At first, Deyan Stankov thought the fraud was so blatant that no one would believe it. 

From his office in Ruse, a small Bulgarian city on the bank of the Danube River, Stankov was tracking biodiesel exports from China to Europe as they surged to unprecedented levels. It started in the fall of 2022, and by January, monthly exports hit a peak of over 250,000 metric tons, a level never seen before and nearly double the trade just a year before, according to data from London-based Quantum Commodity Intelligence. 

When he noticed that exports of palm oil from Malaysia and Indonesia were also surging to China — up 23 percent year-on-year by value in the second half of 2022 — Stankov grew more suspicious. Palm oil can be used to make biodiesel (as well as consumer products, from cosmetics to margarine) but it is notorious for driving deforestation. In fact, palm-based fuel is so unsustainable that the EU is phasing out incentives for it entirely even as it offers generous aid to promote “advanced biofuels,” which are made from waste products.

Seeing the numbers, Stankov and others in the European industry suspected that at least some of China’s palm oil imports were being mislabelled as advanced biodiesel and exported to the EU in order to cash in on European incentives. 

“To us as producers, it seems simply impossible to produce this vast amount of advanced biodiesel,” he says.

Stankov is an executive at Astra Bioplant, a Bulgarian biodiesel producer that his father founded two decades ago. But with the surge in Chinese biodiesel coming into Europe at incredibly low prices, nobody is buying his company’s product. In late April, Astra BioPlant was forced to shut down its four biodiesel plants. It’s not alone: in recent months nearly half of Europe’s waste-based and advanced biodiesel plants have either ceased operation or limited production volumes, according to the European Waste-based & Advanced Biofuels Association (EWABA), an industry group based in Brussels. 

“We don’t mind if we have a competition, as long as it’s fair,” Stankov says. “But in this case, we are talking about massive fraud.”

The Wire could not determine whether fraudulent biodiesel was being exported from China to the EU, but experts note that the difficulty in confirming such a fact is only part of a wider problem in the industry. 

Chemically, biodiesel is nearly identical to petroleum diesel, but instead of coming from crude oil, it is made from substances like vegetable oil, animal fat or used cooking oil. After a production process called “transesterification” — which involves reacting vegetable oil, for example, with alcohol — biodiesel is blended with traditional diesel and used to power engines in cars, trucks and airplanes. Depending on how much is incorporated, biodiesel can cut greenhouse gas emissions by anywhere from 40 percent to 85 percent. 

To take advantage of those emission reductions, many countries have enacted policies to subsidize biodiesel use and promote the industry. The U.S. put in place its first major biofuel policy in 2005, which provide tax incentives, grant programs and testing initiatives for the sector. The EU has a more ambitious and generous policy: By 2030, it hopes to use renewable sources to power 14 percent of its transport sector, including 3.5 percent from advanced biodiesel. To reach that goal, individual EU member states have introduced mandates that require the blending of petroleum diesel with about 6 to 8 percent biodiesel.

Auditors are not seeing the entire elephant. There is no obligation for them to do sanity checks of the data, so they don’t do it. There is no real mechanism for catching fraud.

James Cogan, a transport energy analyst at Ethanol Europe

Until recently, the EU’s strategy seemed to be working: the bloc has grown to be both the largest producer and consumer of biodiesel. But in the wake of the Chinese imports surge, the EU’s biofuel industry is on shaky ground. 

In early June, EWABA put out a statement calling for “urgent action” to prevent “a path which will irremediably spiral into the complete collapse of the EU industry.” Angel Alberdi, secretary general of EWABA, told The Wire that he’s “never seen this in 15 years in the industry.”

Regulators are now stepping in. On June 5, after a complain from the German government, the European Commission announced an investigation into the surge of imports from China. And in late May, the International Sustainability and Carbon Certification (ISCC), the organization responsible for certifying most of the biodiesel flow into Europe, rescinded certificates from six Chinese biodiesel producers and announced that it would be beefing up compliance mechanisms and conducting 70 unannounced audits in China and Singapore.

The China Association for Promotion of Private Sci-Tech Enterprise Bioenergy Branch, a Chinese industry body, also pledged to crackdown on potential fraud amid the concerns, while maintaining that most of the exports are legitimate. The big volumes, it claims, are in fact due to superior efficiency and an increase in the number of Chinese producers, noting that incidences of potential fraud are a natural part of the industry’s development. 

But critics say that regulators and auditors are not doing enough, and describe a system ripe for abuse. Selling biodiesel to the EU is extremely lucrative — certain types of biodiesel are even eligible for ‘double counting,’ meaning it counts extra towards the biodiesel blending mandates — but there is a limit to how much oversight can be achieved. China is a particularly challenging environment for auditing, for example: Covid-19 travel restrictions in China have limited the ability of auditors to visit factories, and due diligence professionals have been under intense government scrutiny in recent months. 

