Chinese imports torpedo German climate protection

Claudius Niessen: Hello, and welcome to a new episode of our #StrawClever podcast. Today I am joined once again by Claus Sauter, founder and Chief Executive Officer of Verbio SE, and we want to – how shall we put it, Claus Sauter? – talk about the big picture.

Now, Verbio, which I know and have followed from the very beginning, especially here in Germany, is now a Group that spans half the world. There are big, international issues; we saw this also in recent episodes of this podcast. Today we want to home in on some of these issues a little. But first of all, I am happy that you are here with us today. A warm welcome to you, Claus Sauter.

Claus Sauter: Thank you, Mr Niessen, and a warm welcome to you, too.

Claudius Niessen:It sounds like you are feeling at home, but this is the first time the first time since we know each other that you are here by car, you normally always bring your bicycle?

Claus Sauter:Yes, that is just down to the fact that I have a flat tyre on my bicycle at the moment!

Claudius Niessen:Now let us look at the picture worldwide. Can we start with Verbio in the USA? It is easy to get the impression that, at the moment, you are much more active there than you are in Germany. What has Verbio done there in recent years, and why is so much going on there at the current time?

Claus Sauter:Yes, we made an active decision after ... after the situation became more problematic and continues to be ever more problematic in Europe and in Germany, that we would go to the USA, which is the biggest biofuels market. And in recent months, since March, most of my time has been spent in the USA. We have a number of positive developments to report. We now have three plants there – one biodiesel plant in Canada, near the US border, really close in fact, and we use that to supply the US market. Then we have an ethanol plant in Indiana; this plant has been in production for some time. We bought it in May 2023. It is a classical ethanol plant, and we have now brought it up to date using our expertise. On May 23, together with the city council and the mayor of South Bend in Indiana, we held the groundbreaking ceremony, as it is called in the USA – in other words, the laying of the foundation stone for the biogas plant that we want to build there, an investment in the order of USD 230 million, quite a major investment. And the plant there is now running very well. We have also increased the number of staff, and from 2026 we want to produce biomethane there on a large scale, which will all be fed into the natural gas grid, making it the largest plant in North America producing methane from biomass.

Parallel to this we are commissioning our plant in Nevada, Iowa, which is somewhat further west. We have invested a further USD 200 million there. We have been producing biomethane from maize straw there since 2021, but now the ethanol plant will be commissioned and then we will produce much, much more gas and feed it into the natural gas grid.

Claudius Niessen:But if we now look at the consequences, that companies like Verbio and others, too, from Germany are ... well, I don’t want to say fleeing, but you have just said that you are focussing investments on the US market now. It is bitter for Germany, it is bitter for the location.

Claus Sauter:Yes, it is also bitter for me, because first and foremost I am a German entrepreneur and I grew up here. But of course these are business decisions, and we all know that the image of biofuels, and the way we produce them, is not always seen in a positive light by the German government. And there are enough people there who say well, biofuels, we don’t want those any more. This is what made it necessary to take the decision to diversify. However, it is not the case that we are doing nothing at all in Germany; on the contrary, we had a groundbreaking ceremony here at our plant in Bitterfeld two or three weeks ago. Unfortunately I was not there, because I was in the USA, but the Minister of Economic Affairs for Sachsen-Anhalt was there, Sven Schulze. Here we receive subsidies from the Federal State of Sachsen-Anhalt. I want to stress that point; these total 25 to 30 percent, I mean comparable amounts. These subsidies are provided at the Federal State level, and the investment there, almost 100 million euros altogether, means that we can take the next step.

So in practical terms, making use of our rapeseed oil methyl ester, which is mainly used today in diesel fuels as biodiesel, we will then be able to use it to produce other products, other renewable products, which will then be used in the chemical industry in particular.

The concept is that we can replace these grey carbon atoms from crude oil, found in plastics, for example, or in detergents, with green carbons. Personally I think this is a better application for the future anyway, because our biodiesel, simply burning it in a diesel engine, this is the wrong application. There is more in the molecule, and that is where we want to go in the future, i.e. to produce more molecules for use in materials, cleaning agents, lubricants, plastic components. We have now made the first investment for this in Bitterfeld, but we also want to move our ethanol and gas segments in this direction in the future.

