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Speaker 1: I'm Dana Perkins, and you're listening to Bloomberg Switched on

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Speaker 1: the B n e F podcast. In today's show, we

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Speaker 1: talk about renewable diesel. It has potential to decarbonize some

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Speaker 1: of the hard to abate sectors. So while all of

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Speaker 1: this talk of vaccines might have some of us streaming

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Speaker 1: of a beach vacation or when we're going to need

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Speaker 1: to travel for work, again, that makes me think about planes,

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Speaker 1: one of the hard to decarbonize parts of transportation. Shipping

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Speaker 1: just another example. Renewable diesel presents part of the solution.

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Speaker 1: And on this week's podcast, Mark Taylor and I sit

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Speaker 1: down with Daisy Morgebar, an oil analyst here at B

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Speaker 1: and EF. She talks to us about a research note

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Speaker 1: that she recently wrote titled Renewable Diesel a green Light

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Speaker 1: for Refiners. You can find it at benof Go, on

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Speaker 1: the Bloomberg terminal at BANF dot com and on BNF's

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Speaker 1: mobile app. And our usual reminder, we do not provide

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Speaker 1: investment or strategy advice, and we have a full disclaimer

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Speaker 1: at the end of the show. But now let's hear

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Speaker 1: about renewable diesel with Mark and Daisy. So we're recording

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Speaker 1: this the day after Thanksgiving, our American Thanksgiving Black Friday.

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Speaker 1: For the rest of the world. I guess it's the

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Speaker 1: official start to the well, the holiday season, I guess

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Speaker 1: you could say. And Daisy are our guest today, was

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Speaker 1: telling us this really cool story about this weird thing

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Speaker 1: or interesting thing that happens in Finland. We're just going

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Speaker 1: to pass to her to start off the show with

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Speaker 1: this story. So, in Finland, there's this initiative that has

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Speaker 1: been running for the last few years now where basically

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Speaker 1: households are in courage to drop off their fat from

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Speaker 1: their Christmas ham to these recycling points and then nest Day,

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Speaker 1: which is a big Finish renewable fuels producer, collects that

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Speaker 1: waste fat and turns it into renewable fuel. Hey, they're

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Speaker 1: collecting all of this stuff from you said. Ham is ham,

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Speaker 1: the traditional like Christmas holiday seasonal meal in Finland. So okay,

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Speaker 1: So they're collecting all of this waste by product from

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Speaker 1: the ham and instead of throwing it into some sort

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Speaker 1: of a handpost heap, they're sending it off to become

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Speaker 1: renewable diesel. So can you explain to us what renewable

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Speaker 1: diesel is. Renewable diesel is is a biofuel that can

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Speaker 1: substitute fossil based diesel, and it's sort of big selling

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Speaker 1: point I guess is that it's it's so chemically similar

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Speaker 1: to regular diesel that it can be used as a

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Speaker 1: like for light replacement in a diesel engine. So other

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Speaker 1: biofuels like ethanol biodies are quite different products, so they

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Speaker 1: can only be blended into regular fuels in small amounts,

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Speaker 1: and so that's kind of why there's a lot of

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Speaker 1: interest in renewable diesel because it doesn't have that limitation.

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Speaker 1: So being able to use renewable diesel in its pure form,

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Speaker 1: not blended into fossil diesel, is a huge advantage. It

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Speaker 1: means obviously there's a lot of carbon savings, but it

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Speaker 1: can also drop in seamlessly to the existing supply chain,

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Speaker 1: so existing engines, transport infrastructure, and also the way it's

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Speaker 1: produced has significant overlaps with convention or refining as well. Well.

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Speaker 1: I think I missed it. Can you explain why it's

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Speaker 1: like for light brade Basically, it's it's so chemically similar

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Speaker 1: to fossil based diesel, so it can be used in

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Speaker 1: in the same engines or the same sort of pipelines.

