Hydrogenated Vegetable Oil Fuel (HVO) in Europe : An economic analysis of the market drivers and barriers of HVO in Europe and the effects of policy instruments

Background: Regular biodiesel cannot be utilized directly as a drop in fuel to substitute diesel due to various properties and electrifying the whole transport fleet is not a realistic short-term goal. However, hydrogenated vegetable oil (HVO) or renewable diesel as it is called can be used as a drop in fuel and substitute fossil diesel directly. Purpose: There is a very limited amount of research focusing on economical supply and demand factors regarding pure biodiesels. Further there is a limited amount of research that explores the effect of policy instruments such as EU ETS and energy taxes. This thesis aims to explore the policy instruments and their effectiveness with regards to HVO. This gives policy makers and managers in the industry the opportunity to make better decisions to increase circular economic measures and sustainability. Method: This thesis uses panel data regression (panel corrected standard error) over the years 2014 to 2023 for a number of European countries. Two models are explored, one for the production of HVO (seven countries included) with explanatory variables such as prices without tax for HVO and for diesel. It further includes the policy instruments EU ETS price and energy tax revenue per capita. The other model is for the consumption of HVO (four countries included) with the explanatory variables as the production model. The exception is that the EU ETS price is replaced by the average annual incomefor the consumption model. Both models are in log-log form and as such elasticates can be seen directly from the results. Results and analysis: The results are that the EU ETS is performing its intended purpose of increasing sustainable production of transport fuels. It is however weaker than the negative effect the energy tax pressure has on the producers. The price of HVO is an important factor as well as the income. In both models the energy tax pressure is affecting only the producers and in a negative way. Conclusions: The conclusions are that HVO has a large potential to be a short term environmentally mitigating substitute for fossil diesel. However, policy instruments, especially taxes and tax exemptions should be decided upon with great care. More incentives for the proper sorting and collecting of waste material, especially used cooking oil and animal fats, is needed to secure an important circulatory feedstock for the production of HVO. Recommendations for future research: More research should be made that is similar to this thesis but with FAME and HVO separated, countries separated as well to see more clearly the difference between the individual countries tax strategies and income effects. Mire control variables can also be added when sufficient data is available.