Fuel Quality Developments in the European Union

1. Fuel Quality Developments in theEuropean Union International Fuel Quality Center Fuel Quality Policy and Technology Briefing Sofia, Bulgaria - April 2003 Sandrine Dixson-Decleve, Director Europe & Africa, International Fuel Quality Center SILAQ Meeting - Sofia, 9 April 2003

2. What is theInternational Fuel Quality Center(IFQC)? A specialized member service that provides comprehensive information and concise analysis to members on pertinent actions and issues facing the transportation industry worldwide. The service focus and emphasis is on automotive fuel quality, vehicle and engine related standards, and the health and environmental legislative and regulatory pressures leading these changes Who isIFQC? Currently: over 80 Global Refining, Automotive and Technology Companies and Governmental Organizations (more than 350 leading executives) Working on the national, regional and international stage to facilitate dialogue and information exchange between transport related industries and governments International Fuel Quality Center SILAQ Meeting - Sofia, 9 April 2003

3. International Fuel Quality Center SILAQ Meeting - Sofia, 9 April 2003

4. Drivers: World Fuel Qualities Politics Refining Industry & technology Engine technologies • Gasoline & Diesel • Direct Injection • Hybrids • Fuel cells Economy Energy Security Engine Exhaust After-treatment Technologies Industry Competition Local Economic Situation • Governmental interest • Taxes • Fuel adulteration • Availability Fuel specifications • Lead • Sulphur • Distillation • Aromatics • Octane/Cetane • Additives • Oxygenates Environment • Global • Country • Regional • Local Alternative fuels • Bio-fuels • LPG • CNG • Gas to Liquid • H2 WHO & Kyoto • air quality standards SILAQ Meeting - Sofia, 9 April 2003

5. Worldwide Consumption:Transportation Sector SILAQ Meeting - Sofia, 9 April 2003

6. Automotive Market SILAQ Meeting - Sofia, 9 April 2003

7. Current Vehicle Emission Standards SILAQ Meeting - Sofia, 9 April 2003

8. Lead free, 0.15 g Pb/l, more than 0.15 g Pb/l GlobalLead Phase Out 1996 2005 Graph Based on March 2003 figures.Policy options to support lead phase out include: Mandatory phase out by certain date, fuel taxes and other incentive policies, unleaded fuel dispenser nozzle, mandating unleaded pumps, mandate vehicle design for unleaded gasoline SILAQ Meeting - Sofia, 9 April 2003

9. EU LAW Dynamics of the European Union COMMISSION 20 COMMISSIONERS 24DG's [directorates general] COUNCIL 15 NATIONS PARLIAMENT 626 MEPs REGIONS ECOSOC COURT OF JUSTICE SILAQ Meeting - Sofia, 9 April 2003

10. Consumer & Environmental NGO’s MEMBER STATES Industry UN-ECE other related Commission services, legal service MVWG MVEG MWG WGRTN EUROPEAN COMMISSION DG ENTR/F/5 Commission proposal to the European Parliament & Council for a new Directive Commission proposal for adapting existing Directive to technical progress Preparation of Proposals SILAQ Meeting - Sofia, 9 April 2003

11. Role of the Institutions Commission proposal foradapting existing Directive to technical progress Commission proposal for a new Directive co-decision procedure right to scrutiny EUROPEAN PARLIAMENT COUNCIL Economic & Social Committee Committee for Adaptation to Technical Progress (CATP) 1st reading common position 2nd reading Directive of the European Parliament & Council Possible conciliation Commission Amending Directive Implementation by Member States SILAQ Meeting - Sofia, 9 April 2003

12. Regulation - binding legislation Directive – national transposition Technical and Environmental Impact Analysis through Working Groups Cost/Benefit and Cost/Effectiveness Analysis Decision – Binding for those intended Derogations on fuel quality or emissions targets Recommendations & Opinions – non-binding Resolution, Green & White Papers, Communications, Notices and Studies – Non-binding documents of legislative intent or statements on particular current topic EU Legislative Acts SILAQ Meeting - Sofia, 9 April 2003

