Germany’s new Diesel Scandal

Hello and a warm welcome to a new edition of our #StrawClever podcast. I have the pleasure of talking to Claus Sauter again, the founder and CEO of Verbio. Happy to have you.

So let’s get to it. We’ve got a lot to talk about. The diesel scandal, climate crimes, cheeky relabeling ― these are just a few examples that came up in the run-up. And I'm very excited! I'd like to tackle our first topic straight away, namely biodiesel. Bio always has a nice ring to it, right? But is it really the better climate-friendly alternative to fossil diesel, Mr Sauter?

Claus Sauter:It’s a great pleasure, Mr Wenz, to be here again. Yes, there are quite a few things that currently leave a lot to be desired. At the moment, biodiesel is the most important biofuel in Europe, and there are a few undesirable developments, which is nevertheless quite interesting. And the subject is rather complicated. Let's just say that biodiesel is not just biodiesel, but that its development began as early as the mid-1990s. That's also when we started Verbio. There was agricultural overproduction, so we started producing biodiesel from rapeseed oil, which can also be used as salad oil. We used rapeseed oil from set-aside land that was deliberately not used for food production. Then, during the German chancellor Schröder first tenure with Jürgen Trittin as Environment Minister and Renate Künast as Agriculture Minister, quotas were introduced. So people wanted to have more biodiesel here, which led to a rapid development in the sector. In 2006, when we went public, Germany was the world’s number one producer in solar, number one in wind and number one in biomass. Then the price of oil rose rapidly, up to $148 a barrel in the summer of 2008. And then the "fuel or plate discussion" began, arguments about it being morally reprehensible to use potential food as fuel. The Indonesians also started cutting down and burning tropical forests in Sumatra on a large scale to build palm oil plantations. Biodiesel in Indonesia and Malaysia now accounts for 30 percent of diesel. In relation to mineral oil, it was a welcome alternative. But when you use biofuel in the fight against climate change, it's counterproductive. The palm oil plantations are highly profitable. They harvest up to 7,000 litres of palm oil per hectare there, and that of course saves these countries in Southeast Asia a lot of money. What got underway then, however, was the export to Europe, but here the food-based use of biofuels was officially limited to a maximum of 7 percent in Europe. One concentrated more on residual materials and residues, for example frying fat, thus putting the plate first and the tank second. Second-generation biofuels are therefore biofuels made from residues. The Chinese then imported palm oil from Southeast Asia on a large scale to produce biodiesel that was then imported to Europe. With the restriction of the few biofuels of the first generation, the Chinese adopted relatively quickly and said, “Okay, this is no longer palm oil, this is frying fat.” And then they exported huge quantities of biodiesel made of frying fat, the so-called UCOME, Used Cooking Oil Methyl Ester or product made of animal fat to Europe. In 2015, the question was asked in Brussels, “Does it actually make sense to import biodiesel made of frying fat from China by the shipload?” Of course, it’s nonsense! And then they came up with the new renewable energy directive in 2015 and said, “Okay, we'll limit that as well. We'll put a cap on biodiesel made of frying fat.” They also said, “We don't want any more palm oil in Europe: this needs to stop.” In Germany, for example, as of 1 January 2023, biodiesel from palm oil does no longer count towards the quota. In turn this means that no greenhouse gas reduction can be achieved in transport. Then Brussels came up with a list of raw materials and residual materials to be used preferentially. It says, for example: liquid manure, dung, straw, sewage sludge, residual materials from the food industry, and from these raw materials biofuel is to be produced in the future, and these are then called advanced biofuels. However, there is also a palm oil residue on this list of raw materials. So on one side it’s palm oil, but on the other side de facto has to be a residual.

Well, that sounds a bit absurd.

