Economics of Biofuels

Lecture 18
Economics of Food Markets
Alan Matthews
IV. Evaluation of biofuels
policies
 Controversies over environmental
benefits
• Subsidisation might be justified where positive CO2
effects exist
• Wide range of estimates on actual GHG emission
reductions
– Depends on feedstock, location, lifecycle effects
– More recent studies less positive than initial evaluations
• Contribution to reduction in GHG emissions will be very
small
– Transport sector contributes 25-30% of GHG emissions
– Mandatory target is 10% of transport fuel in 2010
– Favourable GHG reduction factor might be 30% reduction
– Overall impact on GHG emissions = 30 * .10 * .03 or around 1%
of EU emissions
 Controversies over environmental
benefits
• Subsidy efficiency depends not only on GHG reduction
but also economic viability
• At previous energy prices, cost of avoiding CO2 usually
greatly exceeds price of carbon offset
• US study estimated minimum subsidy cost per tonne of
CO2 equivalent reduced over the 2006-12 period is $295
for corn ethanol; $239 for biodiesel, and $109 for a
hypothetical cellulosic ethanol case. This can be
compared to price of carbon offsets on Chicago Climate
Exchange (CCX), where it would have bought 89, 75 and
33 carbon offsets, respectively (GSI, 2007)
• Does oil at $100/bl or more change this?
 Conventional C02 benefits

Source: Renwick and Reader, AES One Day Conference, January 2007
 Reduction in GHG emissions
compared with fossil fuel emissions
(percentage reduction if positive)

Source: Bamière et al., 2007

Feedstock-to-biofuel pathways

Source: Delucchi, 2006

Approximate typical overall results
of lifecycle GHG emission analyses
of biofuels

Source: Delucchi, 2006

 Issues in life cycle analysis
• Impact of estimation within a dynamic general
equilibrium framework which takes role of price
changes into account
• Uncertainty about energy use and emission
factors
• Representation of changes in land use
• Treatment of energy cost and market impacts of
co-products
• Development of CO2 equivalency factors for all
compounds emitted
Cost vs potential for CO2
avoidance

Source:
Eurcar/Concawe 2005
 Trade issues
• Trade between efficient tropical producers and
OECD countries will be mutually beneficial
• But is mostly absent due to high import tariffs
and production subsidies
• Recall EU has low tariffs on biodiesel but high
(45-65%) tariff on bioethanol
• Whether to allow easier bioethanol imports
divides EU countries.
– Those in favour point to the more favourable energy
and GHG balances of Brazilian ethanol
– Those opposed (France and Germany) put more
emphasis on the potential gains to their own farmers
 Trade issues
• Tariff classification for biofuels under the HS system
used by the WTO is currently inconsistent and in need of
resolution.
• Ethanol falls under HS chapter 22 classification as an
agricultural good and there is no distinction made
between non fuel and fuel uses.
• Biodiesel on the other hand falls under HS Chapter 38
as an industrial good.
• The EU like other WTO members is currently looking into
the advantages, disadvantages and legal implications of
having separate customs codes for biofuels.
• The question of subsidies for feedstocks could become
contentious in future. So far this has not been an issue,
because biofuel trade has been small, and most
countries have used subsidies. But could become an
issue in future.
 Impacts on world hunger
• UN Special Rapporteur on the Right to Food
– Biofuels “a crime against humanity”
– has called for 5-year moratorium on increased biofuel production
• While the landless poor – net food consumers – are
likely to be hurt by higher commodity prices, many poor
farmers stand to benefit from increased bioethanol
demand
• Would all farmers fare equally?
– Benefits will depend on a farmer’s ability to increase production;
whether a farmer produces crops or livestock (livestock
producers could suffer from higher feed prices); and what type of
crop or livestock the farmer produces (poultry and swine
producers could see a rise in feed prices), among other factors.
 Environmental impacts
• NGOs have expressed concern about
potential negative environmental impacts
– In EU, concerns over water resources,
additional fertiliser use, loss of biodiversity
from increased arable cultivation
– Raises opportunity cost of agri-environmental
measures
– In tropics, loss of rain forest
 Environmental impacts
• In response, the European Commission plans to
introduce legislation for a sustainability scheme aimed at
encouraging the use of biofuel production systems that
are produced in a sustainable way.
– setting of minimum sustainability standards for biofuels
– only biofuels that meet these standards will count towards the
10% target
– only these biofuels will be eligible for tax exemptions and only
they will count towards biofuel obligations
– rules will apply equally to domestic and imported biofuels
• But how can sustainability standards for biofuels be
defined? How can they be implemented without
interfering with free trade? How can they be
implemented in an effective way?
V. Future challenges
 Concluding reflections
• Economic research needs
– Improved understanding of viability of biofuels at
higher crude oil prices
– Improved estimates of the GHG benefits and other
environmental effects of biofuel production in order to
estimate appropriate level of subsidy payments for
environmental externalities (+ve and –ve)
– Improved modelling of impacts on agricultural
markets
– Improved understanding of impacts on world poverty
and hunger
• Despite uncertainties, bioenergy production will
become a major income source for EU farmers
in the medium term
 Concluding reflections
• Mandatory targets vs tax reliefs
– Mandatory targets may conceal economic cost of
subsidies, but have advantages of certainty and that
they limit over-compensation to producers when crude
oil prices are high
– Neither intervention distinguishes between biofuels
according to their feedstocks or production methods,
despite wide differences in environmental costs and
benefits
• Domestic production vs trade
– If EU insists on meeting biofuel targets through local
production, there would be significant impacts on food
markets and environment
 Concluding reflections
• Prospects for second generation biofuels
– But still quite land-intensive, even if non food
producing land can be used
– Some doubt if they will ever be economically viable
given the logistical challenge of transporting low value
biomass material to large production facilities
• Biomass for energy or biofuel
– Raising crops to produce biomass for energy can
reduce GHG emissions by much more than biofuels
– However, biofuels are most obvious (only?) current
alternative to fossil fuels which account for up to 25%
of GHG emissions