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Speaker 1: So this is new to me because when I think

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Speaker 1: of this, when I first thought heard the term renewable diesel,

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Speaker 1: immediately thought of biofuels, which actually have to be blended,

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Speaker 1: do they not? And can you explain the difference between

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Speaker 1: bio diesel and renewable diesel, So this is this is

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Speaker 1: a common kind of confusion. Bio diesel and renewable diesel

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Speaker 1: are two very different products, so they have various similarities,

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Speaker 1: but they also have differences. So on the similarity side,

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Speaker 1: they both displace fossil based diesel and can both be

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Speaker 1: used in diesel engines. And they also made from similar feedstocks,

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Speaker 1: so that's anything any sort of organic oil based feedstock

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Speaker 1: like vegetable oils or waste facts and greases can both

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Speaker 1: be used to make biodies or renewable diesel. But the

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Speaker 1: difference is basically how you process those feed stocks, so

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Speaker 1: the production process results in very different products. You've got

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Speaker 1: bio diesel, which is a chemically different product and therefore

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Speaker 1: it needs to be blended in small amounts with regular

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Speaker 1: diesel in order for it to to avoid kind of

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Speaker 1: engine damage or performance issues in your diesel engine, whereas

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Speaker 1: renewable diesel because it's so similar to fossil diesel, you

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Speaker 1: can use it as a as a light foloight replacement.

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Speaker 1: And what are they each made of, so it really varies. Basically,

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Speaker 1: it's any kind of oil based organic matter, So that

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Speaker 1: can range from finish ham waste, yeah, exactly on one

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Speaker 1: side of the spectrum, and then on the other you've

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Speaker 1: got Traditionally, when people think of bio fuels, they think

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Speaker 1: of crops like soybean or rape seed oil or palm

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Speaker 1: oil for example. And obviously in the past these have

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Speaker 1: come up against a bit of scrutiny, not only because

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Speaker 1: of creating high competition for food resources, but also it's

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Speaker 1: land impact because presumably ramping up supply of these feed

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Speaker 1: stocks for biofuels would necessitate kind of clearing of land,

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Speaker 1: and that's why palm oil's got such a bad rep

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Speaker 1: for its associations with deforestation. But there's a kind of

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Speaker 1: another area of feed stocks which is kind of growing

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Speaker 1: in focus now because there's a heightened awareness around the

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Speaker 1: environmental impacts of clearing land, and that is waste products.

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Speaker 1: So the ham fat Christmas ham is a great example

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Speaker 1: of a kind of a leftover or waste fat being

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Speaker 1: recycled into a fuel, and some other waste examples are

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Speaker 1: used cooking, all that comes from restaurants, and any sort

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Speaker 1: of waste animal fats or grease can be repurposed in

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Speaker 1: this way to make a useful product. Is there enough

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Speaker 1: of this to make a difference or are there are

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Speaker 1: other feedstocks that will make a bigger dent in the supply.

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Speaker 1: So this is a question we get a lot, especially

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Speaker 1: with production capacity and interest in renewable diesel really ramping up. Yeah,

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Speaker 1: so question around where is all the feed stock going

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Speaker 1: to come from is a really big kind of uncertainty

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Speaker 1: in the market, and I think producers are acutely aware

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Speaker 1: of this potential challenge, especially with rising competition in the

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Speaker 1: in the production capacity space. Producers are kind of taking

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Speaker 1: steps to protect themselves from this potential kind of squeeze

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Speaker 1: and supply, particularly where there's a much greater focus on

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Speaker 1: waste based in Europe, for example, which has traditionally been

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Speaker 1: based on on more crop based feed stocks like palm oil,

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Speaker 1: like rape seed oil, but they're trying to move away

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Speaker 1: from that and move more towards waste based feed stocks

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Speaker 1: because of their kind of lower environmental impacts. So there's

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Speaker 1: a few things that producers can do to kind of

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Speaker 1: protect themselves against this potential risk. Producers are still investing

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Speaker 1: in R and D to kind of open up other

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Speaker 1: ways of producing renewable diesel, so that would kind of

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Speaker 1: open up a much broader range of fee stocks. So

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Speaker 1: one example is something like algae. Another is household waste.

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Speaker 1: So this is currently being pilot piloted on a on

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Speaker 1: a much smaller scale. That could be one pretty good

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Speaker 1: avenue sort of supply in the future, which is essentially

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Speaker 1: turning household waste into via a different process to what's

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Speaker 1: currently most commercialized, but turning it into renewable diesel as

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Speaker 1: well as renewable jet fuel as well. Okay, so in

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Speaker 1: the process of making renewable diesel, hydrogen is one of

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Speaker 1: the potential ways we can go about making renewable diesel.

