalyzed transesterification, Direct acid-catalyzed transesterification, Conversion of the oil into its fatty acids and then into biodiesel (enzyme catalyzed) and Non-catalytic transesterification of oils and fats will be summarized as one process.

^[126] Knothe, 2005.

^[127] Tomei and Upham, 2009.

^[128] Van Gerpen, 2005.

^[129] 0.24 per cent of total glycerin is permitted in Biodiesel following the ASTM D6571 standard of Free and Total Glycerin Specifications for Biodiesel, as of McCurry, 2007.

^[130] Demirbas, 2008.

^[131] Van Gerpen, 2005.

^[132] Demirbas, 2008.

^[133] Free Fatty Acids (FFA) are

^[134] Zylla, 2012.

^[135] Own demonstration based on Knothe, 2005 and Kabath, 2012.

^[136] Demirbas, 2008.

^[137] Van Gerpen, 2005, Freedman, 1984.

^[138] Van Gerpen, 2005.

^[139] Van Gerpen and Knothe, 2005.

^[140] Kaltschmidt, 2009.

^[141] Own demonstration based on Knothe, 2005.

^[142] USDA, 2011h.

^[143] OVID 2012 based on AEE, 2009, GTIS, 2012, EUROSTAT, 2011, Oil World 2009 and OVID 2012.

^[144] Noble Group Research, 2012b.

^[145] Own demonstration based on Oil World, 2009, Noble Group Research, 2012 and Industry Consensus.