So it is not as though nothing at all is happening in Germany. Yes, we are active in this country, but as long as it is not clear where this is actually taking us here, in Germany and in Europe, and as long as this constant back and forth continues, we have to look for something else. I mean, I have another example. An obligatory use of biokerosene is planned for Germany from 2025. The previous Federal Government implemented a requirement that 100,000 tonnes of kerosene – biokerosine – must be used from 2025. But once again Germany has taken a really super decision to do things differently. Not like how everywhere else in the world makes biokerosene, for example by taking fat and converting it using a chemical process. No, Germany wants synthetic kerosene. Incredibly expensive, no one else chose that route – and moreover, the technology for it does not exist yet. So, from 2025, that is seven months from now – no investments have been made for it. Nothing has been done. That means the quota will not be met. We know that already today, because no one was prepared to invest in this special approach.

At the time these quotas were determined, we were involved in the decision process, and we said, hey, this doesn’t make sense, no one will invest. Still, the legislation was passed, and as a result the oil industry and the airlines will have to pay a penalty. But at the end of the day the consumer pays the fine, or of course what could happen, because the idea was simply so stupid in the first place and not helpful in achieving the objectives, that someone comes along and says, okay, let’s forget all about it. However, this would be another disastrous signal, because if someone had invested there, they would be hung out to dry today. So we need to look beyond Germany and see what the rest of the world is doing. I am not against biokerosene, but we should do it the way the rest of the world does it, and not always take these unique, extremely expensive and, at the end of the day, ineffective approaches.

Now, there are many examples, and in such an environment we as a company need to take a look and ask ourselves, what makes sense here? What will really be sustainable over the long term? And we can only invest where we can answer these questions. So when it doesn’t work here, because the situation does not make it possible, then the situation forces us to look elsewhere. And at the moment the focus in on the USA.

Claudius Niessen:Generally speaking, do you sometimes get tired of constantly operating in such highly politically regulated markets? Because you have cited kerosene as an example just now, but it’s not all that different with fuels for cars, is it?

Claus Sauter:That’s a very good question, and 20 years ago, when we listed on the stock exchange, many investors asked similar questions. What about the regulatory situation? No, look how it is today, 20 years later. Every area of our daily lives is affected, the pharmaceutical industry, the automotive industry, the chemical industry – I mean, there are countless examples. Today, everyone is complaining about the excessive bureaucracy and about the regulations.

There is no escape. And I mean, just remember, renewable energies would not exist if there had [not] been a decision-making process at some point and politicians had [not] decided that this is what we want. We want to get away from fossil. It is just ... I find the approach is wrong.

I think it’s the wrong approach to say we want to move away from fossil fuels, and we will explain to you, the economy, what the right path is there, regardless of what happens in the rest of the world. This is what is wrong with our system. We should do it the American way. Define the goal, define the rules, state what must be adhered to, and then let the industry get on with the job, and it will find the most cost-effective solution for the consumer.

Claudius Niessen:The other question is – we discussed this in the last podcast – how can politicians ensure protection against external forces? I remember our discussion about climate-damaging palm oil, I think that was in August 2023. A, is that solved now, and B, are there new challenges in this area?

Claus Sauter:The issue of fake biodiesel from China is still an issue for us now. It is not just Verbio that is affected, it is the entire European market. There have been various hearings in Brussels, there has been progress, so we have already achieved quite a lot, because it used to be discussed in terms of “allegedly incorrectly declared biodiesel from China”. We have moved on from that now. That a fraud is happening there – biodiesel imports from China, where palm oil is being illegally used as a raw material and not as frying fat or any other residual waste products. So, we have got this far at least. However, measures have still not yet been implemented here, while the Americans reacted quickly. Astounding as it may seem, North America is also suffering, but in their case not due to biodiesel imports. There, raw materials are being imported. So it isn't possible to export finished biodiesel from China into the USA, the Americans have put a stop to that, but what is being imported is the frying fat, or other materials. So here it is now the North American soya bean farmers who are suffering.

And as we all know, there are elections there in November. So here too, the reaction is very fast. We remember a few weeks ago, on Thursday, I heard in the US media that there were going to be import tariffs on Chinese products, electric cars, and so on and so forth. That was on Thursday. On Monday the Pandora’s box was opened, and it was radical, too – a quadrupling of import tariffs for Chinese electric cars.

But back to Europe now, so we still keep suffering under this, and it is no longer just these biodiesel imports. There have also been reports in recent days or weeks on the subject of UER, Upstream Emission Reduction, where climate protection projects in China, project that do not even exist, have been counted towards meeting the biofuel quota in Germany. It’s crazy, really crazy. However, here the Federal Government did react. There was a cabinet resolution last week, or the week before last. But that was actually an idiotic idea from the start. What on earth does a climate protection project in China, even if it does exist, have to do with meeting German biofuels quota obligations? But at that time there were clever lobbyists from the mineral oil industry who had managed to get this fulfilment option, i.e. that instead of using biofuels they were allowed to do some projects somewhere in the world, and they managed to get this fulfilment option into this law. I have to say, I take my hat off to them, they’ve done well, but it's yet another example of the fact that politicians should be very, very careful with proposals from the oil industry, because this is not the first time that shenanigans have been perpetrated there and, at the end of the day, climate protection has suffered as a result.