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Speaker 1: Can you explain a little bit more about how hydrogen

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Speaker 1: fits into this equation. There's many ways of making renewable diesel,

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Speaker 1: but hydro treatment is by far the most the most

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Speaker 1: commercialized production route, and that's actually a reason why refiners

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Speaker 1: are such big players in this market. So right now,

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Speaker 1: more than of production capacity for renewable diesel is owned

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Speaker 1: by all refiners, and a big reason behind that is

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Speaker 1: that they already have hydro treatment capability as well as

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Speaker 1: a well established supply of hydrogen, because most refiners are

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Speaker 1: able to produce hydrogen in a refinery by reforming natural gas.

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Speaker 1: So making renewable diesel is a lot more hydrogen intensive

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Speaker 1: than the conventional refining and so that actually kind of

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Speaker 1: limits how much renewable diesel a refiner can produce from

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Speaker 1: their existing setup, and renewable diesel production is much more

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Speaker 1: hydrogen intensive than conventional refining, and at the moment, most

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Speaker 1: of this hydro treating or renewable diesel production that refiners

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Speaker 1: are going after will be conventional hydrogen that they've already

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Speaker 1: got the capability to produce. But there are kind of

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Speaker 1: signs that refiners are entering the green hydrogen space as well,

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Speaker 1: and this is particular clear the case in Europe. So

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Speaker 1: there's a couple of refineries who are piloting projects to

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Speaker 1: to produce green hydrogen in order to facilitate their renewable

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Speaker 1: diesel production. Just to clarify, green hydrogen is making hydrogen

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Speaker 1: from electrolysis from power from renewable sources. So, Daisy, you know,

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Speaker 1: you mentioned earlier that it was used as a feedstock

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Speaker 1: for jet fuel, and that is you know, air travel

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Speaker 1: is one of those extremely hard to evate sectors. Can

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Speaker 1: we talk a little bit about the benefits from a

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Speaker 1: carbon standpoint, because this looks like this could be a

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Speaker 1: real viable option, there is it not. It's certainly, you know,

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Speaker 1: one of the only few available options currently that's already available.

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Speaker 1: In terms of carbon savings, renewable diesel is between fifty

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Speaker 1: and eighty reduction in carbon emissions, and that kind of

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Speaker 1: range is basically based on the feedstocks, so that comes

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Speaker 1: back to whether you're using a virgin vegetable oil like

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Speaker 1: soybing or if you're using waste which has a much

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Speaker 1: much lower carbon intensity. So yeah, the carbon savings are

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Speaker 1: really huge. The kind of challenge for the aviation sector

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Speaker 1: is that currently renewable jet fuel, which basically kind of

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Speaker 1: related to renewable diesel, and it can be produced in

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Speaker 1: the same process. The challenge is that it's currently much

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Speaker 1: more expensive than fossil based jet fuel. It's between three

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Speaker 1: and four times more expensive, and this year has only

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Speaker 1: exacerbated that issue because COVID has really weighed down on

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Speaker 1: demand for flying because of lockdowns. It's put a lot

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Speaker 1: of financial pressure on airlines, so it kind of means

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Speaker 1: they're probably less able or willing to voluntarily spend that

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Speaker 1: extra money on fuel if they don't have to. If

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Speaker 1: it is more expensive and more challenging for airlines in

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Speaker 1: the current environment, what is driving the growth of renewable diesel?

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Speaker 1: Policy is a really important driver for for this market

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Speaker 1: because it is more expensive. And this is the case

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Speaker 1: both on road, so passenger cars and trucks, but also aviation.

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Speaker 1: So historically aviation has kind of lagged behind in terms

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Speaker 1: of policy support, but it is starting to catch up.

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Speaker 1: So if we look at California for example, which I

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Speaker 1: always use as a case study because it's got one

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Speaker 1: of the most kind of comprehensive low carbon fuels programs

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Speaker 1: in place, called the Low Carbon Fuel Standard. Last year

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Speaker 1: it introduced aviation biofuels into this program, so biofuels for

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Speaker 1: aviation could start earning credits which are are really valuable

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Speaker 1: as of last year, and since then, the supply of

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Speaker 1: renewable jet fuel has has really grown in the state.

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Speaker 1: So it just kind of highlights the importance of policy here.

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Speaker 1: And another important thing that's happened this year is a

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Speaker 1: tax credit in the US which is basically a wand

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Speaker 1: out one dollar peck Allen tax credit which is applied

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Speaker 1: to renewable diesel, renewable jet fuel, and also bio diesel.

