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Indirect Land Use Change: Towards sound European Union policy 
decisions 
 
 

 
Executive Summary 
 
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 
preserved. 
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 
feedstocks. 
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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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 
generally recognised.  
 
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 
grows.  
 
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 
(2010) final. 
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 
of by-products.  
 
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 
of feedstocks 
 
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, Bogdanski, 
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 
from markets. 
 
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. 
http://www.mpob.gov.my/index.php?option=com content&view=article&id=992%3Ankea-national-biogas-
implementation-epp5&catid=153&lang=en.   
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, Bogdanski, 
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 
local populations.” 

 
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”17. 
These concerns are widely hared and growing among 3rd countries rich in biofuel feedstocks and 
production potential.  
 
                                                
16 European Voice, “Growing pressure to change EU biofuel policy”, 28/4/2011. 
http://www.europeanvoice.com/article/imported/growing-pressure-to-change-eu-biofuel-policy/70930.aspx 
17European Biodiesel Board (EBB) Press Release 29/5/2009 http://www.ebb-
eu.org/EBBpressreleases/EBB%20position%20on%20ILUC%20July29%202009.pdf 
 
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