Background

This page gives an overview of how the EU's Fuel Quality Directive had been designed to cut emissions from transport fuel extraction and processing and explains why it is important that carbon-intensive sources of fuels such as tar sands and coal-to-liquid should be forced to clean up if they are to be sold in Europe.

Why does the EU want to reduce greenhouse gas emissions from fuels?

The big picture is that in March 2011 the European Commission’s White Paper on transport committed to a 70% cut in carbon emissions from transport compared with 2008, and a 20% cut by 2030. Transport is the only sector that has seen its emissions increase over the past two decades, and has now become the single biggest emitter of greenhouse gases in Europe, according to the European Environmental Agency.

As well as improving the efficiency of vehicles, it is also necessary to reduce the emissions that result from the extraction, production, processing and distribution of the fuels themselves. As there are wide variations between different sources of fuels in terms of the energy used and emissions associated with their extraction and production, the policy is a smart way of promoting the cleanest fuels over dirty ones.

What does Article 7a of the Fuel Quality Directive (FQD) do?

Earlier versions of the EU’s fuel quality law were designed to reduce health-damaging pollutants such as sulphur. Article 7a of the revised FQD, agreed in 2008-9, for the first time obliges suppliers to reduce the lifecycle greenhouse gas ‘intensity’ of transport fuel by 6% by 2020 compared with 2010. The directive also obliges suppliers to report information, from 2011, on the greenhouse gas intensity of the fuel they have supplied, to authorities designated by the member states of the EU.

The 6% reduction can be achieved through the use of biofuels, renewable electricity and a reduction in the flaring and venting of gases at the extraction stage of fossil fuel feedstocks (upstream emissions reductions).

What was the Commission proposal from October 2011 all about?

The October 2011 proposal from the European Commission established a methodology for the calculation of the GHG intensity of fossil fuels and the electricity used in electric vehicles as well as the baseline from which GHG reductions should be measured.

According to the Commission’s proposal, different fuels and sources of fuel (or ‘feedstocks’ as they are known) get different ‘default values’ for their carbon intensity. The default value for petrol made from conventional crude oil in the proposal was 87.5 g CO2/MJ. Because of the higher default values for fuels made from natural bitumen (i.e. tar sands - 107 g CO2/MJ), oil shale (131.3 g CO2/MJ) or coal-to-liquid (172 g CO2/MJ), fuel suppliers would have been discouraged to use these dirty sources of fuels in Europe. For more information, read our briefing.

Why did tar sands get a separate default value?

An important reason why tar sands got a specific default value is that they are produced from a different feedstock, so-called natural bitumen. Producing petrol and diesel from this feedstock requires much more energy than producing it from conventional crude oil, which in turn means that the carbon intensity of the final product is higher than that produced from conventional crude. In the Directive, natural bitumen is defined in a technology-neutral way, based on its density and viscosity.

Was Canadian oil being unfairly targeted?

No. The proposal did not discriminate between feedstocks on the basis of geographical locations. The specific default value for tar sands was not just in place for Canadian products, but for all fuels that are produced from tar sands anywhere in the world. Other countries with vast tar sand deposits include Venezuela, Russia and the US. Conventional oil from Canada would have received the same default value as conventional oil from the US, Russia or any other place.

What are the differences between the 2011 proposal and the final measures?

The final EU rules still formally recognise that road fuel made from unconventional sources of oil – tar sands (natural bitumen), oil shale or coal-to-liquid – has a higher greenhouse gas intensity than normal fuel. The carbon intensity values for tar sands (107g CO2/MJ) and other unconventional fuels are the same as in 2011.

But there is a big change from the 2011 proposal: the feedstock-specific values are largely a formality now. Under the 2011 proposal, each company would have had to report the share of unconventional fuels it brings to the EU market, and the more high-carbon fuels the company would bring in, the higher its average GHG intensity and the more effort it would need to hit its 6% target. Under the new rules, every company gets the same EU default value per product, regardless of feedstock used to make the product.

The reporting of one single EU carbon intensity value will not discourage the use of high carbon oil. Each fuel supplier has to achieve the 6% reduction target but all suppliers will report annually the same EU-wide carbon intensity value for fossil petrol and diesel, whether their products originate from high-carbon sources like tar sands or not. As a result, this system doesn’t discourage the use of high-carbon oil. One useful feature of the final rules is the reporting of Feedstock Trade Names (or Market Crude Oil Names – MCONs). See our briefing for more information.

What are Feedstock Trade Names?

The novelty of the 2014 proposal is that the suppliers have to report Feedstock Trade Names (or Market Crude Oil Names – MCONs) to national authorities, in addition to the origin and the place of purchase of their oil. Crude oil is sold on international markets under various market names, such as West Texas Intermediate or Brent. The proposal contains a list of names that have to be reported by suppliers who also import crude oil to national authorities. Importers of refined products (20-25% of EU imports) will have to report whether their products originate in the EU or not, but not the MCONs. They will also be required to disclose the country and name of the refinery of origin.

