Paper warns against subsidies for inefficient biofuels in the North, calls for liberalisation of market - major boost to idea of 'Biopact'

The case for a 'Biopact' has received another major boost today by the release of a report that assesses the damaging impacts of subsidies and trade barriers for biofuels produced in the North and that calls for a liberalisation of the market. The study was written for the 'OECD Roundtable on Sustainable Development' (no immediate relation with the OECD) and states that biofuels made from low yield crops such as corn or wheat can only play a marginal role in reducing greenhouse gas emissions; such fuels result in increased food prices; and subsidies and trade barriers prevent competitive and climate-friendly biofuels made in the South from entering the market.

The report titled 'Biofuels: is the cure worse than the disease?' [*.pdf] says that only biofuels produced in the South - such as sugarcane or sorghum based ethanol - are effective at reducing greenhouse gases, do not immediately impact food prices, are energy efficient and do not require damaging subsidies.

The logic would thus be to create a pact between the North and the South, in which the North stops subsidizing its inefficient and damaging biofuels and instead imports the sustainable, energy efficient and competitive fuels from the South. The governments of Sweden and the Netherlands have called for such a relationship. They joined forces to commission a OECD study on biofuel subsidies and tariffs which will appear in 2008 (earlier post).

The new paper, written by Richard Doornbos and Ron Steenblik, indeed calls for a liberalisation of the biofuels market, and repeats what many analysts, including top researchers from the IEA, the FAO, the WorldWatch Institute and Biopact, have said:

Liberalising trade in biofuels is difficult but essential for global objectives. Ethanol from sugarcane grown in Brazil is by far the cheapest biofuel today. South America and Africa have a large potential to increase biofuel production.

The world has a huge technical potential for the production of sustainable biofuels. Assessments by scientists working for the IEA put it at around 1400 Exajoules by 2050, under an optimal scenario. This amount can be produced without deforestation and without threatening the food, fodder and fiber needs of growing populations. But the bulk of this potential can be found in Africa and Latin America. A great number of countries there have the capacity to replace all their petroleum fuels with biofuels, with enough sustainable potential to spare to supply overseas markets (earlier post and here).

The question now is: are these fuels going to be produced in an economical, sustainable and socially acceptable way? Will the North open its markets for biofuels made in the Global South?

Subsidies and trade barriers are inefficient
Key to his question is the problem of government policies and subsidies, which play a large role in the financial attractiveness of biofuels production and trade. Domestic production is supported through both border protection and production subsidies:

Production subsidies are difficult to quantify, but are running in the billions of dollars per year (over $7 billion in United States alone). The leading OECD countries producing ethanol apply import tariffs that add at least 25% to the cost of imports. As a result, current trade is only about 10% of the world’s biofuel consumption. This is an inefficient outcome, as biofuels produced in tropical regions from sugarcane and vegetable oils have a considerable cost advantage over those derived from agricultural crops in temperate zones.

Regulations mandating usage or blending percentages and fuel-tax preferences to stimulate production are used by many countries:
energy :: sustainability :: ethanol :: biodiesel :: biomass :: bioenergy :: biofuels :: efficiency :: subsidies :: tariffs :: trade ::

In most cases these policy measures do not distinguish among biofuels according to their feedstocks or production methods, despite wide differences in environmental costs and benefits. This implies that governments could end up supporting a fuel that is more expensive and has a higher negative environmental impact than its corresponding petroleum product.

Subsidies and trade barriers are not cost-effective
Neither should current biofuel support policies be championed for their supposed capacity to reduce GHGs or improve energy security. The cost of obtaining a unit of CO2-equivalent reduction through subsidies to biofuels is extremely high, well over $500 per tonne of CO2-equivalent avoided for corn-based ethanol in the United States, for example, with other researched countries not performing much better. (Countries in the South do score favorably).

The score is also not very favourable in terms of displacing fossil fuels. In most cases the use of biofuels roughly doubles the cost of transportation energy for consumers and taxpayers together.

Indeed, most current policies fare poorly when measured by their cost effectiveness, and thus court public backlash. Biofuel policies may appear to be an easy way to support domestic agriculture against the backdrop of international negotiations to liberalise agricultural trade, but to measure their cost effectiveness a clear definition of the desired policy objectives is needed.

