Indufor ...forest intelligence

Possible Implications of US Resignation from the Paris Climate Agreement for US Pellet Producers and EU Pellet Consumers

30.06.2017
On June 1st 2017, US President, Mr Donald Trump, officially declared that the US would be withdrawing from the Paris Climate Agreement, dating back to 2015. Out of all possible consequences of such a decision, I would like to focus on a single issue: the future of the US wood pellets exports to Europe.

Background

The pellet production in the US grew rapidly in 2012-2015 from slightly over 5 million t to over 7 million t, driven by emerging demand from energy utilities in the European Union. The US industry is heavily export-oriented with more than 60% of the produced pellets being exported overseas. The largest single market for US pellets is the UK. Other EU countries, such as Belgium, Denmark and France, import about 9% in total. As a result, EU countries accounted for 99% of US exports of wood pellets in 2016. However, the dependence is mutual: for some European countries, such as the UK, the US is the largest supplier of wood pellets representing almost 60%, or 4 million t, of total UK imports. In particular, a large power plant of Drax consumes half of all US exports to EU.

In November 2016, European Commission issued a proposal for a revised Directive of European Parliament and of the Council on the promotion of the use of energy from renewable sources (link), aiming at making the EU a global leader in renewable energy and at ensuring that the target of at least 27% renewables in the final energy consumption in the EU by 2030 is met. According to this document, biofuels, bioliquids and biomass fuels produced from forest biomass shall be sourced from the countries of origin which are “a Party to and have ratified the Paris Agreement”.

US wood pellet production and exports (source Indufor):

US wood pellet exports (source Indufor):

The document says further that when such evidence is not available, the biofuels, bioliquids and biomass fuels produced from forest biomass can be approved, if management systems are in place at a forest holding level to ensure that carbon stocks and sinks levels in the forest are maintained. This requirement can be challenging for the US pellet producers, as they source their raw material from a large number of private forest owners that currently lack proper forest management systems.

Implications

We believe that if US pellets cannot be longer exported to the EU, there will be implications for European energy utilities and consumers. For example,

  • No single country or region could fully replace US pellet exports to the EU in a feasible way. The UK depends on these volumes the most and would have to look for alternative sourcing opportunities. The deficit would escalate further with the start-up of new European energy utilities firing wood pellets
  • Sourcing opportunities would partly lie within the Baltic region (particularly in Latvia and Estonia). The Baltics have very limited demand for pulpwood and wood chips and this biomass is currently exported to Sweden and Finland for pulp production. Due to lack of existing demand for wood pellets, Baltic pellet mills have been lately running at half capacity. With increased demand, existing capacities and possible new investments could be utilized in full

Abandoned sawmilling by-product chips in Russia, source: Indufor

  • Russia has currently enormous unused biomass potential available from sawmilling operations in Siberia and the Russian Far East. Since 2014, new integrated pellet mills in this region have emerged and it is expected that pellet production capacity will continue to grow. However, remote location of these mills from European consumers would make sourcing from them a challenging option
  • Regardless where the new pellets would come from, tight competition for this biomass, high logistics costs and uncertainty would have an impact on pellet prices. This would result in high energy cost, putting European tax payers in doubt about whether conversion to wood pellets was a wise decision.

It should be noted that the official withdrawal of the US from Paris Climate Agreement will not happen overnight: it is estimated that the process will take up to four years and will be finalized by November 2020. It is expected that by that time the UK will step out from the European Union and the question remains, whether European Commission legislation will be applied to the UK or not.