This means that the EU is aligning its system with the one of California. Concretely, this system could also help to give a better picture of the carbon intensity of crudes used in the EU. Having information on MCONs will also permit the public to know, to a certain extent, if EU crudes originated from unconventional raw materials or not. However, the degree of information made available publicly will depend on the level of transparency that member states will set at national level.

How does the FQD tackle emissions from flaring and venting?

The new implementing measures do actually reward reductions in flaring and venting. It does so by awarding credits to producers that reduce flaring and venting (so called upstream emissions reductions – UERs). These credits can be used for compliance towards the 6% GHG reduction target. The verification has to be done at a project level.

But the rules are quite vague and without robust guidance by the European Commission, and restrictions by member states, there is a substantial risk of double counted and non-additional offset credits being used for compliance, seriously undermining the FQD’s effectiveness. The European Commission is expected to release a non-legislative guidance document for the member states in the coming months. For more information, please check our key recommendations on UERs.

How to explain the weakening of the FQD?

From the very beginning, the oil industry in Europe and in North America as well as the government of Canada have attacked the proposed implementing measures for the Fuel Quality Directive (Friends of the Earth Europe has documented the active lobbying by Canada on the FQD in 2011 and 2013). This intense lobbying had an impact on EU countries’ positions in the Council. When member states voted in February 2012 on the good proposal of the European Commission, they were very divided and the vote ended in a stalemate. Some countries abstained because they requested more information and an assessment of the potential impacts on industry before adopting an official position. The European Commission launched an impact assessment in 2012 which was finalised in August 2013. However, it took more than a year after this for the Commission to release its new (weakened) proposal – in October 2014.

During this period of time, the Commission also started to be engaged in a very active trade agenda both with Canada and the US. On the one hand, the EU was negotiating a free-trade deal with Canada (CETA) and it also started negotiations on a Transatlantic Trade and Investment Partnership with the US (TTIP). Both trade agreements have been used as a new lobby vehicle by Canadian and US oil companies to undermine the FQD. More information on trade deals and the FQD can be found here.  

Reporting on fuels carbon intensity – will all this just add too much regulatory complexity?

No. A study commissioned by T&E has indicated that the administration cost of the implementation of the FQD would only add less than half a eurocent for a 50-litre fill-up or a maximum of 1.6 eurocent per oil barrel. This finding has been confirmed by the official FQD impact assessment released by the European Commission in October 2014. Overall, the reporting requirements would have been quite similar to those in place for biofuels.

Who supplies the EU’s oil?

The EU’s dependence on crude oil and diesel imports has increased in the last 15 years – to the extent that 88% of all crude oil is imported. In 2015 Europe spent in total around €215 billion on crude oil and diesel imports. Over 80% of the imported crude oil in 2014 was supplied by non-European companies. Rosneft and Lukoil are the biggest beneficiaries; together they receive around a third of the EU’s oil import revenues or over €60 billion.

For more information, see a report by Cambridge Econometrics and a map showing trade flows of oil into Europe.

Is Canadian oil being unfairly targeted?

No. The proposal does not discriminate between feedstocks on the basis of geographical locations.

The specific default value for tar sands is not just in place for Canadian products, but for all fuels that are produced from tar sands anywhere in the world. Other countries with vast tar sand deposits include Venezuela, Russia and the US. Conventional oil from Canada will get the same default value as conventional oil from the US, Russia or any other place.

Why do tar sands get a separate default value?

An important reason that tar sands get a specific default value now is that they are produced from a different feedstock, so-called natural bitumen. Producing petrol and diesel from this feedstock requires much more energy than producing it from conventional crude oil, which in turn means that the carbon intensity of the final product is higher than that produced from conventional crude. In the Directive, natural bitumen is defined in a technology neutral way, based on its density and viscosity.

What are the Commission’s figures for tar sands based on?

The value of 107 g CO2/MJ is based on the industry average for tar sands production that could be processed in EU refineries. The figure comes from a peer-reviewed study that was financed by the European Commission and written by Professor A. Brandt from Stanford University. A similar study was also done to determine the carbon intensity of oil shale. The figures from both studies were also discussed at the stakeholders meeting organised by the Commission’s Climate department. The figures were not challenged.

The study found that tar sands are 23% more GHG intensive than the average for conventional crude currently used in the EU. This is a suitable value to assign. A recent review of 13 scientific studies found tar sands fuels to be 18 to 49% more GHG intensive than the proposed EU default value for conventional oil.

According to the Stanford University study, “GHG emissions from oil sands production is significantly different enough from conventional oil emissions that regulatory frameworks should address this discrepancy with pathway-specific emissions factors that distinguish between oil sands and conventional oil processes.”

Has the EU chosen to ignore other high carbon sources, such as Nigerian and Russian oil produced with lots of gas flaring?