13. European Union: 1975 - 2000 1990’sFinland & Sweden use tax incentives for cleaner fuels. 1998Council Adopts Auto-Oil Directives 2000: Fuel Directive & Euro III. 1980Smoke and SO2 Directive 1999-2000 Daughter Directives (SO2, NOX, PM, Lead, Benzene, CO) 1993 • Fuel Quality Spec’s • Auto-Oil I Program • EPEFE Program • Euro I implemented 1982Lead Directive (air quality) 2000 Mini- Sulphur Review 1975sulphur content of certain liquid fuels 1999Directive on sulphur content of certain liquid fuels 1985NO2 Directive 2001 Energy taxation legislation? 1996 • Air Quality Framework Directive • Euro II implemented 1999 Derogations for Lead (Gr., It.,Sp.) & Sulphur (Pr.) 1985Lead Directive 2001 Auto Oil II Completion 1999 Further use of tax incentives for cleaner fuels. 1997 Auto-Oil II 1990's 2000's 1970's 1980's Fuel Quality Legislation Mandated at National Level Harmonised Fuel Quality & Auto Emissions become Focus for Air Quality & Climate Change Air Quality & Fuel Quality Directly Linked Implementation Begins - Enhancements Expected SILAQ Meeting - Sofia, 9 April 2003

14. Respond to Ambient Air Quality Targets and an integrated approach requiring further measures to reduce atmospheric pollution caused by vehicles Address growing concern over pollution from the transportation sector Passenger cars represent within EU member states from 75 to 90% of the total traffic volume, goods transport 8 to 20%, while bus and two-wheeler traffic are limited to 1 to 2% each . Number of Vehicles on the road and increase in vehicle miles traveled offset decline in most pollutants Motor vehicles generate about 30 percent of all emissions of nitrogen oxides and volatile organic compounds--the pollution that causes smog. CO2 emissions from transport increased by 41% between 1985 and 1996 quickly becoming the largest source of CO2 emissions next to the energy sector. Road transport accounts for 85% of transport emissions Implement a cost effective program with significant environmental and health benefits When fully implemented, this program is estimated to reduce urban NOx emission by >39%, urban CO by >51%, urban benzene by >48%, urban PM by >39%, total NOx by >35%, total VOCs by >46%. The European Commission and national Governments calculate that the Auto Oil legislation will prevent many deaths especially in urban centers, as well as cases of chronic and acute bronchitis, and other respiratory problems. Auto Oil Directives Program Goals SILAQ Meeting - Sofia, 9 April 2003

15. Ground Level Ozone Volatile Organic Compounds (VOC) Nitrogen Dioxide (NO2) Nitrogen Oxide (NOX) Carbon Monoxide (CO) Particulate Matter (PM) Sulfur Dioxide (SO2) Benzene Carbon Dioxide (CO2) European Union Air Pollution Legislation- Primary Air Pollutant Targets SILAQ Meeting - Sofia, 9 April 2003

16. EU Ambient Air Quality Targets POLLUTANT STANDARD VALUE * STANDARD DEADLINE Carbon Monoxide (CO) 8-hour Average (10 mg/m3) Nitrogen Dioxide (NO2) 1-hour mean (health) (200 mg/m3) (exceedence limit 18times ) 1 Jan. 2010 Annual Arithmetic Mean (health) (40 mg/m3) 1 Jan. 2010 Nitrogen Oxide (NOx) Annual Arithmetic Mean (Vegetation) (30 µg/m3) 19 July 2001 Ozone (O3) 1-hour mean (180 µg/m3) 8-hour Average (120 µg/m3) Particulate (PM 10)Particles with diameters of 10 micrometers or less Stage I: 24-hour Average (Health) 50 µg/m3 (exceedence limit 35times ) 1 Jan. 2005 Stage I: Annual Arithmetic Mean (Health) 40 µg/m3 1 Jan. 2005 Stage II: 24-hour Average (Health) 50 µg/m3 1 Jan. 2010 Stage II: Annual Arithmetic Mean (Health) 20 µg/m3 (exceedence limit 7times ) 1 Jan. 2010 Particulate (PM 2.5)Particles with diameters of 2.5 micrometers or less Not modelled Sulfur Dioxide (SO2) Annual Arithmetic Mean (20µg/m3) 19 July 2005 24-hour Average (125 µg/m) (exceedence limit 3times ) 1 Jan. 2005 1-hour Average (350µg/m3) (exceedence limit 24 times ) 1 Jan. 2005 Benzene Annual Arithmetic Mean (upper value) (16µg/m3) Annual Arithmetic Mean (lower value) (2.5µg/m3) Lead Annual Arithmetic Mean (health) (0,5µg/m3) 1 Jan.2005 or 1 Jan. 2010 * Parenthetical value is an approximately equivalent concentration. European Union- Primary Air Pollutant Criteria Standards SILAQ Meeting - Sofia, 9 April 2003

