*Biofuel Promotion Schemes*

In the context of the transportation sector, there are two main directions in the overall policy efforts directed at the fuels used, to make the sector more environmentally conscious [1,27]. One policy-direction aims at the electrification of traffic and another pursues the substitution of fossil fuels with biofuels. As discussed above, here we concentrate on the second-mentioned policy focus.

As with the widely spread tariff-based support instruments in the power sector, some countries opt for financial incentives to promote biofuels. Thailand directly subsidizes the retail price of biofuel, while the US and Brazil chose tax-relief [1]. Nevertheless, such financial incentives remain an unpopular policy choice in the world.

One of the most common policies is the biofuel blending mandate [1]. Such a policy imposes a requirement on fuel-suppliers to supply a certain minimum share of biofuels in the fuel mix. The European Union has adopted this policy. The EU 32% renewable energy target in the overall energy consumption by 2030 has been supplemented with a sub-target for the transport sector equaling a 14% share of renewables in the supplied fuel mix [28]. Member states are free to set higher targets. Finland, for example, imposes a mandate on fuel suppliers to introduce a gradually growing share of renewable fuels in road transport, reaching 30% by 2029 [29]. Overall, 70 countries around the world have a biofuel blending mandate, however, if left without enforcement achieving the set goals may be jeopardized [1].

Many countries use penalties to enforce biofuel mandates, the list includes Germany, Finland, Italy, and Sweden [30]. In Finland, if the fuel supplier fails to ensure the required volume of biofuels on that specific year of gradual mandate increase, the fuel supplier must pay penalties for each excess liter of fossil fuel produced [29]. The Finnish Government sets the amount of penalty to be 0.04 EUR/MJ, which corresponds to 1355 EUR/liters of diesel equivalent [31]. In addition to penalties, Finland employs tax-relief for renewable fuels. Overall, the biofuel gets a 0.30 EUR/l tax discount if produced purely, and 0.26 EUR/l if in the mix with fossil fuel [32].

Considering the world experience with different policies to support biofuels, we choose to comparatively analyze direct financial incentive, and the combination of penalties and tax-relief, contrasting their policy effects with the benchmark case of no policy support in place.