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Speaker 1: It seems to be a pretty big credit. Yeah, it's huge. Yeah,

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Speaker 1: And this has been a really big factor as to

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Speaker 1: why this year in particular, you've got the combination of

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Speaker 1: COVID really weighing down on refining margins and creating a

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Speaker 1: really difficult environment with low demand for fuels and low

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Speaker 1: margins for refiners. Combined with this new tax credit that

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Speaker 1: got introduced at the start of this year and is

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Speaker 1: now in place until the end of two you get

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Speaker 1: this huge divergence in the potential margins whether you're producing

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Speaker 1: conventional fuels or bio fuels, and simply because of of

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Speaker 1: these huge policy incentives. So this is a really big

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Speaker 1: reason why it's happening this year, and secondly why it's

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Speaker 1: happening in the US in particular. So the US in

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Speaker 1: particular is having a lot of popularity for renewable diesel.

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Speaker 1: Is this both both then in terms of production and

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Speaker 1: in terms of consumptions. Yeah, definitely, So these policy mechanisms

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Speaker 1: have really kind of spurred demand. But also it's not

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Speaker 1: just domestic production, but even producers exporting into the US

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Speaker 1: are able to take advantage of these credits. So going

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Speaker 1: back to nest Day with the Finnish company, they're actually

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Speaker 1: the soul exporter of renewable diesel into the US right

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Speaker 1: now and it all goes to California. So that again

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Speaker 1: just highlights the kind of big draw of these policy

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Speaker 1: and centers, and would you say they're the biggest player

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Speaker 1: in the market right now. Nest Day are by far

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Speaker 1: the world's largest producer of renewable diesel and renewable jet fuel,

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Speaker 1: and they're also working on really ramping up their production capacity,

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Speaker 1: so they're working on a big expansion at the moment

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Speaker 1: in Singapore. Is this a traditional refiner as well? Yeah,

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Speaker 1: basically nest Day are originally an oil refiner of Finnish

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Speaker 1: oil refiner, but they've really kind of evolved their business

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Speaker 1: to be the world's largest producer of renewable diesel and

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Speaker 1: renewable jet fuel. So they have plants in Europe and

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Speaker 1: they also have a plant in Singapore which they're currently

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Speaker 1: working on a big expansion which will really ramp up

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Speaker 1: their production capacity not just of renewable diesel, but also

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Speaker 1: of renewable jet fuel. So is there a chance that

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Speaker 1: I have at this point, whether a flying domestically in

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Speaker 1: the United States or internationally, been on a flight that

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Speaker 1: has been fueled by renewable diesel. Yeah, the chances are

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Speaker 1: that you that you have. And obviously at the moment

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Speaker 1: it's just in small blends, but particularly in Europe and

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Speaker 1: so Kleem are an airline who have been particularly active

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Speaker 1: in the renewable jet fuel space, but more and more

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Speaker 1: in Europe countries are looking to implement blending man dates

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Speaker 1: on renewable jet fuel, just like we do on road.

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Speaker 1: So on road it's not uncommon to have maybe a

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Speaker 1: five or ten percent blend mandate in your gasoline or diesel.

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Speaker 1: This approaches is being slowly adopted for jet fuel. So

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Speaker 1: Norway were the first country to implement a blending mandate

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Speaker 1: of this type, which started this year. Sweden of following

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Speaker 1: in their footsteps with a blend mandate starting next year,

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Speaker 1: I believe, and there's a couple of other countries in

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Speaker 1: Europe who are also considering a similar approach like France,

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Speaker 1: for example, have set a target of two blend of

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Speaker 1: renewable jet fuel. So is it safe to say that

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Speaker 1: we've not seen even the beginning of the potential growth

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Speaker 1: in this space. It's definitely a market that has a

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Speaker 1: lot of room to grow. You know that the pace

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Speaker 1: of that growth I think will be kind of dependent

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Speaker 1: on policy. It's like I mentioned before about the cost,

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Speaker 1: this is something that needs to be kind of supported

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Speaker 1: through policy, which is not quite there yet, but we

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Speaker 1: think that, you know, as policy starts to be implemented,

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Speaker 1: this will really help the market take off take off unintended,

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Speaker 1: So there's going to be still a carbon footprint to this,

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Speaker 1: and there's still tailpipe emissions. So can you describe the

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Speaker 1: kind of what the carbon savings are or or the