17. Passenger Cars and Light Duty Vehicles Euro II-IV Heavy-Duty On-Road Euro II-V (Stage 1-2) Heavy Duty Off-Road/Non-Road Motorcycles Marine Handheld/Other Overview of Current EU Vehicle and Engine Emission Control Programs SILAQ Meeting - Sofia, 9 April 2003

18. Fuel Requires all EU Refiners/ Importers to meet a max sulfur levels 350ppm in 2000 and 50ppm in 2005 plus 10 ppm availability, Requires all EU Refiners/ Importers to meet new limits for cetane, density, distillation, PAH by 1 Jan 2000. Future specs review 2005. Flexibility includes Derogation option for sulfur due to economic hardship(2000) Marketing of fuels with more stringent environmental specifications allowed to further protect health or environment in specific area Tax incentives Review clause Auto Oil I Directives -General Overview • Vehicle • Requires New Passenger cars and Light Commercial Vehicles to meet new exhaust and evaporative emission limits for 2000 and 2005 • Applies to all vehicles post 2000 • Higher durability distance from 2005 • OBD • New specifications for test reference fuels • Revised and new testing procedures • Evaporative emissions test procedures, • New low temperature test • In use conformity testing • Flexibility includes • Review clause SILAQ Meeting - Sofia, 9 April 2003

19. Member States are obligated to transpose into national legislation and comply with the EU Directives by 1 July 1999 or fined Member States establish own monitoring programs either governmental or industry run e.g. UK. New EU wide CEN monitoring standard in pipeline Physical and Paper audits and inspections are carried out at Member State level by local authorities Audits and Inspections Review compliance with legislative specifications Fuel Directives Compliance REQUIREMENTS APPLY TO ALL PARTIES IN THE DISTRIBUTION SYSTEM • Requirements apply: • Refinery Level Requirements • Downstream Compliance Requirements • Record Keeping and Reporting and Retention • Product Transfer Documents • Test Records in house and sent to local authority SILAQ Meeting - Sofia, 9 April 2003

20. WHAT NEXT: 2000 & beyond 2002 Motorcycle Emissions Directive 2001 Clean Air For Europe (CAFÉ): 2003 Non-road Emissions Legislation Euro V (HDV) Low sulfur fuels Bio-fuels Water based fuels LPG Natural gas Fuel Cell 2001 MTBE Risk Assessment: completion 2004 Air Quality Daughter Directives - PM 2.5 2004 European Enlargement (1st wave countries) 2001 Commission proposals (AOII, MTBE, sulphur) for Dir. 98/70 2005 2005 New Fuel Quality and Emissions (Euro IV) Specifications 2000 - 2005 Implementation Begins - Enhancements Expected SILAQ Meeting - Sofia, 9 April 2003

21. EU Auto Oil II Predictions EU Auto Oil II Modeling results predict: • Large improvement in urban air quality by 2010, althoughCO2 emissions will continue to riseat least until 2005 before stabilizing. • Particulates, regional tropospheric ozone precursors (NOx -and VOCs), benzene and NO2 remain problematic. • The number of inhabitants living in citieswhere the air quality objectives for four or more pollutants are exceeded simultaneously will still reach 4.5 million in 2010. • Road transport will still have a major influenceon urban air quality in those cases where exceedances are predicted. SILAQ Meeting - Sofia, 9 April 2003

