27 April 2012
Indirect Land Use Change: Towards sound European Union policy
This paper seeks to contribute to the deliberations of the European Union institutions as
they consider whether and how to address the indirect Land Use Change (ILUC) under the
Renewable Energy and Fuel Quality Directives. As a world-leading renewable diesel
producer and sustainability leader, Neste Oil recognizes and is concerned about the
increasing deforestation rate especially in the tropical areas1, and would like to offer its
views on how to best minimise ILUC risks.
The paper makes the following key points:
1. Any truly effective solution must be global and cross-sectoral in scope, as transport
biofuel feedstocks accounted for only about 2% of global cropland area in 2008,
according to the UN Environmental Programme. 2
2. European biofuels industry, regulated by the sustainability criteria of EU Directives,
is a strong driver of sustainable agriculture in third countries: this role should be
3. There is still uncertainty about ILUC effects, as ILUC modelling is still evolving and
the outcomes of different models vary greatly.
4. Focus of ILUC policy should be on preventive action that mitigates ILUC risks.
5. Long-term investment security is needed for transition to new generations of
6. A poorly designed ILUC policy could have a series of unintended consequences in
terms of carbon emissions, European investments and jobs, development, trade
and food prices, while failing to achieve its ultimate objectives.
Sustainably produced biofuels remain the best and most available option to reduce carbon
emissions from transport, including aviation.
For example, the greenhouse gas emissions of Neste Oil’s NExBTL renewable diesel are
about 40% to 80% lower compared with fossil diesel. In 2011 alone, the consumption of
renewable NExBTL diesel reduced GHG emissions in transport by an amount equivalent
to that of taking around 310,000 fossil diesel cars off the roads, according to figures
verified by independent auditors3.
1 Global forest land-use change from 1990 to 2005. Initial results from a global remote sensing survey. FAO
and JRC, 2011. (http://foris.fao.org/static/data/fra2010/RSS Summary Report lowres.pdf)
2 United Nations Environmental Programme: Towards Sustainable Production and Use of Resources:
Assessing Biofuels, 2009.( http://www.unep.org/publications/contents/pub details search.asp?ID=4082)
3 Source: Neste Oil’s Sustainability report 2011. http://www.2011.nesteoil.com/sustainability
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27 April 2012
1. What is ILUC ?
The concept of indirect land use change (ILUC) expresses the risk that when existing
agricultural land which was producing commodity A is converted to produce commodity B,
or when commodity A is diverted to another use, the existing demand for commodity A has
to be satisfied with expansion of agricultural land somewhere else. The resulting
expansion of agricultural land can, depending on where and how it happens, can produce
additional carbon emissions. Both the concept and the risk of adverse ILUC effects are
Land requirements and land use change are key concerns for both environmental and
social sustainability. Land use change - direct or indirect - can cause negative effects such
as loss of biodiversity, loss of carbon stocks and land right conflicts, as well as positive
effects such as an increase in soil carbon, rural development and a change to more
sustainable agricultural practices. Controlling and mitigating direct and indirect land use
change effects is a major challenge in view of ensuring sustainable energy crop
production.4 2. Successful ILUC policy: global, science-based and preventive
2.1 Effective ILUC policy has to be cross-sectoral and global
According to UNEP, transport biofuel feedstocks accounted for about 2% of global
cropland area in 20085. Adverse ILUC effects may materialise when any industry
increases demand for an agricultural commodity for the production of, for example, food,
cosmetics, detergents or textiles. The world markets for agricultural commodities are
integrated, and production shifts easily to serve other end-use industries following price
signals and regulatory decisions. Consequently, if ILUC is addressed only in the biofuel
industry, the goal of reduction of undesired land use change will not be achieved without
similar policy measures in other sectors.
Equally, large-scale social phenomena such as urbanization and population growth are
major drivers of direct and indirect land use change as land previously used for agricultural
production or pristine land is converted to other uses, while demand for agricultural goods
Therefore, any truly effective solution to ILUC needs to be global and cross-sectoral in
scope. Addressing ILUC in only one sector, biofuels – the one with the most stringent
sustainability criteria – would lead to shift of supply to other sectors and would not have
the desired effect of reducing deforestation. Simultaneously, continuous efforts are needed
to strengthen the combat against deforestation using several policy options available,
including international agreements.
4 Responsible Cultivation Areas, Identification and certification of feedstock production with a low risk of
indirect effects, Ecofys, 2010.
