For the member states of the European Union, the primary policy tool behind the development of a bioethanol industry is the Directive on the promotion of the use of biofuels for transport (Directive 2003/30/EC) [31]. The motiva­tions behind this Directive include improving the security of energy supply, and reducing the environmental impact of the transportation sector [32]. The Directive mandates an increasing share of biofuels from 2% of total fuel sup­ply in 2005 to 5.75% of total fuel supply in 2010 (based on energy content) in order to meet these priorities. Due to relatively slow growth in the industry, it is currently anticipated that renewable fuels will occupy about 4.8% of the market by 2010, which is significantly less than the existing policy target.

The overriding priorities of the European Commission will impact the be­havior of each member nation in setting national policies relating to biofuels. It can be expected that, while economic factors are not the political prior­ity of the EU, the member nations will have a strong interest in utilizing the proposed Directive to meet national goals of employment and economic di­versification. From an economic standpoint, it is anticipated that a biofuel contribution of 1% of the total EU fossil consumption will create between 45 000 and 75 000 new jobs [32].

At the time of writing, many member states have passed the biofuels Di­rective into national law, including Belgium [33], the Czech Republic [34], France [35], Germany [36], Greece [37], Latvia [38], Lithuania [39], and Swe­den [9]. Some countries have announced indicative targets that are below that of the Biofuels Directive, including Malta (target value for 2005 of 0.3%) [40], Hungary (0.4-0.6%) [41], Poland (0.5%) [42], Spain (0.55-0.65%) [43], and Cyprus (1%) [44]. Each of these countries still plan to achieve national targets of 5.75% for the end of 2010. Slovenia follows a slightly different set of tar­gets, ranging from 1.2% in 2006 to at least 5% in 2010 [45]. The Netherlands has set a target percentage of 2% biofuels for 2006, which will be followed in 2007 by requiring suppliers to ensure that these blends are achieved [46]. The UK has announced a Renewable Transport Fuel Obligation, which will place a legal requirement on transport fuel providers to ensure that a specific per­centage of their fuel sales is renewable, ranging from 2.5% in 2008/09 to 5% in 2010/11 [47].

In implementing the biofuels Directive, some countries have set slightly more aggressive targets, including Austria (revised Fuels Ordinance, 4 Novem­ber 2004: BGBI. II, No 417/2004), which mandates that all petrol and diesel marketers blend at least 2.5% biofuels on an energy content basis in all fuels sold within the country [48]. Sweden has set their national target of at least 3% biofuels after 2005, and has mandated that renewable fuels be made avail­able at petrol stations, starting with the largest stations (> 3000 m3 year-1) in 2006, and progressing to smaller stations (> 1000 m3 year-1) by 2009 [9]. Swe­den also has a very aggressive long-term target of 40-50% reduction of fossil fuel use, which should engender significant increases in biofuel use over the next 13 years [49].

Another important piece of legislation is the Directive restructuring the community framework for the taxation of energy products and electricity (Directive 2003/96/EC), which allows excise-tax exemptions for biofuels pro­duced or blended within European countries [50]. This legislation is very important within European nations due to the high level of excise tax that is currently levied on petroleum and diesel in these countries, particularly when compared to North America. Within these countries, a reduction of even a few percent can mean cents per liter, which translates into significant cost savings. For instance, in Austria, a 10% reduction in excise taxes on biodiesel reduces the cost by US $ 0.028 L-1 [51]. This sum is almost equivalent to the federal ex­cise taxes paid for diesel fuel in Canada. A similar percentage reduction in the US federal excise tax for diesel would result in a selling price of US $ 0.058 L-1 and a savings of only US $ 0.006 L-1 [32,52].

Before the release of the second Biofuel Directive, European governments did not always utilize excise tax exemptions to the same extent as their Cana­dian and US counterparts. This was because national controls over excise tax rates were complicated by the rules of the European Economic Community (EEC). A Directive issued by the EEC on 16 October 1992 was intended to harmonize the structures of excise duties among all member nations [52,53]. When France decided to create an aid scheme for biofuels that would ex­empt these fuels from national excise taxes, objections were raised and an appeal to the Commission of the European Communities was made by BP Chemicals [54]. Ultimately, however, the Commission decided to validate the French decision, allowing an exemption amounting to US $ 0.06 L-1 to be extended through 31 December 2003 [13,55,56]. This move created the prece­dent within the EU to allow excise tax exemptions for biofuels, freeing a pow­erful policy tool for decision-makers within the nations of the Union. The second Directive Regarding Tax Relief Applied to Biofuels (2003/96/EC) was issued in 2003, permitting other countries to make the decision to grant ex­cise tax exemptions as biofuel production becomes more widespread within Europe.

Today, most EC member states, including Austria, Belgium, Cyprus, Den­mark, Estonia, France, Germany, Hungary, Italy, Latvia, Lithuania, Luxem­bourg, Malta, Poland, Slovakia, Slovenia, Spain, Sweden and the UK have introduced exemptions at various levels up to 100%, using the precepts laid down in Directive 2003/93/EC. These exemptions are summarized in Table 1.

In implementing tax exemptions, Germany was careful to include a measure that allowed for adjustments to be made in the case of overcompensation. Per­ceived overcompensation has recently been observed in regards to vegetable — oil based fuels, and accordingly, the German government has introduced an Energy Tax Act, which from 1 August 2006 places a tax on these fuels [36].