Claudius Niessen:Mr Sauter, you already mentioned them, but you need to explain them to us again. Upstream Emission Reductions – what are they exactly, and what is the problem with them?

Claus Sauter:In plain language, Upstream Emission Reductions means that emissions, environmentally harmful emissions that occur during crude oil or gas production, i.e. fossil fuels, if you invest in reducing these emissions, then you can register these investments that have been made there and the associated CO₂ savings in Germany with the Federal Environment Agency. And then an oil company can buy these CO₂ savings, and then as a result it has to use less biofuel. An example of such a UER measure could be, for example, that we have crude oil production somewhere in Nigeria or in China, and where crude oil is produced there is always exhaust gas, and if exhaust gas goes directly into the atmosphere then it is 25 or 30 times more harmful to the climate than CO₂. When you hold a simple flame to it, this gas, when it comes out – it burns.

Claudius Niessen:This is what we see time and time again on the North Sea oil platforms?

Claus Sauter:Exactly. Just a flame. It burns, and when it burns, it is no longer methane, just CO₂, which is still damaging the climate [in contrast to being 25 or 30 times more harmful]. And the investment costs of such a flame, these can be credited against the German biofuels quota or the greenhouse gas reduction quota.

And what has happened now? The desk responsible for checking this at the Federal Environment Ministry, they just look at the paperwork. So clever entrepreneurs from China, and their helping hands here in Germany, produced a lot of paper and then submitted it to the Federal Environment Ministry, and then the Federal Environment Ministry approved it without anyone having been to China to look at it, because the Chinese don’t allow that. Therefore, without anyone having been there, purely on the basis of some paperwork, credits were issued in Germany for supposed CO₂ emissions in Germany. Then there were a couple of journalists from Frontal21 that looked into the issue. What they did was, they went to China to have a look to try to find where these projects are. And it turns out that a large proportion of these projects, 60 to 70 percent, did not exist at all, or have existed already since 2015 or 2016, whereby the UERs, they have only existed since 2020. In other words, they have been built a long time ago. At the end of the day, under these schemes a fraud has been perpetrated against the German taxpayer costing billions. This is certain, and the money is gone. The oil companies have obtained it as credits for fulfilment options. Who pays for all this? Consumers, because they believed they were doing something for climate protection. And at the end of the day, of course, the climate, because these CO2 reductions never existed in the first place.

That is the big scandal – and I also find it astonishing that a few months ago the Environment Minister wanted to extend this UER credit, which would have expired anyway, I believe in 2026, by another two years. So, less biofuels, less of the things we make, and more UER projects in China.

A brilliant idea, as we now know. Now, I would also like to know who will actually take political responsibility for this, because billions have been wasted for nothing and, in my opinion this is mainly due to lax handling by the responsible authorities. If I don’t have any possibility to go there and look at it, then I should not be able to approve it. We, with our plants in Germany or in Europe, are subject to inspection procedures. We get regular control visits. This has not happened in China. And as we can see, where there are no checks, there is fraud, immediately.

In my opinion, this should also have very clear political consequences, because a great deal of German taxpayers’ money has been wasted. For nothing, absolutely nothing.

Claudius Niessen:Now, you mentioned the USA again, and explained how quickly and strictly they react with import duties and other measures – not just threats, but measures they implement. We here in Germany, but also when we talk about the European market, we are tied up with China very very tightly, especially here in Germany. To what extent would you say that such a radical policy is at all feasible for Germany as a business location, or for entrepreneurs in Germany?

Claus Sauter:So we’re getting a bit away from our actual business now, but of course dealings with China have serious implications. I have nothing against the Chinese. They have reacted quickly, have a clear strategy, have created massive production capacities for solar panels, for electric cars, for heat pumps. But what is happening at the moment is that the Chinese are flooding the European and North American markets with supposedly cheap products, which is extremely dangerous, and in my opinion this is a self-deception. And the Americans have recognised this. This is the reason for the CHIPS Act, where they are addressing their dependency in the microelectronics sector. The Americans have recognised this, and are taking very consistent action against China – rightly so in my opinion – while the EU is still trying to determine its position, just as it is in the area of biofuels.

