New requirement to hike price of diesel

Photo: Elmo Riig / Sakala

On January 1, a new regulation will enter into force, requiring fuel retailers to reduce their CO2 footprint by 6 percent. Failure to comply is punishable by a monthly penalty of up to €400,000.

The beginning of next year threatens to turn the fuel market upside down. One regulation will require a liter of gasoline and diesel fuel to include 10 percent biofuel, while another expects retailers to cut their CO2 emissions by 6 percent. Fuel sellers have three options, broadly speaking, for lowering their CO2 output: to increase biofuel content in one liter of motor fuel, boost sales of natural gas or electricity or buy CO2 quota.

It is likely retailers will have to opt for a combination of all three as failure to comply with the 6 percent reduction could bring a fine of up to €400,000 a month. The relative importance of biofuels is set to grow.

CEO of Circle K Estonia Kai Realo said that the carbon dioxide requirement will first and foremost affect the price of diesel. While the 10-percent biofuel requirement will take care of the CO2 reduction obligation in the case of gasoline, things are different when it comes to diesel fuel. “In order to ensure the necessary 6-percent reduction, it will be necessary to use biocomponents that have a lower CO2 emissions value all year round,” Realo said. Current requirements do not apply to winter diesel.

What is more, a 10-percent biocomponent content in diesel fuel cannot achieve the required CO2 emissions drop, meaning that the relative importance of biofuel needs to grow to 12-14 percent. “Diesel fuel will become much more expensive for the consumer. The price will grow 6-8 cents per liter,” Realo said.

She said that as a motor fuels retailer, Circle K is willing to comply with the law and hopes the environment ministry has sufficiently evaluated the effect the entry into force of the regulation will have on consumers, the competitive ability of the Estonian logistics sector and fuel excise duty receipt in light of border trade.

Border trade to flourish once more

Fears of border trade taking off again stem from the fact neither Latvia nor Lithuania plan to restrict CO2 emissions, meaning that the price difference of diesel fuel between Latvia and Estonia could grow to 22 cents per liter that comes to €220 for a truck the tanks of which hold 1,000 liters of fuel.

“It will hike the competitiveness of Latvian and Lithuanian cargo carriers and motivate Estonian companies to use Latvian fuel also for domestic jobs. Sales and excise receipt of diesel fuel will continue to fall in Estonia and grow in Latvia and Lithuania,” Realo said.

It is also possible gas stations will not have enough fuel on hand. Because Estonia will have different regulations than the rest of the Baltic region, it will have to import its own products. The law states that biocomponent can only be added to motor fuel at the refinery, which means that international plants will be mixing fuel specially for Estonia, Realo said. “That is clearly not the most cost-effective way to go about it and comes, in addition to higher cost price, with the risk of problems with supply security,” she added.

The new requirement stands to confuse consumers as it might be difficult to understand what is going into their vehicle’s fuel tank. Both regulations concern a retailer’s total sales, meaning that biocomponent content might fluctuate from the maximum level to none at all for a single fuel type.

Realo compares the situation to an American urban legend that when you drink diet coke and eat diet chocolate, you can eat as much of everything else as you please. “Whether this universal treatment of different types of fuel that allows sellers to bypass biofuel requirements will really serve environmental goals is something time will tell,” the executive said.

“Circle K believes every fuel type should correspond to certain conditions as it would allow consumers to contribute to environmental protection. The switch to more environmentally conscious fuels should be legible for all consumers. It would help make it easier to decide which type of fuel to prefer for a person’s next vehicle,” she added.

The heavy duty of reporting

The emissions cut obligation is monthly and needs to be reflected in monthly reports. Realo describes the task as administratively cumbersome and complicated and believes it would be sensible to employ six-month targets and monitoring instead. Because the obligation concerns retailers, there aren’t too many companies to check.

A fuel seller who fails to comply is looking at a maximum fine of €400,000 for every month the target was not met. Regarding the hefty fine, Realo said it remains illegible how the sum was decided, what is the meaning of the phrase “up to” in front of the maximum fine amount and who will be in charge of fine decisions. “The penalty mechanism is made provocative by the complexity of monthly accounting and potential supply problems with fuel mixed specifically for Estonia. The sensible thing to do would be to have a six-month reporting period and fuel type-specific targets,” she said.

Member of the management board of Alexela Alan Vaht said that hiking the biocomponent in diesel fuel to 12-14 percent is a challenge. He also said analyses suggest there is not enough winter biofuel on the market to cover demand. “That is a big question mark right now. Rather, we will anticipate problems,” he said.

Chief specialist of the Ministry of the Environment’s ambient air and radiation department Heiko Heitur said that the new law was introduced at the 2017 fuel market annual conference and took effect that same summer. “This means that the aim of the law and conditions for compliance have been common knowledge for over two years,” he said.

Heitur added that suppliers can also meet the target together. “This means that sellers who have more gas fuels in their portfolio or better access to premium biofuels can agree to trade greenhouse gas reduction,” Heitur explained.