No. While environmental NGOs would like to see stricter rules, the proposal does actually reward reductions in flaring and venting. It does so by awarding credits to producers that reduce flaring and venting. These credits can be used for compliance towards the 6% GHG reduction target. The verification has to be done at a project level.

In fact, the GHG intensity of tar sands is consistently higher in comparison with conventional oil. This means that this higher GHG intensity stems from natural characteristics of this feedstock and is not due to inappropriate management practices that are used when extracting oil with flaring.

According to the ICCT: “In general, production of oil from tar sands results in higher GHG emissions than from conventional crude, even from fields that flare natural gas”.

In a global market, won’t tar sands just end up being sold to countries outside Europe?

This proposal, if implemented, will give a signal to fuel suppliers that the market value of their products depends on their carbon intensity. Fuels with higher carbon intensity can still be exported to other countries such as China, but at a lower price, which will make it less attractive to produce compared with low carbon fuels.

This is not the first time the EU has set quality standards for products entering its market. It did so previously for lead in petrol, and for sulphur in petrol and diesel, for example. These measures also led to a price differential between cleaner and dirtier fuels, making it more attractive to make cleaner fuels and less attractive to make dirtier fuels. Setting standards for carbon footprints will work in a similar way. It will also lead to price differentials based on carbon footprints, and hence higher production of low carbon fuels and lower production of high carbon fuels.

California also has a low carbon fuel standard that works in a similar way. Other regions around the world are likely to follow, as they have on other fuel quality issues.

Will other sources of fuel just become more expensive with no environmental benefits?

The proposal will make attainment of the 6% GHG target of Article 7a cheaper, not more costly.

First, this proposal opens up an additional avenue for compliance. If all petrol and diesel from fossil sources is treated the same, compliance can probably only be achieved through blending in biofuels or supplying low carbon electricity. Offering lower-carbon fossil fuel and opportunities to count the reductions of flaring towards the target becomes an option too with this law.

Second, it is logically impossible to claim that the proposal will lead to large price differentials between low and high carbon fuels on the one hand, and that such large price differentials will have no environmental impact on the other hand.

The exact price differential is difficult to predict but it will be the mechanism of price differentials between low and high carbon fuels that will spur investment in low carbon fuel and deter investment in high carbon fuel.

Could Canada bring a case at the World Trade Organization for discriminatory trade practices?

Canada would be unlikely to win a case at the WTO. Tar sands would most likely not be considered “like products” to conventional crudes and therefore no unlawful discrimination exists under Article I and III of GATT.

Even if this hurdle can be overcome, the Canadian government bears the burden of showing that tar sands receive less favourable treatment vis-à-vis conventional crudes under Article III of GATT. Moreover, the European Union has proceeded in good faith, backed by the best available scientific evidence, and the reporting measures are rational and justifiable.

Therefore, to the extent any discrimination is found to exist, the reporting measures are permissible under the Article XX(g) of GATT, which allows countries to adopt trade-restrictive measures relating to the conservation of exhaustible natural resources.

Will all this just add too much regulatory complexity?

No. A study commissioned by T&E has indicated that the admin cost of the implementation of the FQD would only add less than half Eurocent for a 50-litre fill-up or a maximum of 1.6 eurocent per oil barrell. This finding challenges the industry claims that the detailed rules would add one US dollar per barrell.

Reporting is already required under the FQD and is necessary to determine the carbon intensity of the transport fuel provided by fuel supplier. The proposal represents a well-structured and common-sense approach that relies on information readily available: the feedstock source. It also provides flexible mechanisms for calculating carbon intensity using default values or an actual value if suppliers prefer to show their fuel performs better.

The Commission ensured that the administrative burden is minimal, as they will only require the annual reporting of the imported mix. Establishing a certification system or reporting batch-by-batch will not be necessary for the purposes of this legislation. Furthermore, several more ambitious reporting systems already exist, i.e. in Canada and the US. For example, US producers already report to their national authorities the API gravity, the country of origin, and feedstock stream (market) name. In Canada production of unconventional oil (i.e. tar sands) and conventional oil extraction is reported separately, as it takes place in with different production methods.

Will refineries be forced to shut down?

The differentiation among different feedstocks, as proposed in the FQD, will not have an impact on European refineries because EU refineries are not equipped to process unconventional crudes, such as the ones from tar sands. Only Spain has recently upgraded refineries to be able to accept some Venezuelan tar sands crudes. Most refineries will not have to make additional investments and they will continue relying on conventional crudes that they can process.

What about GHG savings?

This recent study shows that the October 2011 proposal with differentiated values for different unconventional feedstocks for petrol and diesel can save up to 19 Mt of GHG emissions by shifting investment in tar sands projects to lower-carbon alternatives. These savings are additional to the 50-60Mt CO2 savings to be achieved by the 6% target of the FQD.

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