“Auditors are not seeing the entire elephant,” says James Cogan, a transport energy analyst at Ethanol Europe. “There is no obligation for them to do sanity checks of the data, so they don’t do it. There is no real mechanism for catching fraud. It is a license to print money.”

Moreover, he adds, in addition to the effect on European biodiesel plants, any potential fraud undermines Europe’s environmental goals.

“The original purpose of this policy is to reduce the carbon emissions of transport,” Cogan says. “But the most likely candidate for what’s in the fuel [from China] is palm oil. So what we are doing is getting the opposite impact, because palm oil is worse [for the environment] than fossil fuel.”

The controversy also lays bare more profound challenges in the global biofuel trade — a young industry that was seen as something of an environmental savior but one that has been plagued by problems and unintended consequences.

“The potential fraud invites one to look at the overall system,” says Peter Lehner, managing attorney at Earthjustice, an environmental law organization based in San Francisco, “and ask: ‘Are we thinking about biofuels in the right way?’ ”

WASTE NOT

In the early 2000s, biofuels represented a tantalizing promise: a way for countries to reduce greenhouse gas emissions and support domestic farmers — all without any radical change. Traditional cars and buses could remain on the roads, they would just be filled up with a less environmentally damaging type of fuel. 

In the U.S., Republican politicians like former President George W. Bush came out in support of biofuel mandates and subsidies. In his 2007 State of the Union, the president dedicated a whole section to biofuel and its benefits in decreasing U.S. dependence on foreign oil. “We need to… expand the use of clean diesel vehicles and biodiesel fuel. We must continue investing in new methods of producing ethanol — using everything from wood chips to grasses to agricultural wastes,” he said to resounding applause.

But the U.S. was merely playing catch up to the EU, which was early out of the gate on biofuel policy. In 2003, it had stipulated that 5 percent of fossil fuels in transport should be replaced with biofuels by 2010. At the time, the EU’s biofuel of choice was rapeseed — a bright yellow summer flower which can be harvested and processed into fuel.

“All of these biofuels derive from the early 2000s, when we were thinking about energy security and clean energy,” Lehner says. “This was not a big tweak — it seemed less different than a solar panel or an EV. And it was our only option.”

But skeptical voices quickly emerged. Some scientists, for instance, argued that it is a false premise to assume that biofuels reduce emissions. In 2008, Timothy Searchinger, a researcher at Princeton University, published a landmark study in Science arguing that using land to grow crops for biofuel displaces forests and wetlands — which actually increases carbon emissions. Biofuel advocates wrongly assume that “land is free,” Searchinger told The Wire. “It is all based on an error, with high consequences.” 

Indeed, as biofuel targets were put in place, EU imports of palm oil, which is squeezed from the fruit of oil palm trees, shot up. Palm oil farmers in Indonesia and Malaysia cut down vast swathes of rainforest to supply the EU. In Borneo alone, a large island split between Indonesia, Malaysia and Brunei, the palm oil industry was responsible for six million acres — equivalent to the size of New Jersey — of deforestation between 2000 and 2018. In total, the European Commission estimates the palm oil industry contributed to 2.3 percent of global deforestation from 1990 to 2008. 

Others cautioned that using crops for fuel would hurt food security, leading to more hunger across the world. Europe, for example, currently burns the equivalent of 15 million loaves of bread every day to power cars with biofuel, according to one estimate from Transport & Environment, a Brussels-based NGO. 

“It really doesn’t make sense to dedicate crops as food for cars when people are hungry,” says Laura Buffet, who runs Transport & Environment’s energy campaigns.

Taken together, the criticisms of crop-based biofuels led to a global policy shift in the 2010s to incentivize “advanced biofuel,” which is not derived from food crops and instead includes biodiesel made from recycled waste products like used soap stock (a residue from vegetable oil production) or used cooking oil (collected from restaurants and industrial food production). In 2013, the EU strengthened the incentives for advanced biofuel and put in place a 6 percent limit on counting crop-based biofuels towards its 2020 target for transport fuels. And in 2019, the EU decided to cap and eventually phase out all palm oil by 2030.

But the basic incentive structure for biofuels remained, fueling a rapacious appetite among European oil companies, who blend the biodiesel with petroleum diesel in order to meet mandated levels. 

