The European Union has decided to double the agreed-upon target for the adoption of biofuels by 2030, which for Estonia means boosting the share of biofuels fourfold from its current level.

Currently, 7.5 percent of the fuel consumed at Estonian gas stations comes from renewable energy. According to the existing obligation, the share of renewable energy in transportation fuel sold in Estonia was supposed to reach 14 percent by 2030. However, according to the new version of the Renewable Energy Directive, in six years, 29 percent of the fuel consumed in Estonia should come from renewable sources.

Rein Vaks, the head of the Ministry of Climate's energy department, told ERR that, besides electricity, the state is counting on a greater use of hydrogenated vegetable oil or HVO.

"We do not see that electricity should have the largest share, rather renewable diesel fuel used in internal combustion engines. Still, by that time, there should also be about 80,000 electric vehicles, and they will contribute quite significantly," said Vaks.

HVO, or green diesel, can be mixed with regular diesel fuel, which is the most used fuel type on Estonian roads. Neste, Olerex and Terminal Oil also sell pure HVO, advertising that it reduces a vehicle's greenhouse gas emissions by at least 90 percent.

Excluding electricity, green diesel constituted 64 percent of all sold biofuels in 2022 according to the Environmental Board, with biogas at 31 percent, bioethanol at 5 percent, and biodiesel (FAME) at 0.1 percent.

Vaks mentioned that Estonia has a choice in how to adopt the new renewable energy directive. In addition to the 29 percent target, another option would be for Estonia to achieve a situation where each fuel supplier's greenhouse gas emissions in 2030 are 14.5 percent less than in 2005.

"We ourselves see that it is more sensible and economical for Estonia to go with the 29 percent principle," Vaks said.

Fuel sellers: Green diesel excise duty cannot be as high as for fossil diesel

Looking at major retailers, Neste has been selling HVO fuel derived from recycled raw materials under the NesteMy brand. Additionally, Terminal Oil sells pure HVO fuel under the reDiesel brand, and starting from autumn, Olerex has also been offering it under the brand name Ecoforce.

Veiko Värk, the fuel purchasing and logistics manager at Olerex, stated that on better days, some gas stations are already selling more green diesel than regular diesel. However, fuel sellers believe that the state's current excise policy does not encourage drivers of diesel vehicles and trucks to switch from regular diesel to green diesel.

This is primarily because green diesel is currently taxed at the same high rate as fossil diesel. The diesel excise tax is currently 37.2 cents per liter, and according to the government's plan, it will rise back to the 2020 level of 49.3 cents per liter by 2027.

Ülle Tamme, Estonian Transportation Fuels Union and Neste board member, mentioned that in meetings with the state, they have tried to explain that Estonia and the European Union have significant ambitions for reducing emissions. Therefore, we should prefer renewable fuels over fossil fuels and treat all renewable fuels equally to avoid market distortion. She stated that this is the only way to achieve renewable energy targets in the most cost-effective manner.

"Today, it is most profitable to sell fossil fuels in Estonia. This is a consequence of the state's current excise and fuel policy. Now, only in the last year have we started to scramble and realized that we need to quickly change something in the country. Subsidized tax incentives and volumes of LPG imported from Russia are only increasing, which is somewhat masochistic, because we are supporting fossil fuels and at the same time supporting the aggressor who is wreaking havoc in Ukraine and also threatening us," she said.

On Tuesday, the price of green diesel at Terminal Oil gas stations was €1.890 per liter, while regular diesel was €1.589 at the same time. Olerex gas stations were selling both at the same price.

Vote still out at Climate Ministry on whether to lower green diesel duty

Estonia is required to significantly reduce greenhouse gas emissions in various sectors by 2030, which is why a climate law regulating the entire process is currently being developed at the ministry.

The Ministry of Climate sees great potential in adopting alternative fuels in transportation, agriculture and energy, because, for example, pure green diesel, unlike fossil diesel, does not emit greenhouse gases.

"Increasing the adoption of HVO is one of the opportunities with the greatest potential for reducing greenhouse gas emissions. However, these numbers still need to be refined," said Kristi Klaas, the ministry's deputy secretary general for the green reform.

In the agricultural sector, the state is considering, for example, transitioning half of agricultural machinery to alternative fuels. Klaas said that it is being discussed in the climate law's transportation working group to which extent fossil diesel fuel in passenger cars should be replaced with green diesel.