5 United Nations Environmental Programme, Towards Sustainable Production and Use of Resources:
Assessing Biofuels, 2009.
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2.2. Uncertainty of effects: ILUC modelling is still evolving
The European Commission (EC) stated in its 2010 report on ILUC6 that “…Moreover, the
estimated land-use change can never be validated, as indirect land-use change is a
phenomenon that is impossible to directly observe or measure
Indeed, quantifying ILUC can only be based on models that project past impacts and
current state of affairs into the future. As the EC states, “…this is inherently uncertain,
since future developments will not necessarily follow the trends of the past
The complexity of ILUC modelling is increased by the necessity to have a global model
which must include multiple feedstocks and products. Since the key agricultural
commodities are transportable and traded globally, ILUC effects are global in nature. The
results from the ILUC models has been shown to be critically dependent on the
assumptions they make and the data they use – both of which often suffer from significant
reliability issues. Another reason for the uncertainty of modelling is the relative immaturity
of the state of ILUC research. Studies and models on ILUC have been carried out only
during the past 5 years or so.
It is therefore not surprising that there is a large variation in the outcomes from these
models. A study released in July 2011 by economic consultancy Copenhagen Economics
compares the results of various ILUC models and highlights the resulting wide variation of
estimates7. To cite one example, the estimates for ethanol produced from wheat varied
from -79 to 329 grams of CO2 eq./MJ versus the fossil fuel comparator of 83.8 grams. 2.3. Preventive action through mitigation of ILUC risks
Rather than attempting to address the negative consequences of ILUC, the focus should
be directed towards reducing the causes of ILUC. There are several tools available
already today to mitigate ILUC risks. The use of ILUC mitigation measures supported by
an incentive mechanism emerged as the best policy approach to tackling ILUC risks in a
study conducted by Ernst & Young in 20118. Neste Oil was one of the industry and non-
governmental organizations that commissioned this study.
First, increasing hectare yields reduces the need for expanding to new land. Crop
yield increases can come about from relatively low-cost agronomic management
gains, if the farmers are empowered and incentivised to adopt them9. There are
significant governmental initiatives in progress aiming at exactly this. For example,
as part of its palm oil strategy, the Malaysian government is focused on increasing
agricultural productivity. Accelerating removal of older, lower yielding trees and
replanting with high-yield varieties is expected to double over time the already high
hectare yields of palm oil production (3.5 – 4 tons per hectare). Moreover, newly
developed high-yield strains hold the promise of potentially yielding 12 tons per
6 Report from the Commission on indirect land use change related to biofuels and bioliquids, COM 811
7 The Missing Indirect Land-Use Change Factors – how to make decisions when the science is incomplete ?
July 2011. http://www.copenhageneconomics.com/Web/Publications/Energy---Climate.aspx
8 Biofuels and indirect land use change – the case for mitigation, Ernst and Young, October 2011.
9 Murphy, R., Woods, J., Black, M. and MacManus, M, M. (2011) Global developments in the competition for
land from biofuels, Food
Policy, 36 (S1), pp. S52-S61.
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hectare, decreasing the pressure on future plantation expansion. Model-based
ILUC factors can only poorly capture this type of dynamic, positive effects.
Secondly, effective use of co-products can significantly reduce carbon emissions:
The United Nations Food and Agricultural organization (FAO) thinks that integrating
food and energy production in developing countries particularly through the use of
by-products can be an effective approach to mitigate climate change, especially
indirect land use change (ILUC). 10 Integrating food and energy systems can lead
to increased land and water productivity, reducing greenhouse gas emission and
increasing food security. Also, the use of co-products can have a role in
encouraging the displacement of unsustainable animal feed production.
Third, and coupled with the two first ones, an incentive mechanism for ILUC
mitigation should be adopted. The RED and FQD already contain a provision that
foresees a credit to be awarded to biofuels produced on severely degraded land.
This mechanism could be expanded to encompass a broader range of mitigation
measures. The above mentioned Ernst and Young study lays out proposals and a
tentative implementation plan for such a scheme.
