By Charlie Dunmore
BRUSSELS (Reuters) - The EU will protect existing investment in its $13 billion biodiesel sector even as it acts on new evidence that suggests making the fuel from food crops can do more harm than good in fighting climate change.
The environmental arguments in favor of using biodiesel were thrown into doubt last week by a series of leaked European Union reports, revealed by Reuters.
The reports said using Asian palm oil, South American soybeans and EU rapeseed to make biodiesel has a bigger overall impact than conventional diesel on climate change, partly due to forests or wetlands being destroyed to grow replacement food.
European Union policymakers are preparing a political compromise that will safeguard existing biodiesel investments, having baulked at penalizing individual biofuel crops.
While biodiesel producers will be given time to realize a return on the massive investment of recent years, the latest scientific findings are likely to lose them market share in coming years to bioethanol and advanced biofuels, which the reports found to be generally preferable.
Senior European Commission officials met in Brussels this week to debate policy options for addressing the indirect impacts of the bloc's biofuel target, which aims to raise the share of biofuel in road transport to around 10 percent by 2020.
With biodiesel representing about 80 percent of Europe's estimated $17 billion market for biofuels and the bloc dependent on diesel imports to meet rising demand, the officials agreed to delay any action that could kill off the biodiesel sector.
"I think they are going to arrive at a political compromise," Philippe Tillous-Borde, chairman of the EU's largest biodiesel producer, Diester Industrie, told Reuters.
Tillous-Borde and other biodiesel producers insist the science on the indirect impacts of biofuels is uncertain and still evolving and that it would be premature and unfair to regulate them out of existence now.
This argument has won support within the Commission, with the EU's top farm official among those who argued against redrawing the investment map for biofuels overnight.
The Commission is due to adopt its proposals for approval by EU governments and lawmakers after the European summer break.
The dilemma facing EU policymakers concerns a relatively new concept known as indirect land-use change (ILUC), which challenges the notion that biofuels only emit as much carbon when burned as they absorbed during growth.
ILUC means that if you take a field of grain and switch the crop to biofuel, somebody, somewhere, will go hungry unless those missing tonnes of grain are grown elsewhere.
If the crops making up the shortfall are grown on farmland created by cutting down forests or draining peat land, this can pump out enough climate-warming emissions to cancel out any benefits from biofuels.
The Commission considered several options proposed by experts to address ILUC, including a direct one that penalizes individual biofuel crops according to their role in driving land use changes, which would have hit biodiesel hardest.
But EU sources said the Commission dismissed this option in favor of a second, indirect, approach, which involves raising the current carbon-saving threshold -- compared with fossil fuel -- that all biofuels must meet to count toward the EU's target.
This option penalizes all types of biofuels equally and will therefore minimize short-term damage to the biodiesel sector.
Commission officials say this is justified because the huge private investment in biodiesel production in recent years is largely the result of the EU's biofuel mandate and any shift in the policy must be gradual to avoid widespread bankruptcies.
Critics say this approach ignores a growing expert consensus that various biofuel crops have vastly different ILUC impacts.
"I fear a political compromise," said Bas Eickhout, a Dutch Green member of the European Parliament who led research into the land-use change impact of biofuels.
"I'm negative about this solution of raising the threshold for all biofuels, (because) you're not distinguishing between crop types. There are good crops and less good crops, and the policies need to take account of that," Eickhout told Reuters.
EU bioethanol producers, who would benefit more from a direct approach to ILUC than under the compromise option, are undecided about whether to argue for a crop-specific approach.
While the impact of the EU proposals will not be as negative for biodiesel as the sector had feared, some types of production may yet be excluded -- depending on how high the Commission raises the carbon saving thresholds.
The current limits require all biofuels to deliver carbon savings of at least 35 percent versus fossil fuel by 2013, rising to 50 percent in 2017.
"If we go from 35 percent to 45 percent in the short-term, that would be acceptable. If we go above that, It would be difficult," Tillous-Borde said.
"If for the 2017 horizon, which was for 50 percent, we go from 50 to 60 percent, we will find a way to achieve it."
With current production processes, even at 60 percent biodiesel made from imported soybeans and palm oil or European rapeseed would be excluded, according to one of the leaked reports -- a Commission impact assessment of the policy options.
"Note, however, that rapeseed is not very far from meeting the threshold, which implies that low-emitting producers of rapeseed might still be able to comply (after 2017) if their direct performance is improved," the report said.
The prospect of excluding imported vegetable oils from counting toward the EU biofuel target may appeal to domestic producers, but major exporters such as Malaysia and Brazil could be expected to challenge such a move.
While Europe's biodiesel sector is likely to be granted a temporary reprieve by Brussels, its longer term prospects have been seriously undermined in the ILUC debate.
This could have a major impact on the direction of investments in low-carbon energy sources by major oil companies such as BP and Royal Dutch Shell.
Biodiesel's loss would create gains for major EU bioethanol producers such as Abengoa Bioenergy and Tereos Internacional SA.
Ultimately, the ILUC debate will accelerate the switch to advanced biofuels made from algae or household waste, which do not require land, boosting companies developing them, such as Danish enzymes producer Novozymes. (Additional reporting by Pete Harrison in Brussels and Sybille de la Hamaide in Paris, editing by Rex Merrifield and Anthony Barker)