To meet this demand, a cottage industry emerged in China. From 2017 to 2020, according to data compiled for Quantum Commodity Intelligence, exports from China doubled of both biodiesel and used cooking oil (which is then processed into biodiesel by European factories). Since there are few domestic incentives driving its use — Shanghai is the only Chinese city that has promoted biofuel¹Shanghai has subsidized biofuel producers, used biofuel in public buses, and made it available at major gas stations for the past decade. — Chinese biodiesel is almost entirely dedicated to the EU export market.

“China is pretty focused on electrification [as a means to green transport],” says Tenny Kristiana, an associate researcher in the fuels program at the International Council on Clean Transportation in Washington, D.C. For a country with a huge population to feed, after all, diverting crops to fuel is an unattractive option. “China doesn’t want to create a problem with food security,” she notes.

Indeed, in a UN Security Council meeting about food security in 2022, Zhang Jun, the Chinese ambassador to the UN, even called out the U.S. and EU for its biofuel policies. “For energy transition, developed countries are engaged in corn and soybean based biofuel development on a large scale,” he said. “Objectively, this also competes with global food demand. On this issue, we need to have an integrated and balanced strategy.”

China’s objections to food-based fuel means that its young biofuel industry has, from the start, mostly focused on waste-based biodiesel.

Longyan Zhuoyue New Energy, for example, was China’s first biodiesel producer, according to its website, and the first company in China to receive ISCC certification in 2016. Founded in 2001 by Ye Huodong, an engineer and biofuel expert, the Shanghai Stock Exchange listed company now operates four biodiesel plants, which specialize in turning used cooking oil, palm oil waste products and grease into biodiesel.

After a 2018 ISCC-run meeting in Shanghai, the industry seemed to take off. ISCC put out a statement that the growing interest in the industry “reflects the rapid upscaling of China’s waste-based biofuel and feedstock industry to meet rising waste fuel demand into Europe.”

Beijing Haixin Energy Technology Company,²Formerly known as Beijing Sanju Environmental Protection. Founded in 1997 as a chemical manufacturer, the firm received significant investment from Beijing’s Haidian district government — today, it is 35 percent government owned — and went public on the Shenzhen Stock Exchange in 2010. for instance, made its first shipment of biodiesel to Europe in 2019, and is now the largest producer in China, according to data compiled by the US Department of Agriculture. Other industries have also gotten in on the action: In 2019, Yum China Holdings, a conglomerate that operates KFC, Pizza Hut and Taco Bell in China, was the first restaurant company in China to get ISCC certified, allowing them to sell used cooking oil to biodiesel producers.

China has emerged in the last five years as the dominant waste oil purveyor in the world. It is not because they are cheating in some way, it is because they are better at it.

 Henri-Jean Bardon, director of the biofuels platform at ACX, a UAE-based carbon exchange

None of these companies responded to requests for comment.

China’s entrance to the market seemed like a win-win: after all, if China’s used cooking oil could help power Europe’s cars, what’s not to like? And, indeed, the set up still has its advocates. 

“China has emerged in the last five years as the dominant waste oil purveyor in the world,” says Henri-Jean Bardon, director of the biofuels platform at ACX, a UAE-based carbon exchange. “It is not because they are cheating in some way, it is because they are better at it.”

Still, as China’s role in the industry grew, concerns about possible fraud and the ability to trace the supply chain simmered. After the Shanghai meeting, ISCC noted that “a regulated and reliable supply chain will be key” as the “new waste trading Silk Road west from China” emerges. 

But, as it turned out, the European biofuel industry would first be rocked by a crisis closer to home.

WANT NOT

The first cracks in the European biodiesel industry’s great environmental promise emerged in 2019 when a Dutch company, Biodiesel Kampen, was found to be selling ordinary biodiesel as much more expensive “sustainably certified biodiesel.” Kampen was cashing in on some of the EU’s double counting incentives, and Cees Bunschoten, Kampen’s CEO, was found to be using the illicit returns to buy up apartments in the Caribbean island of Bonaire. 

Analysts note it was an inflection point — the first moment when the EU’s optimism was punctured by graft — and critics say it exposed inherent weaknesses in the system. But very little has changed since the Kampen case. 

For starters, the auditing architecture for biodiesel is still almost entirely dependent on ISCC, a certification organization with more than 250 stakeholders, including NGOs and biodiesel companies, that was founded in Germany in 2006. But ISCC acts as an auditor of the auditors: It contracts audits out to local auditing organizations, which then visit factories and provide companies with a certificate that is required to sell biodiesel into Europe. 

ISCC does not directly oversee the biodiesel supply chain, and this layer of separation has led some critics to say that its certificates are little more than a box to check.