Klaas said that discussions on whether and how much to lower the HVO excise duty to promote the adoption of green diesel are still ongoing in the ministry. She emphasized that before lowering the excise tax, it is crucial to ensure that the reduced tax would be reflected in the final price of the green fuel.

"Finland took the same path of lowering the excise tax, but in the end, the price at gas stations did not significantly drop. The general logic, however, is that lowering the excise tax should reduce the final product price, but since the right to set retail fuel prices ultimately belongs to the gas station itself, this excise tax reduction does not always automatically translate into a lower final product price," Klaas explained.

According to the Tax and Customs Board, allowing the consumption of HVO, both in its pure form and mixed with fossil diesel, accounts for 3 percent of excise tax revenue from diesel fuel. Last year, excise tax from diesel fuel amounted to a total of €315 million, which means that approximately €9 million was paid in excise tax on green diesel last year.

Finance Ministry would not rush to lower green diesel excise duty

Erle Kõomets, head of the tax and customs policy department at the Ministry of Finance, mentioned that so far, the idea of lowering the excise tax has not gained much support in the ministry, mainly due to the negative experience from 2005-2011, when biofuels were also exempt from excise tax. Kõomets explained that this created a significant administrative burden for both the tax administrator and companies, and state aid permission had to be sought. Despite this, the share of biofuel remained marginal, she said.

Kõomets also noted that there is no certainty that a reduction in excise tax would ultimately affect the price.

"Usually, what we see is that it initially impacts the price, but then gradually starts to climb back, and in the end, the consumer ends up paying for it," she stated.

Kõomets expressed that moving too hastily with excise tax reductions should be avoided, especially since a new Energy Taxation Directive is being discussed in the European Union, which would introduce a distinction where biofuels are taxed lower than fossil fuels. This means that fuels would be taxed based on their energy content, which is largely related to their CO2 emissions.

"We would rather wait to see what happens with this directive, and if we move too hastily, we might end up having to make changes soon, which would be additional work for everyone – both companies and us," she mentioned.

Kõomets indicated that the directive is not expected to be adopted in the coming months, but positive developments in this area next year are not ruled out.

Rein Vaks mentioned that it would be theoretically possible to meet the European Union's obligations regarding biofuels without lowering the excise tax on green diesel, for example, by encouraging the adoption of electric vehicles to a greater extent.

"It would definitely be possible, but it makes sense for the polluter to pay. The greenhouse gas footprint of HVO is lower than that of diesel fuel, so it is obviously logical that its excise tax should be lower than the excise tax on polluting diesel fuel," he said.

Excluding electricity, HVO constituted two-thirds of all biofuels sold in Estonia in 2022, according to the Environmental Board, with the remainder largely being green gas.

Retailers: State supervision regarding biofuel sales still insufficient

Amid discussions on lowering the excise tax on green diesel, fuel sellers continue to question whether, even if the state further encourages the use of HVO, there can be assurance that all market participants are selling a product as green and pollution-free as the rules prescribe, and in the volumes required by the rules.

Ülle Tamme stated that one of the objectives of using renewable raw materials is not to achieve one hundred percent renewable raw materials but to meet the bio-obligation. This obligation, according to her, can only be met with fuel that fully complies with the requirements, and the enforcement of these requirements is a weak point in Estonia.

The Environmental Board has fined Olerex several times for failing to meet the biofuel requirement. Most recently, in December, the agency imposed a fine of €8 million on the company, which Olerex has since contested. According to the Environmental Board, Olerex directed fossil fuel into consumption in 2022 instead of fuel made from renewable sources.

Additionally, a criminal investigation is underway to examine suspicions that Olerex has knowingly provided false information to the Tax and Customs Board about the fuel imported into the country. Furthermore, the Competition Authority is investigating a complaint from Terminal that Olerex has gained an unfair market advantage by not complying with the biofuel requirement.

According to Tamme, the state has still not sufficiently tightened supervision over fuel suppliers in the past few years. She questions why fuel sellers should make very expensive investments in biofuels when, at the same time, the state cannot ensure effective supervision and thereby fair competition.

"It seems to us that those who are directly supposed to conduct supervision, such as the Environmental Board, do not realize how bad the situation is due to the state saying it lacks resources. It's ridiculous when hundreds of millions from the state budget are lost because some agency is understaffed," said Tamme.