22. Auto Oil Legislation Benefits SILAQ Meeting - Sofia, 9 April 2003

23. EU Fuel Quality Overview • Past and Current Legislative/Policy Developments: • Ambient air quality targets (Framework legislation and daughter directives e.g SOx, NOX, NO2, PM, Lead and PAH) • Auto-Oil I, II Legislation (auto emissions and fuel quality) • Kyoto Protocol and climate change policy including: Voluntary CO2 agreement with ACEA, JAMA, KAMA (120g/km CO2 emissions for average vehicle) and emissions trading scheme • Other legislation/policy developments: CAFÉ, National Emission Ceilings, Motorcycle Emissions Directive, MTBE Risk Assessment, Enlargement • Current Major Issues and Alternative Fuel Developments: • Amendments to directive 98/70/EC on fuel quality and fuel Quality Monitoring and increase in tax incentive use • Alternative Fuels Communication with Bio-fuels Directive • CEN – CEN 589/228, FAME standard, development of ethanol standard • LPG, CNG, water based fuels and bio-fuels used across Europe SILAQ Meeting - Sofia, 9 April 2003

24. EU Gasoline & Diesel Specs – 2002 * Review clause: By end 2005 the European Commission will carry out a comprehensive review of the other non-sulfur parameters and alternative fuels and see if new specifications are necessary, the outcome of the various commitments with the auto-manufacturers to reduce fuel consumption and CO2 emissions of new passenger cars, the effect of metallic additives on new pollution abatement technologies, and the final date of on-road and non-road diesel 10ppm introduction. **2005 introduction of 10ppm sulphur – Fuel must be geographically available in an appropriately balanced manner SILAQ Meeting - Sofia, 9 April 2003

25. Tax incentives: How do we ensure geographic coverage and no product shortages in countries with lower or no tax incentives? Large difference between tax incentives for 50 ppm fuels e.g. 1.5 - 4.5 Ec/l Unleaded example has shown that geographic balance can be ensured with tax incentives and that Southern countries have used tax incentives for unleaded market penetration Non-Road: Accounts for 8.5% diesel volume (Concawe 2001) but in some cases <50% transport emissions. 7 (UK, IL, FR, NL, BE, FL, ES) out of 15 countries (Concawe 2001) allow use of dyed/marked lower duty 2,000ppm heating oil. How do we ensure farmers continue to receive tax incentives? And that distribution systems function? EU Fuel Specs Outstanding Issues SILAQ Meeting - Sofia, 9 April 2003

26. Penetration of ULS Fuels Example: Swedish Diesel Market Source: ECMT 2001 SILAQ Meeting - Sofia, 9 April 2003

27. EU Issues: Tax Incentives 50 & 10ppm Sulphur Fuels 0.3Ec/l 50ppm Petrol (2001) 5.7Ec/l 10ppm Diesel (2001) National Tax incentives For 50ppm sulphur fuels 3.9Ec/l Diesel (2000) 4.5Ec/l 50ppm Petrol (2000), Diesel (2001) 10ppm Diesel Available (2000) National Tax incentives For 50ppm & 10 ppm sulphur fuels (and or availability) 10ppm Petrol (2002) 10ppm Diesel (2002) 2.5Ec/l 50ppm Diesel (1993) 2.4 Ec/l Diesel (1999) .076Ec/l 50ppm Petrol (2000), Diesel (2001) 3.1Ec/l 50ppm Diesel (1993) 1.5EC/l 10ppm Petrol/Diesel (2003) 1.5Ec/l 50ppm Petrol/Diesel (2001) 50ppm Diesel Available (2000) 10ppm Petrol/Diesel incentive (2004) 4 Ec/l Petrol/Diesel (2001) 2 Ec/l Petrol/Diesel (2001) SILAQ Meeting - Sofia, 9 April 2003

28. From Air Quality to CO2 EU moving from air quality concerns to climate change concerns. Transport sector largest CO2 emitter and biggest challenge to meeting Kyoto Protocol Commitments e.g. Lowering GHG emissions to at least 5% below 1990 levels during 2008-2012. Conventional fuels, vehicles and transport patterns greatest impact thus policy focus. Non-road and marine fuels increasing % of transport pollution EU CO2 voluntary agreement with European, Korean and Japanese auto makers will be reviewed. Promotion of alternative fuels especially renewables and fuel cell for climate change and energy security reasons. SILAQ Meeting - Sofia, 9 April 2003

