Presenter : Liisa Saikkonen, University of Helsinki

1. Production of Renewable Diesel fromDomestickFeedstocks and Palm Oil in the EU: Market Equilibrium, GreenhouseGasEmissions and Biofuelpolicy Presenter: Liisa Saikkonen, University of Helsinki Co-authors: Markku Ollikainen, University of Helsinki and Jussi Lankoski, OECD

2. Researchquestions • Is itsociallyprofitable to producerenewable diesel fromdomesticallygrownrapeseedorimportedpalmoil in Finland/EU ? • Does the currentbiofuelpolicysupportsociallyprofitableproduction of renewable diesel ?

3. Researchframe • Renewable diesel is produced in Finland from domestically grown rapeseed and imported palm oil. • Renewable diesel can then be sold in Finland or in EU biofuel market (Central Europe). • The by-product of rapeseed based renewable diesel is animal feed.

4. Methods • We develop a market equilibrium model for four cases: i) private optimum in the absence of policies ii) social optimum where the life-cycle greenhouse gas emission damages of the diesel products are taken into account iii) traditional fiscally-motivated energy policy iv) current biofuel policy

5. Methods • We calculate prices and produced and demanded quantities for diesels and their feedstocks in all four equilibria. • We also assess the social welfare impacts of renewable diesel production in these equilibria.

6. Estimates for greenhouse gas emissions by production stages (kg CO2-eq/t fos.dies.-eq)

7. Summary of greenhousegasemissions • Renewable diesel production from palm oil can be warranted by lower life-cycle greenhouse gas emissions compared to rapeseed based renewable diesel and fossil diesel, but only if oil palm cultivation does not result into clearing of rainforests. • The rapeseed cultivation in Finland leads to significant greenhouse gas emissions, mostly due to nitrogen fertilizer and lime application. • The life-cycle greenhouse gas emissions of rapeseed based renewable diesel can thus be higher than for fossil diesel.

8. Summary of greenhousegasemissions • If the palm oil used in diesel production is from a plantation that is established by clearing natural rainforest, the life-cycle greenhouse gas emissions of palm oil based renewable diesel can be higher than those of rapeseed based renewable diesel or fossil diesel. • EU’s sustainability requirements followed by renewable transport fuel producers are criticized for neglecting the indirectland use change caused by oil palm cultivation. • Indirect land use change caused by oil palm cultivation can result in clearing of rainforest when for example food crop cultivation has to expand elsewhere to make room for oil palm plantations.

9. Theoreticalmodel: supply and demand • In the theoreticalmodel country A producesrenewable diesel fromdomesticfeedstock and fromfeedstockimportedfrom country B. • Inversesupplies for renewabledieselsproducedfromdomestic (1) and imported (2) feedstocks: • Total supply of renewable diesel:

10. Theoreticalmodel: social supply • Social inversesupplies (marginal social costs) of renewablediesels (i=1 or 2) • Social price of fossil diesel • Social supply of renewable diesel are the life-cycle greenhouse gas emissions of renewable diesels. D is the damage caused by one unit of emissions. P is the exogenous tax-free price of fossil diesel. E are the life-cycle emissions of fossil diesel.

11. Theoreticalmodel: private and social optimum • Renewable diesel is produced in the privateoptimumif . • The demand of diesel in the privateoptimum in country A is . • Renewable diesel is produced in the social optimumif . • The demand of diesel in the social optimum in country A is . • The diesel taxesaccording to the social optimumare , and .

12. Theoreticalmodel: energypolicy • The producerprice of renewable diesel in country A is . • Demand of diesel in country A is . • Supply of renewable diesel in country A is . is the valueaddedtax in country A. is the tax for renewable diesel in country A. is the tax for fossil diesel in country A.

13. Theoreticalmodel: biofuelpolicy • Underbiofuelpolicy the producerprice of renewable diesel is determinedbybiofuelpolicies in the EU. • The blendmandate in country A is . • Following De Gorter and Just the demand of blended diesel in country A: • The demand of renewable diesel in country A: • The producerprice of renewable diesel in country A: • The supply of renewable diesel in country A: wheredenotes the renewable diesel exports from country A to international market.

14. Empiricalapplication • The theoretical model is applied to production and market data from Finland (country A), Malaysia (country B) and EU biofuel market. • Prices and other market data are from year 2010. • Greenhouse gas emissions and quantities of production inputs are based on Finnish studies : -Inventory of greenhouse gas balances for different biofuels (Mäkinen et al., 2006). -greenhouse gas and energy intensities of renewable diesels (Nikander, 2008) • The empirical model is defined in more detail in Section 3 of the paper.

15. Results: prices

16. Results: quantities

17. Results: Social welfare impacts in Finland (M€)

18. Foreignwelfareimpactsunderbiofuelpolicy • If the exported renewable diesel is used to substitute for fossil diesel, the resulting loss in greenhouse gas emissions is 8.18 million CO2-equal tons, which equals climate benefit of M€163.69. • If the diesel is exported to a country which has a tax exemption for renewable diesel, can this lead in a significant loss in the tax revenue in that country. • The loss in the consumer welfare can be considerable if the diesel is sold in a country with a binding blend mandate for biofuels. • In Malaysia the increased production of palm oil results in a social welfare gain of M€320.71, but only if oil palms are cultivated sustainably and no rainforest is cut down. • If all palm oil used in renewable diesel production (2 656 258 tons) is from oil palm plantations which are established by cutting down natural rainforests, the social welfare in Malaysia decreases to M€201.17.

19. Greenhousegasemissions in the equilibria (CO2-equal tons)

20. Conclusions • According to ourresultsthe production of renewable diesel from imported palm oil is neither privately nor socially profitable. • It is the high renewable diesel price set by the current EU biofuel policies that promotes the production of palm oil based renewable diesel. • The use of domestically produced rapeseed in renewable diesel production is socially profitable in Finland, but only if rapeseed meal is produced as a by-product.

21. Conclusions • However, the greenhouse gas emissions balance shows that life-cycle emissions from palm oil based renewable diesel are significantly lower than those of fossil diesel or rapeseed based renewable diesel, but only if oil palm cultivation does not result in clearing of rainforests. • If palm oil production results into clearing of rainforest, the greenhouse gas emissions resulting from renewable diesel production and consumption under biofuel policy can be higher than under traditional energy policy.

22. Thankyou!