I really see a big issue regarding dealings with China. I think urgent action is needed, just as I described, take action against what they are doing. And I would simply like to see more courage in this matter. In my opinion, we Europeans, but above all we Germans, are currently making the same mistake with China as we did with Russia. We make exactly the same mistake by being hesitant, not wanting to recognise the problems, and, as a result, doing nothing.

Claudius Niessen:This means that politicians should be doing more to address the risks associated with China?

Claus Sauter:Now, look, I asked myself the question, why do the Chinese have these competitive advantages? Why? They are not capable of performing magic. On the one hand there are economies of scale, much, much larger plants, but on the other hand they have gained a competitive advantage, because they are saying that they are not taking part in all the global decarbonisation today. China is now responsible for more than a third of global CO₂ emissions. Since 1990, since we have been trying to reduce CO₂ emissions in Europe and in North America, the Chinese have quadrupled their CO₂ emissions. The classic case of “carbon leakage”. And now I say to myself, these products that I mentioned, the electric cars, the solar systems, the heat pumps, we use them in the interests of climate protection, and those we buy them from, they don’t give a damn. They say, I am having no part in this. Just look at fuels; coal is the biggest emitter of CO₂, and the cost of a tonne of coal through CO₂ taxes in Europe has risen from 150 euros a tonne to around 400 euros a tonne. Three years ago it was 180 euros instead of 150 euros. And now we are not talking about 180, but about more than 400.

The Chinese are not interested in this at all. That means they used to have a competitive advantage of 150 compared to 180, of 30 euros. But now they have a competitive advantage in fuels of 250 euros. And now it is relevant, because it means they produce under completely different conditions.

And energy is just one example. They do not have the bureaucracy that we have, all the documentation obligations, the other environmental regulations. In other words, we are letting someone into our market – which is driven by greater climate protection and lower CO₂ emissions – and we are letting them play along, giving them a huge competitive advantage and doing nothing about it.

And I think this is just logical. I am not calling for the Chinese to be excluded, or simply for punitive tariffs, as the Americans are doing. What I’m saying is that I can’t just allow anyone to take part in a market if they don’t follow the rules of the game. Doing that means I create a competitive disadvantage for my local economy.

So the message needs to be very clear – why are the Chinese bringing their frying fat biodiesel to Europe and to the USA? They should be using it themselves to decarbonise their own industry. So it is really schizophrenic, the way we are going about things. And why does it have to be the Germans that put a brake on things?

Claudius Niessen:Because many companies are so closely tied up with the Chinese market?

Claus Sauter:Because we have been doing great business with the Chinese for 30, 40 years, and because we are economically dependent. For decades Volkswagen has been earning the largest share of its profits in China, and of course no one wants to lose this.

We have to remember, cheap gas and cheap oil from Russia – I mean, we always complain about Donald Trump, but back then he warned us about it, massively. He even went so far as to take political action to ensure that the companies that laid the gas pipeline, Nord Stream 2, could no longer operate. And basically he was proved to be right. We had to learn the hard way, and then reacted with sanctions. The whole thing has cost us 40, 50 billion, the high oil prices, the high gas prices, and that is just the state – the consumer probably much, much more. These things are more or less back on track.

But we are making exactly the same mistake with the Chinese. We are making exactly the same mistake again. We want to just carry on. Nor do we see the same potential threat in terms of armed conflicts. It is just a question of time before China takes over Taiwan. The more political pressure Xi is under internally, the quicker he will respond. And then we will see how the world reacts. But as Germans we find ourselves again in the same situation of dependency. And in contrast, instead of now saying that it is not just about applying punitive tariffs, they should have to fulfil the same rules of the game as we do. We are increasingly destroying our domestic economy. All these heat pumps which will be used in the future, none of them will be produced in Europe. Most of them will be produced in the USA and China.

In other words, this resilience, this resilience that we actually increasingly need, we simply have to recognise that this idea of globalisation, as we knew it until 2022, no longer exists. It stopped existing even before then. Trump had started it; he said, look, we are doing our own thing. And we Europeans are swimming around somewhere in the middle, losing importance, nothing to worry about. But what I say is that we’ll have a hard time imposing similar sanctions on China if they invade Taiwan tomorrow, because we can’t even assemble a bicycle any more without Chinese components.

Claudius Niessen:But what do you think a sustainable trade and climate policy towards China should look like?