Claus Sauter:Eventually, Verbio had to react to this development with the increase of its biomethane production from straw. We built plants there for it, and it needs to be said that the advanced second generation biofuels are more expensive to produce than the first generation. So an incentive had to be created, which in Germany it looks like this: advanced biofuels produced from this list of raw materials count twice towards the quota. If a mineral oil company has to reduce its greenhouse gas emissions, then it only needs to use half of this form of biofuel, or it can pay double for the same molecule, if you like. So it's also an incentive for producers, and that's where the challenge starts. The value of biofuel, and in this case above all of the biodiesel, is determined by the raw material used. At Verbio, we carry out regular checks on this. There are companies certifying us, and they check random samples to see which raw materials we use. Where do these raw materials come from? Under what conditions, for example, was the rapeseed that we mainly use for biodiesel production ― or the rapeseed oil ― under what conditions was it produced? How much energy would be used to produce it, and where, for example, do residual materials and waste for biodiesel production come from, like for the second generation? And which company did these residual materials stem from? And is Verbio, for example, technically capable of processing these residual materials at all? You also have to know how to process these residual materials. For biodiesel, for example, you need special equipment. We've been operating a plant like that since 2015. We're actually building a new one right now, but the design, construction and everything takes about three years, just like the biomethane production from straw. We had to develop our own process for that, our own technology. We have been working on it for years, even built our own plants. With all of this going on, it’s becoming very attractive. There's a wave of investment in Germany, in Europe, and all of a sudden, out of nowhere, huge amounts of advanced biodiesel are coming from China. Suddenly, everything that comes out of China is advanced. The biodiesel market in Europe currently has a volume of about 12 billion euros per year, and the Chinese imports alone coming in represent a volume of eight to 10 billion on an annual basis. You can see the dimension there. And 95 percent comes from China. There's nothing coming from Brazil or from Southeast Asia. Everything comes from China. The goods are top, super cheap. The Chinese offer this stuff at half the price, even though the freight costs from China to Europe account for 20 percent of the product price. This has serious implications for the whole market, including the agricultural market and therefore for individual farmers. A year ago, rapeseed cost about €1,000 a ton, and now we're talking about €450, more than a 50 percent drop in price. In January alone, 500,000 tons of this supposed advanced biodiesel came from China to Europe, and I maintain: there are neither the facilities nor the quantities of residues for advanced biofuels in China, and that's the problem we have at the moment: somebody, a big player, is playing with unfair means.

That gives rise to the question, “what’s in it?” And also who actually controls the quality of this diesel?

Claus Sauter:That’s exactly the point. As I said, it's about which raw material has been used? And when the stuff arrives here in Europe, it meets the specification that it has to meet. But the decisive factor is which raw material was used, and I can only check that by going to China and ask, “Where do the raw materials and the residual materials come from? Are the plants technically capable of doing this?” And that's exactly what's not happening right now. I mean, we have had a covid lockdown in China for much longer than we have. Nobody got in there, we all know that. The whole logistics chains all stopped working, and during that period of time, the on-site testing also stopped, and that's indeed the real problem. I would have to go to China, I would have to check the plants’ technical capability of processing this? Basically, it's exactly the same thing that happens here in Germany every year.

Which would bring us to the question of how it came to light if it is no longer checked on site, right? Was it a chance find on site here or are there any established regulatory instances already performing checks?

Claus Sauter:Well, we are observing this development. The Chinese have always been the biggest exporters of these supposed second generation biofuels, and we've been watching the development since 2015. Back then we are talking small quantities, about 30 to 50,000 tons, and there was a lot more interest among the authorities to really follow up on it. Now there is a certification system with everything laid out in detail, but without consequences. And the market has become aware of the fact that the cap has been lifted for biodiesel from where the marker was laid with frying fat and animal fat. And when the new legislation got activated in 2022 and 2023 in the respective member states, it was like an explosion. The options for Chinese producers have disappeared, as China itself is no biodiesel market. A large part of the chip fat used to go to the USA, and a big part also went to Europe. Now the Americans have also put the screws on. In March, for example, two ships were seized in New Orleans. They checked on them and said, “you see, that’s raw palm oil: that's not chip fat at all. And then the pressure increased when the producers suddenly issued more and more advanced certificates, and the quantities simply exploded. 50 percent of the plants in Europe that process used cooking oil are now in operation. I mean, that's a little bit of the irony of the story. We never focused on chip fat and stuff like that. We started with rapeseed oil that we make. We produce high quality by-products. We need quality in the input, for example in your toothpaste that you use, there is our glycerine in it. We have quality requirements, and we have to meet them. That's why we have always relied on this raw material. But the effects are now simply too serious, and then of course you ask yourself the question,”where does this stuff come from for the whole industry in Europe? Does it add up? We asked the certifiers, “did you check that?” And we were told, “no, we couldn't, because there was a lockdown.” They argued that it was impossible to travel and so on and so forth. In a word: China is the black hole of biodiesel production at the moment. But it’s not about where the stuff disappears, but where it pours out. And everyone asks the question, “where does the stuff come from?”

