Sweden's Drive for E85

The European Commission has agreed to continue to allow Swedish ethanol supplier SEKAB to import low-cost Brazilian ethanol at a lower import duty until early next year. Sweden is unique among European Union member states in its promulgation of E85 and flexible-fuel vehicles. Can Sweden continue to secure its import privilege in the face of opposition from the European ethanol industry?
By Ryan C. Christiansen | June 03, 2009
According to the European Automobile Manufacturers' Association, approximately 30 percent of European cars are diesel-powered and slightly more than half of all new cars sold are diesel models. Meanwhile, in Sweden the government says it is spending 69 million ($91 million) to ensure that there will be 2,000 E85 fueling stations by the end of this year approximately the same number of E85 fueling stations in all of the U.S. as of May 2009. Fifty percent of all new car models on the Swedish market are offered as flexible-fuel vehicles (FFVs) and approximately 25 percent of all new cars sold in Sweden in 2008 were FFVs. That portion is expected to have risen to 35 percent by this summer, which will bring the Swedish FFV total to 300,000 vehicles by the end of 2010. The number of FFV models offered in Swedish showrooms has increased from just three to 28 in the span of two years. Swedish drivers are increasing E85 to be 10 percent of the transportation fuel market in the country by 2012.

"If you look at the development of E85, it has been fantastic!" says Anders Fredriksson, CEO of SEKAB BioFuels & Chemicals, Sweden's primary ethanol marketer and importer. "It has been a big investment and it has a very promising future."

Price vs. Principles
The promise of pervasive E85 in Sweden is in jeopardy, however. Lower oil prices have supported cheaper E5-blended petroleum gasoline prices at the pump. So long as consumers can opt to fill their FFVs with cheaper, lower blends, they will do so.

"The problem with E85 as fuel is that the cars that run it are flexi-fuel cars and the customers always have the choice of using either gasoline or E85, which means it's basically like Coke or Pepsi," Fredriksson says. "If you're a Coke fan, you always buy Coke; but if for some reason Coke is suddenly $1 more expensive per can than Pepsi, then you would probably switch to the other brand. Here you have the same thing."

According to the U.S. DOE, E85 contains approximately 27 percent less energy per gallon. Swedes understand that using E85 means getting lower gas mileage compared to using pure petroleum gasoline. Fredriksson says to remain competitive, E85 must not retail for more than 70 percent of the price of the E5 blend at the pump. When the price of the regular blend in Sweden fell to less than the equivalent price for E85 in the fall of 2006, sales of E85 and also FFVs declined as a result.

Because E85 is more sensitive to ethanol price fluctuations than petroleum prices, the fuel is more dependent on less costly sources of ethanol. To supply Swedish drivers with competitively priced E85, SEKAB has been importing cheap ethanol from Brazil. The company claims the ethanol is "verifiable, sustainable ethanol", produced by a handful of select producers and independently certified to reduce fossil fuel carbon dioxide emissions by 85 percent compared to petroleum gasoline and produced with zero tolerance for abusive labor practices or the conversion of rainforest land into agricultural land. The wholesale price of verifiable sustainable ethanol is slightly higher than just any Brazilian ethanol, however, to help cover the additional overhead involved with administering sustainability criteria.

For Swedes, using ethanol that meets sustainability criteria is a main attractor, but high prices at the pump can trump principles. "Every liter of petrol that is replaced with a renewable fuel such as ethanol represents an environmental benefit," says Ulf Roos, technology coordinator for BIL Sweden, the organization that represents manufacturers and importers of cars, trucks and buses in Sweden. "Thousands of Swedes have already purchased flex-fuel vehicles that run on E85. It is important that these vehicleswhich in practice can run on petrol, ethanol, or a mixture of the twoare actually run on E85. If not, the environmental benefit is lost. If ethanol is much more expensive than petrol, there is a great risk that ethanol vehicles will be run on petrol."

A Temporary Solution
To continue to import cheap, certified undenatured ethanol from Brazil, SEKAB and Sweden have had to annually petition the European Commission's Customs Code Committee for permission to classify the ethanol as a chemical product for blending with petroleum gasoline, thereby exempting the product from the much higher duties that are imposed on imported agricultural products. The Commission granted SEKAB the privilege in early 2008 and in April 2009, extended the privilege for one year, provided the ethanol is used only for E85 blends and in Sweden. SEKAB imports the ethanol to Sweden and then blends the ethanol with petroleum gasoline under customs control. The company then pays duty on the final E85 blend as a chemical product.