Vaks: We have already ramped up fuel marked supervision

In response to the fuel sellers' criticism, Vaks mentioned that the state has already intensified its supervision. For instance, starting from the beginning of this year, the Environmental Board, in cooperation with the Tax and Customs Board, samples every biofuel batch that enters the country and is greened for consumption. Vaks explained that upon analyzing a batch, the agency determines whether it contains as much renewable fuel as the documents indicate.

Currently, a law is being processed in the Riigikogu that, according to Vaks, will enhance supervision. The government-approved draft amendment to the Liquid Fuel Act gives the state better means to penalize fuel suppliers for violating biofuel requirements.

Vaks said that the current Liquid Fuel Act allows for a maximum fine of €10 million for fuel suppliers who have violated biofuel regulations. Under the new law, however, the fine will be €125 for each gigajoule of energy by which a fuel supplier falls short of meeting their obligation.

"If we assume that the supplier with the largest market share fails to meet their obligation, then based on their sales volumes and allowed quantities, the fine could reach up to €40 million if the obligation is not met at all," Vaks stated.

The new draft law also tightens supervision – previously, the Environmental Board reviewed market participants' compliance once a year, but now, according to the plan, supervision will occur twice a year.

Annual production of green diesel enough to cover three days of global oil consumption

Neste board member Tamme stated that while in 2022, hydrogenated vegetable oil (HVO) accounted for about 2.5 percent of all fuel used in transportation, demand for HVO at Neste gas stations has surged over the last year.

Tamme highlighted that demand increased especially in the logistics, transport and heavy machinery sectors. "We've received very positive feedback from these sectors because it's a very clean product that doesn't require rotation – it remains frost-resistant down to -32 degrees Celsius. Even if it sits in the tank, it can stay there for ten years without any issues," she said.

Tamme also mentioned that farmers have discovered green diesel for similar reasons, as they need to leave their machinery idle over the winter. Additionally, HVO has been discovered by organizers of large events who use generators, as, unlike conventional diesel, green diesel does not emit an unpleasant odor.

Oliver Järvik, associate professor at the Institute of Energy Technology at TalTech, said that discussions on whether and to what extent green diesel is better for vehicles than conventional diesel are still ongoing. He explained that unlike conventional diesel or gasoline, HVO does not contain aromatics, resulting in less soot formation in the engine and more efficient combustion – which is also better for the engine.

In terms of meeting the European Union's climate objectives, Järvik raised questions about the extent to which it's feasible to replace fossil diesel fuels with green diesel.

"The world consumes approximately 11.3 million cubic meters of oil per day. About every three days, the volume equivalent to Lake Ülemiste is consumed. A few years ago, the global production of HVO was around 35 million cubic meters per year, which is the same as the amount of oil consumed every three days," he said.

Järvik noted that while it's possible to experiment with green diesel in certain regions, replacing the world's fossil diesel fuel consumption entirely with it is likely not feasible.

Estonian retailers' HVO made from used cooking oil

The European Court of Auditors warned in February that despite the European Union investing €430 million in the development of biofuels, they may not be as environmentally friendly as initially thought.

"The European Commission assumed that biofuels would increase energy independence, but in reality, dependency on other countries has grown, with used cooking oil imports from China and Malaysia as an example," said member of the Court of Auditors Keit Pentus-Rosimannus at the time.

Oliver Järvik mentioned that the environmental impact of producing vegetable oil for fuel depends on the source of the oil.

"A lot of HVO production uses palm oil, which is pressed from the fruits of oil palms. The question is, where have these oil palms been planted? Has forest been cleared for them or not? Another source of raw material could be used cooking oil. In such cases, if the used cooking oil would otherwise become waste, producing HVO from this oil could be considered environmentally friendly," Järvik explained.

Järvik added that since the vegetable oil is hydrogenated in the process, it also matters whether so-called green hydrogen or hydrogen obtained from natural gas is used.

Representatives from both Olerex and Terminal Oil stated they purchase HVO from Neste, which is primarily based on used vegetable oil. Veiko Värk from Olerex mentioned that there might also be some use of palm oil residues, and the hydrogen used is predominantly green.

Raimo Vahtrik, director of motor fuel sales at Circle K Estonia, said that Circle K replaces an average of 7.5 percent of every liter of diesel fuel with refined HVO. He noted that they do not sell pure green diesel in Estonia because mixing HVO with fossil fuel is more practical and affordable.

Rein Vaks mentioned that the updated Renewable Energy Directive is expected to reach the Riigikogu by the end of the year.

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