Alright, so it’s like some kind of whodunit. It's also interesting that the market players have to chase after the bad guy in the end. What is being done about it?

Claus Sauter:Yes, far too little is being done at the moment. Mistakes are made as well. Biodiesel in Germany is not very well regarded politically. This is why I would say the pressure to follow up on this is restrained. Of course, one could also say, “man, the Chinese are simply cleverer than the Europeans. Plus, they’ve developed better technologies. Be all this as it may — even with the presumption of innocence applied — it would be good to validate it as a certifier, just as they do with us. And that's not happening at the moment or it can't happen at all, because the Chinese won't let anyone in. So the question is what will happen. Consequently, you’d have to declare that as long as we can't control the circumstances, this stuff can no longer be counted as what it’s supposed to be. Quite simply because we’re talking of an egregious dimension. Today we are talking about biodiesel with fraud having a hand in this. What will happen, at some point, with renewable hydrogen? It is supposed to be produced from renewable electricity. Today, hydrogen is mainly produced on the basis of natural gas. If the Chinese are bringing hydrogen to Europe by shipload tomorrow, they could produce it from Russian exhaust gas with a note attached that says “produced from renewable electricity with solar cells”. This can also only be tracked here, and so the story goes on. What about low- CO₂ steel, what about low-CO₂ aluminium? I mean, there's enough steel, but we want to have the one that was produced with low CO₂.

The fraud that is going on here has the same dimension as the diesel scandal five years ago. In the case of the diesel scandal, the hardware was manipulated, the engines were manipulated. What's happening right now is that the fuel is being manipulated. So, when talking about the fuel — and in every litre of diesel there are 7 percent biodiesel — we just assume that it was made from advanced raw materials, from residual materials, from residues. But without any proof! And what is even more dramatic is that the European industry is now suffering. The Chinese are laughing up their sleeves and blowing our lights out here. We at Verbio are now internationally active, and we know the U.S. market, which is the largest in the world. We know where we stand technologically. We're not afraid of the Chinese, and even if we were, we’d have to accept that. But there's nothing there. And this is why we are demanding consequences. On the one hand we have the producers, and on the other hand we have the fences, because somebody has to buy the stuff. And if I say that this has the same dimension as the diesel scandal, then we now have the quota obligated parties, i.e. all those who put diesel and gasoline into circulation, who are obligated to reduce greenhouse gases, and what they do is help themselves to this stuff. They know full well that it's not clean. But a ship arrives here in Brussels with a certificate, and then they say, it says here that this is residual material, grease separation residues, which rebounds the credit. If you, however, claim you’ve bought a train of biodiesel from me in June 2019 and demand to know where the raw material came from, then tomorrow I'll tell you the blood type and shoe size of the farmer who grew the stuff. That's what we're being asked to do. In the example of the Chinese imports, no one is asking any questions, and that’s what’s inviting reasonable suspicion here. The presumption of innocence applies. But: if we can't control it in China, everyone who uses this stuff here in Europe should present the evidence here. And a producer in China with a clean slate should present the documents for the sake of customer retention. He can give a description of what jis plant looks like from a technical point of view, and then the engineers here can check it. He can say, “look, these are my customers, and I have collected the residual materials there for such a tremendous number of tons.” Everything that applies to us should apply to them. All the work we had to put up with in the past twelve months. Just like it was with the diesel scandal. I also find the parallelism very interesting. Where did the diesel scandal blow up? It was in the United States in California. Where did the biggest fallout happen? In the United States. What happened to the automotive companies here in Europe? De facto, nothing at all. I mean, Volkswagen produces the largest quantities of vehicles for the Chinese market there. And the diesel scandal happened here as well. But as far as I know, nobody in China seemed to care. And I can also understand the Chinese to some extent. There is an enormous amount of money at stake. Just to think we’d put a reverse spin on it here. I’d tell the inspector, “just rubber-stamp it, okay?” Then the inspector would reply, “you used palm oil here, but that’s okay. Just label it as frying fat.” I mean, turning a high-quality raw material into an inferior one from this Chinese world of thought seems like nothing reprehensible. It would be worse the other way around. Our line of thought is beyond Chinese comprehension, but to us the consequences are very serious. If China doesn’t feel unjustly treated, neither should we. It is all the worse for the customers in Europe. And now it’s time the consequences follow, above all by putting up barriers now. Because at the moment we are really running the risk that a large part of the biodiesel producers in Europe who process frying fat and also residual materials will go bankrupt. We will lose this part of the value chain to the Chinese, just as they did with solar and wind. And I don't understand why there is no reaction at all, because I read the papers and they always say that we have to become more independent after the experience with the Russians during the war in Ukraine. Now we are making the same mistake again with regard to biofuels, and there’s no need for it at all.