SEKAB blends E85 in both summer and winter varieties. While the E85 summer variety must have a vapor pressure of at least 35 under Swedish standards, the E85 winter variety must have a vapor pressure of at least 50, which is accomplished by increasing the amount of petroleum in the winter blend to assist with ignition and operations in colder climates.
SEKAB and Sweden will petition the Commission again this year to extend the import privilege. "It could be a hard fight," says Ewa Bjrling, Sweden's Minister for Trade, in a
statement.

"It's a big problem that this permit goes from one year to the next," Fredriksson says. "Basically, it's just a Swedish problem, also, because E85 is only a market in Sweden. There is hardly any volume in any other country in Europe. Just getting a permit from one year to the next, it's not a very stable business environment. Consumers, they want to know, If I buy this car, is the fuel going to be 30 percent more expensive next year because of higher tariffs?' So we will be working very hard and still are working very hard on the lobby side to try to get politicians and other interest groups to realize this. If we pay the higher customs tariff, there is no way that we can compete with gasoline. There would be no market."

Greenhouse Gas Reductions
If Swedes do switch from using E85 to using the standard E5 blend, the environment may suffer, the Swedish government said. In its petition to the European Commission, Sweden notes that nearly four years ago, the country had the highest fossil fuel carbon dioxide emissions in Europe from new cars sold. By October 2008, after strong measures to move toward using more ethanol, Sweden had the lowest CO2 emissions in the EU.

Sweden is doing its part as a member state to help the EU stick to its greenhouse gas (GHG) emissions reduction goals, which were established in part by the Kyoto Protocol to the United Nations Framework Convention on Climate Change. Under the treaty, the EU commits its member states to reducing their collective GHG emissions at least 8 percent by 2012.

Sweden's contribution to the EU's overall goals in the transportation sector is important. The latest progress report from the European Commission says that collectively, member states are unlikely to reach the EU's target for using 5.75 percent renewable fuelsincluding ethanol, biodiesel and other renewable fuelsin the transportation sector by 2010.

While some member states already have reached their own targets, other countries are falling behind, and the EU as a whole might only achieve using 4 percent renewable fuels in 2010.

Under an EU directive, member states are required to submit annual progress reports to the Commission. By 2007, only Germany had managed to surpass the 2010 goal, using 7.4 percent of transport fuels from renewable sources. Austria, Bulgaria, France, Lithuania, and Sweden individually achieved more than half the 5.75 percent target by that year.

The EU as a whole achieved less than half of the target at 2.6 percent overall.

The European Union Council of Ministers adopted a legislative package in April that increases the amount of ethanol to be blended with petroleum gasoline in the EU. The EU plans to increase the share of renewable energy it consumes in the transport sector to 10 percent by 2020. The measures were first proposed by the Commission in January 2008 and were amended by the European Parliament in December. EU member states must now adopt national plans by June 2010 and enact national laws by the end of that year. In its progress report, the Commission says it believes that this new directive includes a stronger legislative framework for ensuring increased use of renewable fuels in the EU.

"This target cannot be achieved without increased use of imported green fuels such as ethanol," Roos says.

A Large Impasse
From the Swedish point of view, importing ethanol from Brazil at a competitive price advantage over European-produced ethanol is absolutely necessary if the country is to continue to reduce GHG emissions by adopting E85 in the transportation sector.

"The customs tariffs are there for a reason," Fredriksson says, "and the reason is that it is much more expensive to produce ethanol in Europe than in Brazil and from sugarcane."
Fredriksson says the higher import duty on ethanol, when classified as an agricultural product, is only necessary when the tariff is used to protect the market for domestically produced ethanol for use in low-level blends. "There is no market for European ethanol in E85 as long as gasoline is as cheap as it is today," Fredriksson says. "For European producers, it's either having zero percent of a small market or having 100 percent of no market at all. [On the other hand], for a low blend of ethanol in gasoline, it's not a competition issue. It's not that the consumer can choose zero percent ethanol or 5 percent ethanol; we have 5 percent in all gasoline. It's not a price-sensitive market in that sense. You keep the high tariff for that."