29. Alternative Fuels 27 Mtoe (1.7%) LPG EtOH Natural Gas Bio: Diester ETBE Road Transportation Fuels World 2000 1550 Mtoe* *Not including petrochemical sector, airplanes Diesel 600 Gasoline* 950 *including MTBE Source: IFP / Axens SILAQ Meeting - Sofia, 9 April 2003

30. CONSIDERING NEW OPTIONS: EMISSIONS EVALUATION Evaluation of the emissions potential of different alternative fuels in the year 2005 (EURO 4) in passenger cars and light duty vehicles applications Source: Auto-Oil II / Working Group 3 report on alternative fuels SILAQ Meeting - Sofia, 9 April 2003

31. CO2 Benefits: Alternative Fuels Source: IEA - Carmen Difiglio 2002 SILAQ Meeting - Sofia, 9 April 2003

32. “Communication on Alternative Fuels for Transportation and on a set of measures to promote the use of bio-fuels”: • Strategy:Security of supply, low environmental impact and fuel efficiency, high level of safety, and continued low overall cost of driving, new source of income and employment for rural areas. • Result:Council and Parliament agree on voluntary targets for Member States to increase share of fuel pool by 2020 of bio-fuels ( 5% based on energy content), natural gas ( 10%), hydrogen ( 5%). • Result: Exemption of bio-fuels from excise duty application SILAQ Meeting - Sofia, 9 April 2003

33. Simultaneous Outstanding Issues: EU Alternative Fuels Policy Assumptions made: 1) Based on EU total automotive fuel demand of 270mton in 2005, 283mton in 2010 (Europia figures) 2) Natural gas vol% in pool will also be calculated by energy content as in the case of bio-fuels Source: Data and estimates compiled by Lyondell Europe SILAQ Meeting - Sofia, 9 April 2003

34. “Communication on Alternative Fuels for Transportation and on a set of measures to promote the use of bio-fuels”: • Main Market and Economic Issues: • Production and process efficiency varies • Is set aside land enough (5.6 million ha = 1.2-5% potential of total European petroleum product consumption) • Environmental degradation factors e.g. fertilisers, pesticides, rural air quality, soil erosion, water pollution • Farming intensification practices, mono-cultivation/crops aesthetic, GMO’s???? • Economics and price (in some case liquid bio fuel production cost 3 times cost of conventional fuels) • Large subsidies necessary yet conventional low sulphur fuels already taking chunk of current treasury revenue • Imports issue: Can we meet 2-5% bio-fuel goals domestically? • Does it make sense to invest in bio-fuels when fuel cells are on the horizon and other alternative fuels e.g. CNG, LPG are already on the market? SILAQ Meeting - Sofia, 9 April 2003

35. “Communication on Alternative Fuels for Transportation and on a set of measures to promote the use of bio-fuels”: • Main Vehicle, Environmental and Emissions Issues: • Full environmental or air quality benefit analysis by Commission lacking e.g. no programme or stakeholder process • Real integrated policy approach between existing EU policy e.g. potential conflicts with CAP, Dir 98/70, ozone air quality targets • CO2 emissions data contradictory and controversial • Changes to gasoline engines necessary for greater than 10% ethanol issues related to corrosion properties • Volatility issues linked to ethanol e.g. handling and VOC emissions • Bio-diesel oil blends can create engine issues and greater NOx emissions e.g. Germany unregulated pure cooking oil use • No fuel quality specs exist for bio-ethanol Question: Will the Bio-fuels directive approach set a precedent for future alternative fuel policies? Should the Communication on Alternative Fuels cover more than just natural gas and hydrogen? SILAQ Meeting - Sofia, 9 April 2003

36. Harmonisation of Member State laws under EU legislation is essential Air quality objectives/targets must be set and evaluated regularly Fuel and vehicle must be treated as a system Stakeholder process between government and industry fundamental Full scientific and technical assessment needed for acceptability - European Union Fuel Quality Policy- Lessons Learned SILAQ Meeting - Sofia, 9 April 2003

37. Fiscal incentives for market penetration very useful Unintended Consequences of Clean Fuels legislation Supply: Cleaner Diesel and Gasoline Age of vehicle fleet: Differences in climate across Europe Cost: Different excise taxation and VAT structure across EU leading to price differences, Competition between clean conventional fuels and alternative fuels for tax incentives - European Union Fuel Quality Policy- Lessons Learned SILAQ Meeting - Sofia, 9 April 2003