We have local production, and we are also technologically very far ahead. But if someone plays the wrong game and sells a supposedly inferior product as a superior one — and nothing gets done about it — then our economic basis gets unfairly withdrawn, and then you have to close shop. And as I said, I would also like to point to the dimensions of the whole thing. What’s just biodiesel, will be steel tomorrow, aluminium next week, and chemicals the week after. If we adjust our industry in Germany and Europe to meet demands for less CO” emissions, but the Chinese are still allowed to come in here with fake chemicals or fake steel, fake aluminium, it will knock our industry's lights out and further increase our dependency. So, this thing has the same explosive power as the diesel scandal. Brussels, Berlin will have to crack down on it to avoid another diesel scandal, even if now it’s not the hardware but the fuel that’s affected.

So what you're saying means that the Chinese could sell us practically everything, because we don't look too closely anyway. That's something that journalists have now become aware of as well. German weekly Die Zeit has asked four companies for a statement and has already published its findings. The majority of these companies reject accusations. One company didn’t answer at all, and a suspicion against a certain southern Chinese company seems all but confirmed. It really becomes a bit scandalous. Said company that lists mineral oil companies like Shell and BP as customers, and they are big players here from Europe.

Claus Sauter:Yes. The diesel scandal was about Volkswagen, one of the biggest carmakers in the world. A well-known company doing the same thing. That's why I'm talking about stolen goods. The difference is about consequences, because if you are a petroleum company and you have to use biofuels by law, then you can trust that the goods you buy have been produced in accordance with the certificate. Imagine I give you a 50-euro note and with a wink I tell you that it’s a well-made flower. Then you go shopping, use the fake note for payment and get caught. You and I go to prison for 50 euros. When a ship arrives here with 50,000 tons of frying-fat biodiesel ― not 50 euros, but 50 million Euros worth of goods ― and then there's a piece of paper, a certificate, that confirms the raw material used to make it was grease-trap residue. You accept that and meet your quota. A week later it turns out, the company in China has cheated. And there are no consequences. Because all you need to do is say you trusted the delivery note.

So, nothing can happen to me as a buyer!?

Claus Sauter:Nothing happens to you. Obviously, if you read the regulations, it's not a free ride. But again, the authorities are afraid to draw consequences. They are shying away. They don't apply the same standards to these imports as they do to European producers, and so it goes on uninhibitedly. It just keeps going on and on. And we are of the opinion that the regulations in place cater to a possibility to call in to the public prosecutor's office based on the basis of reasonable suspicion. Thing is, even if it does get called in, what does the public prosecutor's office want to investigate? Do you think that the Chinese will answer the public prosecutor's office of Brunswick’s request for administrative assistance? They would be laughing their heads off. It’s all smoke and mirrors, which has been duly discussed in the press. It wasn't just German weekly Die Zeit,there was also coverage in the Handelsblatt and in the journal Fokus. With the topic slowly boiling up, we keep hearing the same reassuring phrases. “Yes, yes, we’ve called in the public prosecutor's office.” It becomes painful at the moment when all you want to reply is, “Take the quantities into account that have come in over the last twelve months and mark new deliveries with a red dot.” And yes, the presumption of innocence applies. But because there is reasonable suspicion, we need the quota obligated mineral oil company to provide proof. We can't go to China. You have bought goods. Now there are two possibilities.