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Speaker 1: environmental impact. Yes, So the savings when you're looking at

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Speaker 1: renewable diesel or renewable jet fuel is between fifty and

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Speaker 1: eighty percent carbon intensity reduction versus fossil fuels. So it's

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Speaker 1: by no means a zero carbon fuel, particularly for the

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Speaker 1: aviation sector, because there are kind of few alternatives out

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Speaker 1: there at the moment. So, you know, the two clean

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Speaker 1: energy solutions that spring to mind for aviation would be

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Speaker 1: something like hydrogen or electric planes. And these two options

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Speaker 1: are you know, either a couple of decades away at least,

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Speaker 1: or in the case of electrification, probably only really feasible

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Speaker 1: for short haul distances. So, while it's not perfect by

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Speaker 1: any means, biofuels are considered to be one of the

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Speaker 1: key solutions that are available now, able to drop into

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Speaker 1: existing infrastructure without the need for a complete overhaul in

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Speaker 1: refueling airports and also the aircrafts. So it is kind

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Speaker 1: of seen as a a big opportunity. Okay, I'm coming over.

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Speaker 1: It sounds cool, sounds cool. Can I ask one more

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Speaker 1: question about the European policies like two percent blending mandates,

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Speaker 1: You know all that they're not as aggressive as the

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Speaker 1: California policies. Are they having an effect? Are they having

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Speaker 1: a similar effect of getting companies excited and getting getting

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Speaker 1: after it. Yeah, it's a good point in and let

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Speaker 1: you say, two percent doesn't sound like much, and it's

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Speaker 1: even lower right now in Norway and in Sweden they're

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Speaker 1: starting really really low and gradually increasing every year with

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Speaker 1: really small incremental steps. And it's it's worth noting here

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Speaker 1: the size of the renewable jet fuel market right now

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Speaker 1: is so small, so it currently accounts for zero point

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Speaker 1: one percent of jet fuel, so point zero one percent

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Speaker 1: of Dana's ride on an airplane region my ride. Come on, Mark,

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Speaker 1: you travel too? Were both expats. Yeah, I guess we're

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Speaker 1: I guess we're expats on this island for the foreseeable future.

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Speaker 1: So I think basically policymakers are kind of conscious of

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Speaker 1: not creating mandates that are unachievable or too much too soon,

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Speaker 1: because it could potentially encourage the wrong sort of growth. So,

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Speaker 1: you know, things like the EU are looking to phase

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Speaker 1: out their use of palm oil in renewable fuels because

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Speaker 1: historically they've been quite reliant on palm oil too as

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Speaker 1: quite a big contributor to its feed tomas. So ramping

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Speaker 1: up potential demand quicker than supply could potentially catch up.

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Speaker 1: I think is a bit of a risk. Quite a

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Speaker 1: bit of popularity at the moment for renewable diesel and

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Speaker 1: looking like potentially gaining popularity in the future. So as

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Speaker 1: you started to research this topic, oftentimes we find a

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Speaker 1: lot of answers which were therefore published in this research note.

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Speaker 1: It raises more questions for US what were the sorts

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Speaker 1: of things that were raised for you as kind of

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Speaker 1: follow on questions that you weren't able to get to

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Speaker 1: in the scope of your research for this particular research report.

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Speaker 1: I think the availability of sustainable feedstocks is a huge

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Speaker 1: question that that keeps coming up, and it's one of

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Speaker 1: the biggest questions that we get with regards to this

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Speaker 1: big ramp up in in production capacity. So this is

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Speaker 1: something that you know, I want to look further into.

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Speaker 1: I think this is something that producers are really aware of,

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Speaker 1: and you can see that by some of the actions

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Speaker 1: taken by some of the big producers who was sort

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Speaker 1: of trying to, you know, take these steps to shore

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Speaker 1: up certainty of supply, Like what are they doing? Yeah,

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Speaker 1: So one of the kind of strategic moves that some

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Speaker 1: of the big players are doing are kind of making

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Speaker 1: these partnerships. So one example is Diamond Green Diesel, which

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Speaker 1: is the biggest producer in the US right now, is

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Speaker 1: actually a joint partnership between a joint venture between a

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Speaker 1: US refiner, Valero and Darling Ingredients. So Darling Ingredients is

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Speaker 1: a company that basically collects and recycles waste fats from

