Swedish government plans stronger emissions reduction targets in boost for biofuels

Sweden's government is proposing to boost its emissions reductions targets for road fuels, according to Swedish news outlets and parliamentarians, in an expected policy boost for its biofuels sector less than a year after it watered down its climate targets.

In what would be a significant policy u-turn for the center-right coalition, the government is expected to increase its greenhouse gas emission reduction targets for diesel and gasoline from 6% to 10%, based on a 2010 baseline, in its upcoming Autumn budget in September.

New measures expected to be introduced as early as next summer would be coupled with tax cuts to help mitigate fuel inflation, according to Sweden's SVT Nyheter, citing comment from the Sweden Democrats and governing parties Aug. 26. Increased reduction targets effectively oblige suppliers to blend higher proportions of biofuels with fossil fuels.

Existing targets were initially intended to stay in place until 2026, after levels were slashed last year from 30.5% and 7.8% for diesel and gasoline respectively -- once among the most ambitious levels in Europe.

According to the latest estimates by S&P Global Commodity Insights analysts, Sweden's renewable diesel demand for road transport is set to plummet from 1.2 million mt in 2023 to 541,000 mt in 2024 as demand slumped, knocking it from its place as the largest consumer in Europe and blunting growth outlooks for 2024.

Commodity Insights forecasts that Swedish renewable diesel demand for road fuel will account for 12% of European consumption in 2024, down from 29% in 2023, while policy rollbacks in Finland also resulted in a lower contribution from the Nordics overall.

Weaker demand incentives and import pressure from China had contributed to a slump in prices over the year, according to analysts and key stakeholders.

Platts, part of S&P Global Commodity Insights, assessed the premium for used cooking oil methyl ester complying with the EU's Renewable Energy Directive at an average premium of $534/mt to ICE gasoil in the year 2024 to date, down from an average of $588/mt in 2023, with levels hitting a low of $335/mt on Feb. 9 2024.

Meanwhile, Sweden's environmental protection agency and other lobby groups had warned that the weaker climate targets risked seeing the country fall short on its EU emissions reductions targets.

With the support of firmer policy incentives and new antidumping duties imposed on Chinese biodiesel imports, however, producers and key lobbyists hope that stalling growth will reverse course and restore investor confidence in the market.

Market boost

Neste, Europe's largest biofuel producer by capacity, welcomed the policy measure but withheld from quantifying the potential impact on its operations ahead of a formal policy enactment.

"It is difficult to assess the exact effects of the change to Neste's operations at this point. However, the decision in Sweden to increase the biofuel blending mandate volume is a step in the right direction," a company spokesperson said Aug. 27.

The Finnish refiner has been among the hardest hit by a squeeze on biofuel margins, reporting its steepest net losses in over a decade in Q2 2024. In 2023, it had been outspoken in calling reduced emissions targets from Sweden a source of margin pressure.

Meanwhile, Preem, a Swedish producer, reiterated its commitment to the biofuels sector despite evidence of market distress that has seen several prominent players pause large biorefining projects across Europe.

"Preem aligns with the government's position that the incorporation of biofuels is a vital tool in reducing fossil carbon dioxide emissions from the transport sector", Mattias Holmqvist, head of media relations at Preem, said.

It remains to be seen whether fuel tax cuts will make blending incentives appealing for center-right voters, while biofuel traders said the policy change could also be accompanied by support measures for electric vehicles.

Beyond the ruling coalition, the policy move has also attracted bipartisan support from the far-right Sweden Democrats and the Greens.

"The government seems to be restoring some of the climate damage they have caused," said Daniel Hellden, a spokesperson for the Greens and member of parliament in a statement on X, formerly known as Twitter, on Aug. 26. "The reduction obligation needs to be increased, but it needs to be done in a way that is fair for the whole country and which does not affect those without alternatives."