It’s time we drew a red line, because we can't control it. When there's reasonable suspicion, we'll give you the chance to prove it now. That's the way it has to be, because there’s no other way to import biodiesel from China. It's a huge business, and a lot of fun! Once we tackle a ship like that with 50,000 tons, we'll be set for life. It's good that this is happening at the moment, because it shows the scope. The frightening thing is perhaps that it only concerns biodiesel. And it is frightening that no one is reacting to it. America has reacted. Hardly anything is getting through. The Americans have put the screws on. Why do we always have to wait for the Americans to do something first? Our naivety will need to come to an end at some point.

Yes, it’s like that. At the end of the day, this isn’t about paper clips or any insignificant stuff, it's about high-stake future issues. It's about the climate crisis, it's about fossil fuels. Palm oil is not an issue that is viewed particularly uncritically. It's an industry or a field that has to be regulated and controlled in some shape or form. Do you see any gaps there or is it just complete? Are we just letting things slide completely? 

Claus Sauter:Basically, I don't see any gaps. What the certification system controls is all provided for. After all, we have to present the proof, and the system as such is good, too. But of course, I also have to be able to control it. Just imagine. Tomorrow you find out that the city of Leipzig is sending all its traffic wardens on vacation for three months. Will you still pay attention to where you park? If nobody is there to control you, you will park in the public park or anywhere you see fit. We don’t need to fool ourselves what we’d do if there was no control. First, the system in place just needs to be enabled. Second, fraud must have consequences. In the Netherlands, there was a similar scandal five years ago, but with a Dutch producer. Now, they no longer have any protection of confidence if it is proven that some quantity that was used did not meet the requirements. Even if you have a certificate, you are subsequently deprived of the quantities. This is not the case in Germany, and because of this special incentive of double crediting for progressives, most of the goods are currently being shipped to Germany. Third, we have to build barriers. I'll bring up the example of the USA again. You can't just import biodiesel or export grain. You need a licence, and the first thing they do is check, “Are you a reliable company? How long has the business been around?” If you're only six months old, then you have no chance at all of getting such a licence. In addition, you have to provide a guarantee that if you make a mistake, your guarantee will be withdrawn and you will suffer the financial loss. You wil need to set the hurdles higher in Europe as well. We need, especially for imports, we need hurdles. And the first hurdle could be a licence for an import to prove that all the requirements are met. With a money deposit as guarantee, the supplier would suffer a financial loss in case it turns out that something doesn’t run cleanly. And then the extent of the audit. The people performing these don’t need to be administrative scientists, but engineers. Engineers who know can tell a heat exchanger from a distillation column, because they need to get in there. We see a similar issue with the glycerin that goes into high-value applications. An inspector from the USA comes in every three months. He is highly trained, he walks through our plants, he wants to know where each pipeline goes. He also knows how a distillation column works. He checks very carefully whether the glycerine that goes into toothpaste or cough syrup, for example, has been produced to the highest quality standards. The incentive here is high-quality products. In our case, the issue has to be that we make things to protect the climate, and equal requirements apply. A different quality of people in the field is required. And yes, there must also be consequences for those who use it.

I wouldn't say that they have to go to jail right away, but there has to be a penalty, and the penalty actually has to be on the grounds that you didn't meet your requirements, meaning you’ll get cancelled. And for the amounts that you didn't meet there, you’ll need to pay a penalty for trying to cheat in the same amount. We do need barriers that make it harder. We don't need to invent everything ourselves. Just look at how they do it in the USA.

In any case, it doesn't make it easier if China simply won’t let inspectors in, right? Now, the German government has just recently adopted a China strategy, which has caused a lot of fuss and still does. How do you assess these recent incidents with regard to this China strategy?