Currency exchange rates (December 2006): US$ 1.0000 = € 0.7567 = CDN$ 1.1545 “Canadian Federal excise tax rate is shown. Provincial rates are variable, ranging from US 4.5 /L-1 (Yukon Territory) to US 12.1 /L-1 (Newfoundland and Labrador). Provin­cial excise tax exemptions range from US 0.7 /L-1 (Alberta) to US 1.8 /L-1 (Manitoba) b Mexican and Russian rates are ad valorem and vary on a monthly basis, depending on world petroleum prices

c US Federal excise tax rate is shown. State rates are variable, ranging from US 2.0 /L-1 (Georgia) to US 7.7 /L-1 (Rhode Island). State excise tax exemptions range from US 0.1 /L-1 (Florida) to US 0.7 /L-1 (Idaho)

Italy also incorporated measures to adjust in the case of overcompensation; that country currently provides tax exemptions for an annual quota of200 000 t of biodiesel for the period 2005-2010, as well as reduced excise duties on bioethanol and related bio-derived additives [57]. Several countries have ex­perimented with pilot excise tax exemptions on a project-by-project basis, including Finland [58], Ireland [59], and the Netherlands [46]. Latest reports indicate that Greece [37] is also considering tax exemptions for biofuels.

As of late 2005, only one country exceeded the goals set out in the Direc­tive. German biofuel use (primarily biodiesel) accounted for 3.75% of total fuel consumption in 2005 [36]. Swedish biofuel use (primarily bioethanol) accounted for 2.2% of the total in the same year [9], which came closest to achieving the goal; however, since most cars in Sweden are now running at E5 bioethanol blends, the country has encountered a constraint in the form of the EU Directive on Fuel Quality, which limits renewable fuel blends to 5%. Other countries, including the UK, have identified this Directive as a barrier to achieving the goals of the Directive on Biofuel Use [47]. In France, about 1.2% of fuel sales consisted of renewable fuels in 2005, mostly in the form of bio-ETBE or bioethanol [35]. In Austria, biodiesel production had reached almost 100 million L, which is approximately 1.1% of national fuel consump­tion [13,48]. Spain used significant amounts of both bioethanol (1.49% of total petrol) and biodiesel (0.10% of total diesel) [43].

Most EU members had not yet reached their biofuel use goals under the biofuel Directive in 2005, although the situation is changing rapidly as new capacity comes on-line. Lithuania’s use of biofuels has grown, rising to 0.72% in 2005 [39]. Both Italy and Malta report increasing biofuel produc­tion characterized by significant amounts of biodiesel, achieving about 0.57% and 0.52% biofuel use, respectively, in 2005 [40,57]. Other growing biofuel producers include Poland (0.48%) [42] and Latvia (0.33%) [38]. Countries with less than 0.2% biofuel use in 2005 include Greece (0.18%) [37], the UK (0.18%) [47], and Finland (0.1%) [58]. In the case of Finland, it should be noted that a new biodiesel plant designed to be online in 2007 will produce about 200 million L annually, raising this percentage significantly.

Countries reporting less than 0.1% biofuel use in 2005 include Hun­gary (0.07%) [41], the Czech Republic (0.046%) [34], and Luxembourg (0.021%) [60]. Countries with no appreciable biofuel use include Cyprus [44], Ireland [59], the Netherlands [46] and Slovakia [61]. In Denmark, a limited number of Statoil stations began selling 5% bioethanol blends in 2005, but total sales are as yet unknown and unlikely to meet 2% of total transporta­tion fuel sales. Biodiesel is produced in Denmark but exported, primarily for use in Germany [10]. Estonia has some biofuel production, but this volume is completely exported to other EC member countries [62].

Direct funding mechanisms have been implemented in a number of EU member states. In Belgium, the Federal Public Service of Finance has issued a call for tenders to market increasing amounts of biofuels, beginning in November 2006 for biodiesel and in October 2007 for bioethanol. Some re­search funding has also been made available [33]. In Cyprus, legislation to comply with the biofuel Directive includes a grant scheme for energy conser­vation and renewable energy utilization. Under this legislation, four applica­tions for biodiesel plants have been submitted [44]. In the Czech Republic, state aid for biodiesel production has been introduced at a level of about US$ 39 million (CZK 821 million) [34]. In Estonia, about US$ 5000 (EEK 57 600) was granted as support to draw up business plans for the production of liquid biofuel in 2005 [62]. Ireland announced a renewable energy grant aid package in 2005 which provides up to US $ 86 million (€ 65 million) annually to a range of projects, including biofuel initiatives [59]. Latvia provided about US $ 680 000 (LVL 358 980) for bioethanol and US $ 380 000 (LVL 201 770) for biodiesel production [38]. Lithuanian producers of biofuels may claim re­funds on every tonne of feedstock used in biofuel production [39]. Poland has provided approximately US $ 550 000 (PLN 1 601 700) in funding to research projects related to biofuels, and an additional US$ 95 000 (PLN 271 500) to­wards two production start-up projects [42]. Sweden has provided an invest­ment of approximately US$ 120 million (SEK 815 million year-1) for energy research, which includes research into transportation fuels [9]. The UK has created grant programmes to help upgrade infrastructure and to provide dir­ect support for the development of a biofuels industry [47].

Some countries have also implemented other measures to promote bio­fuels. The Czech Republic has introduced policies that provide resources to support biomass production for non-transport energy purposes [34], and Es­tonia has set aside resources to support the expansion of energy crops [62], as has Slovenia [45]. Ireland has established a number of initiatives, including tax exemptions for corporate fleets and for flex-fuel vehicle sales [59]. The UK created a fleet biofuel mandate for its Government Car and Dispatch Agency in 2005, which specifies 5% biodiesel use in the fleet [47]. Sweden has created a number of progressive measures, including a provision that state-owned vehicles be environmentally sound (which includes power by biofuels), and introduction of a congestion charge for Stockholm to which biofuel-powered vehicles are exempt [9]. Sweden has also released a report entitled “Making Sweden an oil-free society”, which has among its goals the reduction of petrol and diesel in transportation fuels of 40-50% by 2020 [49].

2.4