Under current production levels, European producers could not supply Sweden and every other member state with enough ethanol. While producers in the EU made 2.8 billion liters (740 MMgy) of ethanol in 2008, up from 1.8 billion liters (476 MMgy) in 2007, Europe increased its imports of ethanol by an estimated 400 million liters (106 million gallons) in 2008 to an estimated 1.9 billion liters (502 million gallons), with most of the ethanol (between 1.4 and 1.5 billion liters, or between 370 and 396 million gallons) coming from Brazil, according to the European Bioethanol Fuel Association (eBIO).

"Looking at the EU, then, if you want to have 5 percent or 10 percent of gasoline in the EU, then we're talking about 10 million cubic meters of ethanol, which means we can develop our current production more than 10 times for just a low blend," Fredriksson says. "The important thing is that there is no way that we can produce so much ethanol within the Union. We want ethanol production to be developed within the Union as much as we can, without interfering with food production, and that is about 7, 8, 9, or 10 million cubic metersand that is about it. We cannot produce more of it in terms of the photosynthesis and the land to produce more. And so by keeping high tariffs for low blends, that means there is an incentive to develop as much production as we possibly can within the Union."

Understandably, European ethanol producers can't agree that Brazil and Sweden should be granted a privileged trade arrangement, thereby bypassing higher-priced, domestically produced European ethanol, especially when so much Brazilian-produced ethanol is being imported into all of Europe, anyway.

"We are very, very much concerned by this lack of a coherent approach in terms of trade," says Valrie Corre, director general for the European Union of Ethanol Producers (UEPA). "We are not supporting the way the EU is actually conducting its policy in terms of letting in more and more and more and more ethanol on the market. It's not that we are, per se, against imports, it's that we are very much against the fact that there is no sort of balanced approach. We want to have a sustainable, balanced approach in terms of how we manage imports in the EU, just like [in the U.S.], because in the States you are not completely flooded with cheaply produced ethanol from Brazil. We are just talking about Brazil here. Brazil is very competitive for many, many reasons, which need to be, actually, also clarified. Even the [U.S.], with the strongest industry in the world, even now can't compete with Brazil, for obvious reasons, and for reasons that we, perhaps, don't know about."

Other industry leaders agree. "Obviously, we were not really thrilled with what was agreed to by the member states," says Rob Vierhout, secretary general for eBIO. "The decision-making is a simple majority where one member state has one vote. There was a slim majority in favor of agreeing to this request."

Vierhout says European ethanol producers are placed in a difficult position when having to lobby against Sweden and E85. "Of course E85 is very attractive," he says. "It's kind of a sexy car fuel and it makes ethanol very visible and so it has an attractive side, really, but if it means for us that we can never supply this market because it's really a cost issue, then we better not have [the market]. We better go for an E10 market or an E15 market, because that market we can supply. But I believe that it is possible to supply even [the E85] market with European ethanol."

The issue is not whether Sweden should be granted special permission, Vierhout says, it's that special cases should not be granted at all. "It is not the way that we should handle imports of ethanol from third countries that normally pay the full duty," he says. "Instead of allowing these kinds of requests, we believe that the community should first solve the trade issue in general. We believe that all of the ethanol going into the fuel market should be treated in a similar way, the way that you're doing it in the United States. We are seeing huge imports in the past two to three years. This is a growth market and a very attractive market where you can earn a lot of money on your margins. But still, the price in general for ethanol for fuel is set by the Brazilian spot in Rotterdam. Everyone looks at that particular price and then knows for what price he can sell."

According to the Port of Rotterdam Authority, approximately 2.4 million metric tons of ethanol passed through the port in 2008, a 50 percent increase over 2007, with 1.7 million tons coming from imports, mostly from Brazil, but also from Argentina, Costa Rica, Venezuela, Peru, and Guatemala. More than 30 percent of the ethanol through Rotterdam is destined for Sweden.

Corre says granting Sweden a special case is not an economically sustainable scenario. "I just don't understand why we continue doing things which are not going to be really helpful, neither for Sweden and its constant promotion of E85, nor for the overall global objective of the EU," she says. "We can understand that it is much more convenient to buy cheap ethanol for high volume and high blendsit makes sense, especially with a barrel [of oil] at such a low-level pricebut we need to go much further than just the simple thought that we need to suppress the import duty and that's the solution to a problem. No, I don't think free trade is, necessarily, the solution to all of the problems."