“Kampen was ISCC-certified throughout the period when the fraud took place,” says Patrick Lynch, who previously worked as a biodiesel supply chain compliance executive. “The standards and auditing process have been developing to manage the known risks throughout the last ten years, but the standards have not changed fast enough to close some of the gaps which criminals are quick to take advantage of.”

In China, the holes in the ISCC system may be even larger. The country has long been a challenging place to do due diligence, and multiple analysts noted that Chinese companies often see ISCC guidelines as a foreign, and even arbitrary, regulatory requirement. 

In response to recent suspicions, ISCC said in April that it is working with laboratories to explore the possibility of developing physical tests for biodiesel that “may facilitate the identification of wrongly declared materials,” like palm oil. 

In May, ISCC removed certificates from six Chinese companies, some of which are major or state-linked players. One of the firms, Yangzhou Jianyuan Biotechnology, is the fourth largest biodiesel producer in China, according to USDA data. Another, Jiangsu Qianglin Biology Energy Materials, is 20 percent state-owned, through an investment from an institute at the Chinese Academy of Forestry, a government entity, according to WireScreen data. ISCC has also reportedly issued temporary suspensions to at least three more Chinese companies.

ISCC declined to comment for this article.

Critics argue that revoking certificates barely constitutes a slap on the wrist. Because ISCC does not retroactively punish the companies — either financially or legally — there are few repercussions for providing false information to ISCC. Critics say some companies may be ‘certificate hopping’ — losing certificates, setting up a new company and getting re-certified to sell to the EU — especially with the giant incentives still in place.

“There is quite some incentive for fraud in this market,” says Siegfried Falk, the co-editor of Oil World, a Germany-based information provider. “Whenever Europe provides incentives for advanced biofuels and grants double counting, this, of course, creates the market for that.”

Not all of the blame can be laid at the feet of ISCC. Cogan says that customers, usually oil companies, help fuel fraud as well: “Most companies are more than happy to accept the ISCC certifications,” he says. 

In the wake of the Kampen scandal, the EU Commission, which is in charge of overseeing biofuel policy and enforcement, put in place a central database to strengthen compliance and incorporate modern technology into a system based on millions of paper certificates. The database was supposed to be implemented last year, but due to protest from the European industry, it was delayed to the end of this year. 

One of the companies providing the technology for the central database is Bioledger, which was founded by Lynch, the biodiesel supply chain expert. Bioledger, a simple green and white platform, allows every step along the supply chain — from the used cooking oil collector, to the trader, to the final buyer of biodiesel — to be inputted in a standardized format. The platform so far has about a dozen corporate users, and it also operates an app for used cooking oil collectors. As a driver makes their rounds picking up used cooking oil, the app cross references their location with the addresses of the disclosed restaurants or food plants.

Lynch says that the database is critical now in the aftermath of a surge in Chinese biodiesel imports into the EU. “If you had a centralized system to manage the transactions, you would easily see where there are implausible amounts from any supplier,” he says.

Another solution to concerns about potential fraud would be to eliminate double counting, and even put in place a cap for the amount of waste-based biofuels allowed in the EU. “The big takeaway is that the government needs to put in place realistic targets,” says Kristiana, at the International Council on Clean Transportation. “Yes, using waste-based biodiesel is good, but set your target realistically. How much waste based biodiesel is actually available? Without a cap, the market is going to surge.” 

Indeed it is, especially now that the EU has put in place quotas for sustainable aviation fuel (SAF), which is biofuel for aircraft. By 2025, 2 percent of fuels supplied at EU airports have to be SAF; the quota will increase to 6 percent by 2030. 

Some green energy experts argue that now is a good time to reconsider biofuel targets given advances in other technologies. 

“Let’s really think about what we need biofuel for,” says Lehner, at Earthjustice. “We didn’t think that electrification was going to be reality — EVs seemed space age-ey. It turns out we were wrong, and we probably won’t need biofuels for land-based transport. But we still do need it for aviation fuels.”

Allowing the potential fraud to continue may delay that recalibration, however. 

It is cheaper to buy fraudulent material than invest in finding and processing new types of wastes and sustainable feedstock. It is an extremely damaging market failure.

Patrick Lynch, founder of Bioledger

“What are the impacts of the fraud? You are distracting green investments from other alternatives,” says Lynch. “It is cheaper to buy fraudulent material than invest in finding and processing new types of wastes and sustainable feedstock. It is an extremely damaging market failure.”

So far, this market failure has been contained in the EU, but the exports may spread to other markets. Cogan, from Ethanol Europe, warns that the U.S., which has traditionally sourced all of its biofuel domestically from soybeans and corn, could be “the second chapter of this story.”

Eliot Chen contributed to this story.

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