38. Conclusions: EU Policy Hot Spots • Main Vehicle, Environmental and Emissions Issues in pipeline: • 98/70 Review work • Fuel Quality monitoring standard adoption June 2003 • Non-Road emissions and fuels legislation • Final adoption Bio-fuels Legislation andtax exemptions • CEN standards on bio-ethanol • Alternative Fuels discussions linked to climate change and energy security policy • Marine fuels • Climate change and GHG emissions trading legislation • Central and Eastern European Accession countries and implementation of EU legislation SILAQ Meeting - Sofia, 9 April 2003

39. Enlargement & Fuel Quality Latvia - CEN 1993 (CEN 1999 by 1/1/04) Lithuania - CEN 1993 (CEN 1999 by 1/1/03) Estonia - CEN 1993 (CEN 1999 by 1/1/04) Bulgaria - CEN 1993, CEN 1999 Romania – CEN 1993, CEN 1999 Malta – Dir. 98/70 Transition period Turkey CEN 1993 (CEN 1999 by 1/1/05) 1996 “Euro 2” 2000 “Euro 3” 2005 “Euro 4” 2009 10 ppm 2004 Slovenia - Dir.98/70 2000 Slovakia - Dir.98/70 2000 Czech Rep - Dir. 98/70 2000 Hungary - Dir. 98/70 2000 Poland – Dir. 98/70 (1/1/03) Cyprus – Dir. 98/70 (1/1/03?) Source: IFQC’s A Summary of Worldwide Automotive Fuels Specifications, January 2003 SILAQ Meeting - Sofia, 9 April 2003

40. Country following spec EN 228:1993 for gasoline and EN590:1993 for diesel Country following spec EN 228:1999 for gasoline and EN 590:1999 for diesel Country following Former Soviet Union specifications Little to no data ESTONIA Other FSU Countries LATVIA RUSSIA GEORGIA LITHUANIA BELARUS ARMENIA POLAND UKRAINE AZERBAIJAN CZECH REP. SLOVAKIA MOLDAVIA KAZAKHSTAN HUNGARY SLOVENIA ROMANIA KYRGYZSTAN BOSNIA CROATIA BULGARIA TADJIKISTAN YUGOSLAVIA TUKMENISTAN MACEDONIA TURKEY ALBANIA UZBEKISTAN CYPRUS Eastern/Central European & FSU Fuel Specs SILAQ Meeting - Sofia, 9 April 2003

41. ESTONIA Other FSU Countries LATVIA RUSSIA GEORGIA LITHUANIA BELARUS ARMENIA POLAND UKRAINE AZERBAIJAN CZECH REP. SLOVAKIA MOLDAVIA KAZAKHSTAN HUNGARY SLOVENIA ROMANIA KYRGYZSTAN BOSNIA CROATIA BULGARIA TADJIKISTAN YUGOSLAVIA TUKMENISTAN MACEDONIA TURKEY ALBANIA UZBEKISTAN CYPRUS Country still using leaded gasoline Country that completed lead phase out Eastern/Central European & FSU Lead Phase-Out SILAQ Meeting - Sofia, 9 April 2003

42. Conclusions:EU Policy Hot Spots • EU fuel policy focus through 2003: • 10ppm sulphur conventional fuels (98/70/EEC) by 2005/2009 (diesel to be confirmed); Other parameters e.g. PAH, Metallic additives etc.. after 2005 Review [adopted Fall 2002] • Non-Road 10/50ppm sulphur diesel by 2009 [?] • Bio-fuels indicative levels by 2005 [adopted March 2003] • Alternative Fuels [DG Env. Study 2002; Review 2005 DGTREN Contact Group focus natural gas and hydrogen] • Fiscal Incentives will increase with Mineral Oil Taxation Directive • On the horizon: Heating oil and marine bunker fuels with lower than 1,000ppm sulphur? • Energy Security and Climate Change will continue to be the main drivers…. SILAQ Meeting - Sofia, 9 April 2003

43. Thank you! Any Questions? Sandrine Dixson-Declève Director, Europe and Africa International Fuel Quality Center sdixson@chemweek.com SILAQ Meeting - Sofia, 9 April 2003