Vierhout agrees. "I can understand that the Swedes would argue that this is so attractive for us and to keep it attractive, we need to source our materials as cheap as possible," he says. "We're not going to say that this cannot be discussed. But what we prefer to do first is to get clear rules for how ethanol for fuel enters the European market. If that, in the end, would mean that we would need to give specific access to the Brazilians for specific marketsniche marketsthat would be an issue to discuss. We believe that first you need to have a good system in place. The system is not good. Once that is solved, then we can look at maybe allowing access to the market under special conditions for special suppliers."

A Carbon Tax
In order to continue to support the European ethanol industry, Corre suggests a carbon dioxide tax on petroleum gasoline is needed. "It's obvious that if you introduce a CO2 tax on petrol, then it's going to make it more expensive and then you are also acknowledging the fact that petrol is detrimental for the environment," she says. "One of the most efficient tools at the disposal of humanity, so far, is a tax becausewith a taxyou clearly orient and push the consumer in a certain direction. That's good. I don't understand why it is taking so long to actually have one in place. But, of course, one should not underestimate that politicians and industry sometimes are very much connectedone with the otherand it's difficult."

Vierhout said European tax laws need to be examined. "Maybe our entire tax system is wrong," he says. "We [in Europe] tend to treat diesel fuel very favorably, and that means that petrol prices are quite high; it means that we have built very efficient diesel engines and never invested a lot of money in improving the quality of gasoline engines. If you also would have high-efficiency gasoline carsif you would adopt your taxation structure in such a way that biocomponents become more attractive to useI think the overall picture could very well change."

A proposal is on the table at the EU level that would tax all fuels based on their CO2 emissions, Vierhout says. "That would mean that a biofuel is not going be taxed for CO2 because it is supposed to be CO2 neutral compared to fossil fuels," he says. "And all of the fuels and all of the energy products would be taxed on their energy content; that is again attractive for biocomponents because their energy content is lower than the energy content of fossil fuels. And so in that way you can promote the use of biofuels because they become more attractive in the market, because they are lower-taxed."

Corre says a carbon tax would help lawmakers to steer policy. "It's very important to know what is going to be the price of a barrel [of oil]," she says. "As a decision-maker, you need to make sure that you're establishing a system whereby this very volatile element is not going to disrupt your efforts overnight. Otherwise, that's not policymaking, it's just a waste of time. You can't be fooling around when you have people investing billions of euros [in biofuels]. It's not responsible."

Fredriksson notes the price of oil can be deceptive. "The challenges that we're facing are enormous, completely enormous," he says. "Just look at the situation that we have today.

We have the worst economic downturn in about 100 years. The world is on its knees and still you pay $50 per barrel of oil and then you have to remember that the dollar has strengthened a lot in the last year. So if you recalculate the currencies, we're paying about $75 to $80 per barrel. And nobody is talking about that. Oil is extremely expensive."

Priorities
One of the reasons the European ethanol industry has lagged behind the U.S. is because the U.S. has made energy security a priority, Corre says."[The U.S. has] established a system where you finally achieved the objective," she says, "the objective being reducing energy dependency more than reducing CO2 emissions. At the beginning, it was about energy security, but it's also a support for farmers and it's good for sustainability because, somehow, it is easier to control what is happening on your territory than importing from God-knows-where. As far as the European industry is concerned, it's more difficult for us than what is happening in the States. You actually have much more support from your politicians than what we have here in the EU, so far."

Vierhout says he is hopeful. "We do have a mandate now," he says, "but the mandate really only kicks in in 2020. That's a big difference [compared to] the U.S., where there is a renewable fuels standard [and] certain volumetric objectives. We don't have these volumetric objectives, we have a percentage objective or relative objective by energy and we don't know what that means in terms of volume and so it's a bit of a question. We can make some assessment, but still it remains a question mark. The U.S.much more than Europehas created a clear perspective for their home production by having a duty wall that works much better than in Europe. We have some holes in our wall."

Ryan C. Christiansen is the assistant editor of Ethanol Producer Magazine. Reach him at rchristiansen@bbiinternational.com or (701) 373-8042.