Claus Sauter:The main mistake is that parts of the German government praise it when we can buy cheap electric cars, cheap solar cells and cheap heat pumps from China. It is presented as a big win for German consumers, but it is nothing of the sort. All this is doing nothing for climate protection, because all these products come with a huge baggage of CO2 emissions, while we fool ourselves that we are doing something good for the climate. In the meantime we first have to work off the legacy of the CO2 baggage through the use of the products so that the actual effect can occur. The politicians are taking the wrong view on all this; we are supporting the carbon leakage, which means that we are responsible for more CO₂ emissions in China, because we are increasingly purchasing products from there. We are weakening our own economy by pretending that the Chinese can do it better. They can’t do any better, because they are not adhering to the central part of the rules of the game, namely climate protection.

In doing so we are losing expertise, we are losing jobs, losing competitiveness, and the consequences are very serious.

Claudius Niessen:Do you think that the majority of German entrepreneurs agree with you on this analysis, or do they agree without coming into the open about it, given that they have such close ties with China itself? In the market?

Claus Sauter:Now, I can certainly understand that if I’ve built up a market over decades, I want to continue serving it – that’s clear. And if we were to impose tariffs on Chinese imports now, it is clear that the Chinese would react in other ways too. Many “Mittelstand” companies have invested in China, but many “Mittelstand” companies are also telling us that the mood is changing.

The Chinese government is turning the screw tighter and tighter. And no one has to follow me; every businessman should ask themselves these questions. They see the trends. What will change? And as I said, what will happen if China invades Taiwan tomorrow? What consequences would that have for my company, if my production is in China? And what consequences would it have if China is my sales market? I believe that this is a question that needs to be dealt with intensively at the moment. And then everyone, if they are honest, will come to the conclusion that something needs to be done about it. Something needs to be done. And it isn’t necessary to throw a switch tomorrow.

But I think it’s time to ... to look for other markets, to become more independent, also at company level, because politically, I don’t think much will happen, and then everyone will have to make the decision for themselves. But we will not be investing in China. We have already had good contacts and offers, but this system contradicts our standards in all areas. That they are not taking part in climate protection, this is just one example.

I say no democracy – well, we don't have that in Russia, either – human rights violations, environmental standards and so on. So what I would say is, you could get the impression that as long as people are earning money – even after the Russian war of aggression – as long as people are earning money, we can tolerate the other things.

Claudius Niessen:This is not the way you work.

Claus Sauter: I think for us, too, the environment in China, biomass, renewable energy, it would not be the right market. The Chinese also have major problems with burning corn straw fields in northern China, which they would also like to get under control. For that reason we were there once, but otherwise the size of the market for us is limited, and therefore there are no concrete investment opportunities for us there as of today.

Of course, the Chinese try to lure you in by saying, hey, build your plant, we’ll give you the money, you don’t have to worry about anything, come and produce, there’s a big city here that will take all your molecules. It is made very easy. The hurdles are not particularly high.

However, there you always need to have a Chinese partner on board. And then it is clear that it is only a matter of time before the core knowledge, the core expertise is lost, and then the second, third, fifth, hundredth plant will certainly not be built with our involvement, but will be built by someone else.

Now one needs to be very clear about it: the rules in China are different, also in business. And the Chinese are very, very friendly and polite, as long as they want something from someone. But I think that as soon as the investment has been made and the framework conditions have changed, the helpfulness will evaporate relatively quickly, because the Chinese have a very clear strategy and we all know where they want to go.

They want to be the biggest global player. They are also well on the way to overtaking the Americans in purely economic terms; that, too, is also only a matter of time. They have a gigantic domestic market with 1.4 billion people, and as far as political assertiveness and simply organising things is concerned, they do not have a democratic system, so nobody is consulted, but there is a clique that decides and then it is enforced. They have a five-year plan, which they stick to. All the kind of things that would cause us as Europeans to tear our hair out. And, if anyone thinks that trade and economic co-operation will change anything in China, I will tell them this: just remember how little changed in Russia. Anyone who still comes up with this argument, “change through trade”, should know for themselves that it does not work.

Claudius Niessen:Mr Sauter, thank you very much for everything that we have heard from you today. Thank you for giving us your insights. This time we have had a look at the big picture, as well as how you deal with the, let’s call them challenges – you would say difficulties, because you don’t mince your words, that’s how we know you.

We now know about some of the pitfalls of Germany’s trade policy with China, in particular with regard to climate protection, how things could be done differently, and how you at Verbio are positioning yourselves in order to be entrepreneurially successful here in Germany, but also elsewhere, especially in the USA.

Many thanks for this opportunity to talk with you.

Claus Sauter:Thank you.