Fourth, international development organizations – the World Bank, the regional
development banks, the European Union and bi-lateral development agencies,
together with the industry and NGOs, could launch concerted action through
funding and advice to give a serious boost to crop yield increasing methods and use
We believe that the combination of these and potentially other mitigation measures offer a
more promising way to address ILUC than the policy options of assigning blanket ILUC
factors to different feedstocks or increasing the requirements of already significant GHG
reduction requirements of biofuels. 3. Long-term security for investments is necessary for transition to new generations
Industry has invested billions of euros in recent years to build renewable energy
production facilities in response to RED and FQD directives. A recent analysis has
suggested that the current average annual capital investment in all forms of renewable
energy in Europe is around 35 Billion euros.11 The investment signals provided by these
directives have fostered technological innovation and a wave of job creation and economic
growth in the renewable energy industry in Europe and beyond.
These renewable energy investments have been made with long-term horizons in mind.
Through a multi-year investment program just completed, Neste Oil alone has invested
some 1.5 billion euros in Europe (Rotterdam, Porvoo, Finland) and Asia (Singapore) for
producing its innovative and clean-burning renewable NExBTL diesel. NExBTL is
10 Making Integrated Food-Energy Systems work for People and Climate’ – An Overview
Dubois, Jamieson and Krell, FAO, 2010 (http://www.fao.org/docrep/013/i2044e/i2044e.pdf)
11 Financing renewable energy in the European energy market, Ecofys, 2011.
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produced from a range of sustainably produced feedstocks, including waste animal and
fish fat, rape-seed oil, crude palm oil and by-products of palm oil refining.
Recouping these kind of investments are necessary for the industry to make the longer
term shift toward new generations of feedstocks, such as microbial oil and algae oil. Land
use requirements for these feedstocks would be small. Neste Oil is investing 80% of its
R&D effort into these new feedstocks. However, their use on a significant commercial
scale is still probably a decade or more away based on current progress, due to yet
unproven technology, high costs and the necessary timeframes from R&D and piloting to
successful large scale industrial production.
Neste Oil is concerned that assigning ILUC factors to feedstocks or biofuels in Europe in
particular could very well jeopardize the development of new generations of feedstocks by
stranding the current, large investments that need to be recouped. A significant cash-flow
is needed to finance the necessary R&D, piloting and capital investment in view of
transition to new generations of feedstocks.
The necessary investment security requires “grandfathering” of existing production
facilities from any possible ILUC factors, as well as realistic understanding of availability of
new generations of feedstocks at significant commercial scale.
4. Possible unintended consequences of ILUC policy
Neste Oil is concerned that ILUC policy based on assigning blanket ILUC factors to
feedstocks could have a series of unintended environmental, developmental and economic
consequences without reaching its climate policy goals.
The RED directive already guarantees that biofuels reduce carbon emissions by setting
requirements for direct emission reductions (35 % compared to fossil fuels now, and 50%
reduction in 2017), and by providing a detailed GHG calculation methodology. Assigning a
blanket ILUC factor to biofuels would entail a risk to exclude sustainably produced biofuels
4.1. Sustainability efforts of European biofuels industry at risk ?
The biofuel industry in the EU is currently one of the main drivers of sustainability in
agriculture in many third countries. This is because of the stringent sustainability criteria
enshrined in the RED and FQD directives. Since European biofuel producers require
traceability of feedstock and sustainability certificates, the whole supply chain needs to
adopt sustainable practices and must therefore refrain from expanding into areas where
land types are banned by the European directives. No such criteria exist as yet for other
sectors which require use of agricultural land (food, cosmetics, textile, pharmaceutical),
and do not exist in most jurisdictions.
In addition to the positive effects throughout the supply chain, significant governmental
action has also ensued.
One example is the palm oil industry in Malaysia12 and
12 The palm oil sector is one of the sectors under “National Key Economic Area” of the Economic
Transformation Programme (ETP) initiated by the Malaysian Government in 2010. One of the Entry Point
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Indonesia13. Both countries are taking concrete actions to eliminate the methane release to
the atmosphere which is produced in the wastewater treatment at palm oil mills. The EU
directives have played a significant role in moving this forward.
If ILUC policy was to exclude certain feedstocks from the biofuel pool, the positive
sustainability developments would likely grind to a halt, as the supply would be directed to
other uses than biofuels or to other jurisdictions without sustainability criteria. 4.2. Sustainable biofuel production as a driver of economic development
According to UN Food and Agriculture Organisation (FAO) safe integration of food and
energy production may be the best way to improve national food and energy security
whilst reducing poverty in a climate friendly way.14 Farming systems that combine food and
energy crops present numerous benefits to poor rural communities. Using such integrated
systems, farmers can also save money from reduced use of fossil fuels and through
substitution of chemical fertilizers with slurry from biogas production.