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Speaker 1: restaurants and things like Talo from slaughter houses. It collects

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Speaker 1: all of this and recycles it. So this joint venture

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Speaker 1: is really mutually beneficial because Valero or Diamond Green Diesel

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Speaker 1: basically gets this priority access to this highly competed feedstock

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Speaker 1: which has a really low carbon intensity and gets a

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Speaker 1: lot of rewards. So I think that this could be

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Speaker 1: a growing trend that we see where producers are increasingly

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Speaker 1: positioning themselves to kind of get this priority access to

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Speaker 1: feed stock. So another example is nest Date, who are

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Speaker 1: the world's largest producer. So in June this year, they

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Speaker 1: announced a partnership with McDonald's in the Netherlands. So basically

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Speaker 1: McDonald's will supply nest Date with all of the US

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Speaker 1: cooking a used to make their French fries in all

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Speaker 1: of its restaurants in the Netherlands. Nest they will then

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Speaker 1: recycle this into renewable diesel and then that fuel will

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Speaker 1: be then be used in the trucks that deliver to McDonald's.

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Speaker 1: And so, both from a kind of transport decarbonization perspective

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Speaker 1: and also a circular economy, this is an area that

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Speaker 1: I think we'll get a lot of attention going forward.

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Speaker 1: And it's like I said, a mutually beneficial partnership. So

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Speaker 1: companies like McDonald's are looking to improve their sustainability and

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Speaker 1: reducing their carbon emissions, and obviously from the biofuel producer's perspective,

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Speaker 1: this secures supply of a highly sought after feed stock,

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Speaker 1: so it's kind of a win win, and this model

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Speaker 1: can be replicated over many times, not least looking just

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Speaker 1: a McDonald's, who obviously have a huge global footprints, so

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Speaker 1: they could kind of replicate this in other countries, but

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Speaker 1: other also, other similar restaurant chains could look to do

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Speaker 1: something similar. And also this this sort of close loop

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Speaker 1: concept can also be applied on a city level too,

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Speaker 1: so looking at NESTA again, they launched a partnership with

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Speaker 1: the city of Oakland in California, whereby basically all of

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Speaker 1: the kind of waste cooking oils and greases and other

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Speaker 1: kind of waste fats from the city was collected and

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Speaker 1: supplied to nest Day, who will recycle it into renewal

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Speaker 1: diesel which will then fuel the city's fleet. So yeah,

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Speaker 1: I think this is kind of a cool circular economy which,

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Speaker 1: like I said, could be replicated many times over, and

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Speaker 1: I think is is something kind of to keep an

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Speaker 1: eye on. Yeah, so what it sounds like if we're

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Speaker 1: going to see a lot more effort to collect any

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Speaker 1: grease and oils and fats you know that exists anywhere

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Speaker 1: in the market that can be taken up before Yeah,

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Speaker 1: finding other feed stacks. Yeah, that's crazy, that's cool. Yeah, definitely,

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Speaker 1: I think it's I think it's an area that needs

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Speaker 1: still needs a bit of work to kind of streamline,

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Speaker 1: but there's definitely a lot of attention on it right now.

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Speaker 1: And just the other day, in fact, I saw a

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Speaker 1: bio fields producer and in the U a E has

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Speaker 1: made an app to facilitate the kind of track and

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Speaker 1: monitor the delivery and collection of use cooking on from

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Speaker 1: McDonald's restaurants. Again, so I think this is something that's

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Speaker 1: really gonna continue going forward, trying to streamline this process

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Speaker 1: and make it a lot more transparent. I know it's different,

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Speaker 1: but this really reminds me of you know, the It

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Speaker 1: reminds me back to the future and the DeLorean time machine. Yeah,

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Speaker 1: I mean I could have a DeLorean that is now

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Speaker 1: renewable diesel. Yeah, there you go. On that note. On

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Speaker 1: that note, back to the future, guys, On that note,

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Speaker 1: let's see how this develops in Finland in the next

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Speaker 1: couple of weeks. We are not too far from the

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Speaker 1: Christmas holiday and the cash cow of renewable diesel coming

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Speaker 1: in to Finland, and you know, maybe Oakland. Daisy, thank

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Speaker 1: you so much for joining us today. Thanks for helping me.

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Speaker 1: Today's episode of Switched On was edited by Rex Warner

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Speaker 1: of Grace Stoke Media. Bloomberg an e F is a

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