IEA chief economist: EU, US should scrap tariffs and subsidies, import biofuels from the South

President Bush visits Brazil this week and is expected to hear President Lula lobbying him to end American ethanol tariffs. Brazil's push is now receiving the support from an unlikely quarter - the authoritative International Energy Agency (IEA), the independent energy adviser to 26 of the most industrialized nations.

The IEA understands its case: it has been studying all aspects of biofuels and bioenergy in-depth for years now, with dedicated scientific Task Forces (see IEA Bioenergy), which unite top experts in the field. Bioenergy Task 40 - which analyses the potential for sustainable international trade in biofuels - has made the case very clearly: a large amount of green fuels can be produced in a sustainable manner, without threatening the food security of people and without threatening ecosystems and biodiversity, in the Global South and exported efficiently to world markets (earlier post). Other Bioenergy Task forces come to the same conclusion. Europe and America do not have this capacity.

Earlier we reported on how the IEA's very chief, Claude Mandil, knowing the science, called on Europe and the United States to end their trade distorting subsidies for biofuels that can not compete in the market. He also urged the large consumers to import green fuels from the developing world instead (earlier post).

Now the IEA's Chief Economist, Fatih Birol, is joining this position: biofuels made in the EU and the US, using food grains, make no economic sense. They are inefficient and cannot compete against biofuels made in the South, where good agro-ecological conditions and suitable crops result in efficient fuels. Moreover, inefficient biofuels made in the US and the EU do not really contribute to reducing greenhouse gases, whereas those made in the developing world do.

For all these reasons, Birol says "the U.S. and Europe should scrap import duties on developing countries and in the longer term reconsider all subsidies."

The case for a 'Biopact' of sorts (see our Biofuels Manifesto) is increasingly being strengthened by scientists, economists, and energy experts alike.

The recent dip in oil prices proves the point: the EU/US government policy-fuelled rush to produce biofuels is backfiring as it pushes up costs and makes their domestic biofuels far less competitive. A looming biofuels glut plus falling rival crude oil prices, down a fifth on last summer's highs, mean producers can less easily pass on their spiraling costs. The present dip will last until demand rebounds, perhaps as far off as the end of the decade. Falling oil prices are hurting sales of biofuel which was barely competitive before, pricking European and U.S. euphoria built on subsidies and ambitious targets.

Profits are still to be had but a continuing scramble for raw materials like corn, soy and wheat will knock margins as producers re-negotiate more pricey supply contracts.

Still thriving, however, is biofuels pioneer Brazil - the symbol for the fact that biofuels made in the South make sense -, which has a booming domestic market where more than two-thirds of all new cars can run on either gasoline or ethanol:
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Biofuels costs will likely fall and demand and prices rise in Europe and the U.S. as better infrastructure and economies of scale kick in over the next two to three years, analysts say.

U.S. Democrats last week proposed a $15 billion energy plan, including boosting the country's network of ethanol service stations, for example.

But biofuels future also depends on oil prices, and analysts cannot guarantee crude oil will stay above the $60-$65 where it is trading now and undercutting biofuels - excluding subsidies - outside Brazil, according to the IEA.

Another factor is input cost: but sugar, corn, grain and palm oil prices are all seen holding or rising in the near term.

A new generation of biofuels made from waste like straw and wood chips would ease input shortages, but is not expected to be commercially available before 2009 and possibly much later.

In the United States soaring demand is expected to beat farmers' efforts to keep up, with high corn prices likely in the near-term, not least after Bush in January asked Congress to back a near 5-fold increase in the use of biofuels by 2017.

The biofuels craze is risking a surplus in the United States and elsewhere.

Investors F&C, with 155 billion euros ($204.9 billion) under management, says it has exited investments including the second biggest U.S. ethanol producer VeraSun, because of the prospective over-supply and margin squeeze.

A glut is also expected in parts of Europe, where biofuels support is switching from tax credits to blending targets, and notably Germany where higher taxes have knocked sales by as much as a third this year so far.

"In the very short-term we have far too much production capacity," said the EBB's Garofalo.

Elsewhere, Spanish energy firm Abengoa is mulling suspending output at its biggest ethanol plant, partly on higher grain prices and partly because the domestic market is saturated under present blending labeling rules.

Oil major Total has put on hold a biodiesel project with Finnish refiner Neste Oil, while prospective British ethanol producer Ensus postponed last December plans to list on London's Alternative Investment Market.