Claus Sauter:That's marketing for me, because I also remember those pictures where Ms Baerbock was bickering with the Chinese foreign minister on the open stage there. Unfortunately, the reality is different. At the moment, no one wants to gets on to China. They say it's an important trading partner and blah, blah, blah. Even the fact that the stuff comes from China doesn't mean that all the stops are being pulled out there, it's still very restrained. And the development in our country is also in stark contrast to these statements, because I think it's about making ourselves a bit more independent again. Look at solar and wind. The largest solar cell producers in the world today are the Chinese. If we want to do more solar somehow, we can't do anything without China. Among the ten largest wind turbine manufacturers, seven companies are Chinese. Now the same thing happens with biomass. It’s quite ironic when you think about it. On the one hand, Ms Lemke wants us to use less first-generation biofuels from rapeseed oil. Now more is being made there with frying fat. But because of these misguided developments, European value chains are breaking down. I mean, you also have to collect this frying fat. If it doesn't pay off, no one will pick up the frying fat from MacDonald’s anymore, because what can you do with the stuff? There’s a whole industry drying up again, and we benefit from it to a certain degree, because we keep with the rapeseed-oil theme. Well, farmers are suffering, because they only get half the price for their rapeseed. But for us, of course, prices have become cheaper. I would say that we are currently the ones who suffer the least. But it doesn't change the fact that we should be conscious of this China strategy. We shouldn't rely so blindly on the Chinese: we should build up our own value chains again. But contrary to what I've been explaining for the last half hour, exactly the opposite is happening. Make of it what you will, but all I’m telling you are facts. I have also called people from the ministries. They told me that I would need to provide proof. But how should I do that? Fly to China, bring the guy who issued the delivery note to Europe, sit him in front of the public prosecutor so he can be questioned? That’s not quite possible. You can only get concrete proof if you go to China. But you can't go there. So I just have to admit that, “no, if that's not possible, we're corrupted.” Then let’s stop the imports. How quickly do you think it will happen that we get documents if we said, “China, stop! All serious producers of China will immediately need to report to the Foreign Office or the BMU in Berlin and say, “What can we do?”

What would be the leverage that you could apply in the end?

Claus Sauter:Well, that should be quite clear now. But it isn’t applied, because we’re talking about China.

As you already said, it is now also about issues such as the climate crisis, our energy transition, everything that is connected to it, and if you look at it from a broader perspective, what can the EU in Germany do concretely? What has to happen in these topics?

Claus Sauter:Well, the dimension is huge, because it will also affect all other areas.

Steel, aluminium, chemicals, renewable hydrogen will all be affected, because each of these products has a fossil brother, and we do need concrete rules for these areas as well. There must be consequences that must be applied consistently. When it comes to import, you’ll need to qualify it again a little bit differently. Define it, because in the last 18 months we have learned how important local value chains are.

That the price of imported goods must not be the sole criterion. And here there was more wisdom in the way politics was done in the 1970s and 1980s. We used to see the topic of energy as a critical topic and realised that a certain part of our own production and a certain part of independence must be maintained. Today this is particularly true for climate protection, because what we are currently doing in transport is fake climate protection. We are not achieving anything, and we simply need a different focus. Today I read about our hydrogen strategy again, that has now gained momentum, and so on. Yes, we have all these goals. But how do we want to get there? What motivates the companies to invest in hydrogen, and how do we ensure that these surely quite expensive products were also manufactured in such a way that these additional costs are justified? Apply a bit of common sense and don’t just assume the world is a good place, especially the energy business. There are dozens of examples where energy giants have been created by systematically circumventing sanctions. If you want positive thoughts and good intentions to have fewer CO₂emissions, to operate more sustainably, to not see everything disappear industrially, to avoid jobs being lost, then we need mechanisms to ensure that. Otherwise, we'll kill our industry. And that's why I say it's good that this is happening right now with biodiesel. It shows the brutality in which the market is acting there.

With the participation of global players from the mineral oil sector, they just play along and that’s where the brutality comes to the fore. There's no morality, it's all about money. If I don't have to expect sanctions, then I can just pull it off. And that's what's happening right now. And it's all going to happen to us in the other areas as well. In politics it needs to be realised that you need tough rules and see to their implementation. You can’t have one set of tough rules that apply to a local German European producer and a different set to imports.

Mr Sauter, thank you ever so much. It’s a very complex matter and all the more helpful to receive your classification. Absolutely. I think we'll keep a good eye on future developments. And it's definitely good to know that Verbio is well positioned and that we can already look forward to the next meeting. Thank you very much.

And also many thanks to our listeners. We look forward to a new edition of # StrawClever. Find us on Apple Podcast, Deezer, Google Podcast, Spotify and online at Strohklug.de.

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