The role of palm oil in rural development has received particular attention from the World
Bank, given the concerns over tropical deforestation. In its report published in April
201115, leading to the end of a year long moratorium on new investments in palm oil
projects, the World Bank found that:
“The palm oil sector employs an estimated 6 million people worldwide and generates
more jobs per hectare than other large scale farming operations. The sector is largely
driven by private sector investment and includes a large number of smallholder
farmers. Smallholder farmers are involved in nearly 40 percent of Southeast Asia‘s
area under oil palm cultivation and over 80 percent of Africa‘s area under oil palm
cultivation. While income earned by smallholders can vary widely according to the
form of engagement and market access, smallholders regularly report achieving more
income from oil palm than alternative crops. This is causing increasing numbers of
smallholders to enter the sector as global demand for palm oil continues to grow.”
The World Bank went on to conclude that:
“The net environmental and social impacts of oil palm depend on where and how it is
developed. Problems arise when strong economic incentives for expansion are
superimposed on a governance framework that has weak capacity for guiding the
Projects (EPP) is to get all palm oil mills to trap biogas from POME for heat and power generation by 2020.
13 In Indonesia, a new, legally binding regulation requiring a reduction of GHG emissions of palm oil
production is being implemented. This regulation is called the Indonesian Sustainable Palm Oil (ISPO)
standard and it requires the reduction of GHG emissions in oil palm plantations. The ISPO certification
system is mandatory and by 2014 all enterprises must implement it.
14 ‘Making Integrated Food-Energy Systems work for People and Climate’ – An Overview
Dubois, Jamieson and Krell, FAO, 2010; ibid.
15 The World Bank Group framework and IFC Strategy for Engagement in the Palm Oil Sector
http://www.ifc.org/ifcext/agriconsultation.nsf/AttachmentsByTitle/Final PO+paper Mar2011/$FILE/WBG+Fra
mework+and+IFC+Strategy FINAL FOR+WEB.pdf
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development of new oil palm plantations onto areas where the environmental and
social impacts are minimized... A focus on increasing the productivity of existing oil
palm plantations, when combined with good governance, could limit pressure on
expansion into forest lands, and most importantly, addressing the productivity
differentials between large plantations and smallholdings could benefit the poor.
Improving access to markets and finance for independent smallholders, and
strengthening farmer extension services, would also deliver additional benefits to
4.3 Effects of shifting demand – higher food prices?
The world oil seed markets are very sensitive to shifts in demand and supply, and are
therefore characterised by quick and large volatility of prices. If the main non-European oil
plants (soya and palm oil) were taken out of the European biofuel pool through ILUC
factors, and an equivalent demand was shifted to European grown rapeseed and
sunflower oil, the impact on the prices of the latter could be dramatic. This would mean
higher food prices in Europe, but likely also globally, due to integrated nature of world
vegetable oil markets.
4.4. Increased dependency on imported fossil diesel and increased oversupply of
gasoline in Europe?
For years, Europe has had a large diesel deficit and a gasoline surplus. In other words,
too little diesel is refined in the EU to meet the intra-EU demand, while there is oversupply
of EU refined gasoline. Consequently, the EU needs to import diesel oil, while its own
refining industry suffers from thin or negative margins because of oversupply of gasoline.
Taking out significant portions of the biodiesel and renewable diesel feedstock pool by
blanket ILUC factors would result in a situation where the biofuel mandates set by RED
and FQD directives would have to be met increasingly by ethanol blended gasoline, if
ethanol was assigned lower ILUC factors. The additional fossil diesel demand resulting
from disqualification of high ILUC factor biodiesel feedstock from the diesel pool would
have to be satisfied with imports from outside of the EU.
4.5 ILUC and international trade
European and non-European stakeholders have already expressed concerns about the
compatibility of ILUC policies and WTO rules. The Brazilian Sugar Cane Association, UNICA fears
that ILUC might turn into a non-tariff barrier. “It is difficult to base the legislation on such immature
science. It would be easily challengeable at the WTO
”, said Géraldine Kutas, head of UNICA
liaison’s office in Brussels in 201116. The European Biodiesel Board (EBB) has also stressed that
the introduction of ILUC “should be assessed against the World Trade Organization’s rules
These concerns are widely hared and growing among 3rd countries rich in biofuel feedstocks and
16 European Voice, “Growing pressure to change EU biofuel policy”, 28/4/2011.
17European Biodiesel Board (EBB) Press Release 29/5/2009 http://www.ebb-
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