Sustainable Feedstock Contracts
If you are a biodiesel producer, you already believe in sustainability and taking care of our natural resources. You already have your renewable fuel standard (RFS) pathway and are making the best biodiesel you can while trying to make the highest profit possible. Sustainability is part of your DNA, but is it part of your feedstock contracts?
Sustainability in biodiesel feedstock contracts means many things. Historically, it has meant simply buying feedstock that allows for the resulting biodiesel to qualify for a renewable identification number (RIN) under the RFS. Increasingly, however, sustainabilty is starting to be looked at more broadly, and biodiesel companies need to be aware of the specifics of what makes a feedstock and fuel sustainable.
When it comes to establishing a pathway for biodiesel, feedstock is key. The “better” the feedstock, the lower the carbon score and, thus, the more you can get paid for your biodiesel. This is especially true in California under the low carbon fuel standard (LCFS) where a lower carbon score means more money.
So what does sustainability mean for a feedstock contract? In its 1987 report, “Our Common Future,” The United Nations World Commission on Environment and Development defines sustainable development as “Development that meets the needs of the present without compromising the ability of future generations to meet their own needs.”
The Sustainable Biodiesel Alliance even has defined sustainable biodiesel: “Sustainable biodiesel is biodiesel that is produced in a manner that, on a life-cycle basis, minimizes the generation of pollution, including greenhouse gases; reduces competition for, and use of, natural resources and energy; reduces waste generation; preserves habitat and ecosystems; maintains or improves soils; avoids use of genetically modified organisms; and provides community economic benefit that results in jobs and fair labor conditions.”
Note that the definition above is mostly focused on feedstock-related issues, rather than production technology issues. Tilling, irrigation, fertilizer use, GMOs, even transportation distances between feedstock supplier and biodiesel plant, are all critical elements, and each can be part of an offtake contract you may be facing in the future. While not common, there are already contracts with provisions related to sustainability in offtake agreements being signed with major strategic partners. While most sustainability provisions are voluntarily adopted in the U.S., this may change as customers push for sustainability, and regulators on a state and federal level increasingly pull; and in Europe and parts of Asia, sustainability is part of the legal landscape. Biodiesel producers selling biodiesel into foreign markets are already aware of the differences.
If a customer requires your biodiesel to be sustainable, you will need to require your feedstock providers to be sustainable. For biodiesel, the thought of requiring your farmers to sign feedstock contracts is very odd. Besides the fact that your customers may require your biodiesel to be sustainable, sustainability is really about good farming practices and a sense of connection to the land, and with the people who work that land. Working with your growers to be sustainable is ultimately good for everyone.
Contract provisions for your feedstock suppliers may include requirements to use farming methods that require lower use of fertilizers and pesticides, both of which can contribute to carbon emissions and soil degradation. Contracts could also impose sustainable crop rotation requirements to minimize loss of soil nutrients and maximize disease resistance. One common requirement is to not place marginally productive land, including but not necessarily limited to CRP land, in service in order to avoid releasing land-sequestered carbon. Other requirements are related to the supply chain and may demand use of low carbon emissions for on- and off-road vehicles in the farming and transportation of the feedstock, as well as placing maximum distances on hauling feedstocks.
Sustainability is part of the daily life of farmers and biodiesel producers. As the rest of the world adopts sustainability, biodiesel producers will have to address a host of new voluntary and potentially mandatory sustainability conditions as we all adapt to a changing world.
Author: Todd A. Taylor
Attorney, Fredrikson & Byron