Subsidies and trade barriers are on a colision course
The current policy response to the environmental consequences of biofuel production is to develop criteria designed to ensure a sustainable production of biofuels. However, biofuel mandates are still targeting ambitious market shares without an in-depth understanding of a sustainable production level and from where this biofuels could be supplied.

There is a serious risk that biofuel quotas for demand are higher than potential sustainable supply, creating a strong incentive to ‘cheat’ in the system.

Liberalising trade in biofuels essential
Ethanol from sugarcane grown in Brazil is by far the cheapest biofuel today. South America and Africa have a large potential to increase biofuel production. Ethanol may also be efficiently produced in South-East Asia and Australia, though the availability of suitable land will place tighter constraints on production there. Production in North America and Europe is considerable in the current market but its long term potential is not sufficient to realise the objectives set.

Trade between the efficient producers and OECD countries is therefore mutually beneficial. Nevertheless, it is also mostly absent as a result of the import tariffs and production subsidies that protect domestic consumers and keep prices artificially high.

Liberalising the market will prove extremely difficult given the Gordian knot with agricultural markets that has since long been characterised by agricultural subsidies, high import tariffs, export subsidies and preferential treatment arrangements. A lack of progress on this front should be translated into a lowering of ambitions.

At the same time, according to Jacques Diouf, Director-General of FAO, bioenergy provides a chance to enhance growth in many of the world’s poorest countries by bringing about an agricultural renaissance and supplying modern energy to a third of the world’s population. This means not only improving export opportunities for developing countries to the industrialised world but, perhaps more importantly, helping them to use biomass to produce their own electricity.

Certification useful but cannot be trusted
Certification of biofuels is a useful tool for promoting sustainable practices, as reliable certification could provide a way to discriminate between the ‘good’ and the ‘bad’. There are, however, serious questions that must be raised about the effects and effectiveness of certification schemes.

First, enforcement and chain-of-custody control could prove to be an enormous challenge, as recent experiences with the certification of wood products has shown. Second, the effectiveness of certification could be undermined by displacement of biofuel products. As long as certification is not a multilateral requirement but conducted on a country by country basis, it will merely lead to a segmentation of the market, not a reduction of unsustainable practices. Third, without a uniform certification scheme exporters will face increasing costs and bureaucratic complexity. A final limitation is that certification schemes do not easily capture knock-on effects on agricultural markets.

Moreover, discrimination of trade on the basis of production methods is highly contentious and has been the nub of several precedent-setting trade disputes at the WTO. Misuse of certification schemes and sustainability standards regulations provide a continuing challenge to fair and indiscriminate trade. The question of if, and under what design criteria, trade rules should be allowed to exclude fuels that fail to meet minimum performance levels from mandatory schemes or preferential tax treatments should be addressed urgently. From an environmental perspective, only worldwide certification that is effectively enforced stands a chance of making a difference.

Selective certification gives the appearance of sustainable production to some while allowing the practice of unsustainable production to continue for others. Though theoretically possible, reliance on certification schemes to ensure the sustainable production of biofuels is not a realistic safeguard.

Policy implications for the near future
To harness the real potential of bio-energy and biofuels an important shift in current expectations and policies is necessary. Based on the findings in this paper, the following policy directions could be debated:

• The strategic importance of and objectives for first generation biofuels need to be refocused and refined. International organisations such as the IEA, OECD, FAO and World Bank need to continue to adopt a soundly-based, common understanding of the limits of both traditional and second-generation biofuels in their analysis of energy futures.
• Priority should be given to research into second-generation biofuels — not only their technologies, but also the assumptions regarding the cost and long-term availability of feedstocks. Domestic policy efforts should be redirected from (subsidy) instruments aimed at the deployment of biofuels in general back to the R&D and demonstration phase of advanced biofuel technologies.
• Further research is needed to verify the environmental benefits for each biofuel production pathway, feedstock and location.
• Current biofuel support policies place a significant bet on a single technology despite the existence of a wide variety of different fuels and power trains that have been posited as options for the future. National governments should cease to create new mandates for biofuels and investigate ways to phase them out, preferably by replacing them with technology-neutral policies such as a carbon tax. Such policies will more effectively stimulate regulatory and market incentives for efficient technologies.
• Policy efforts to develop certification of biofuels must be unified. Only a global and coherent approach stands a chance of making a positive difference.
• Certification of biofuels - and the design criteria to use them in combination with GHG emissions reduction regulations and preferential tax treatments — should be urgently placed on the WTO agenda. A special committee on trade and environment has been created to channel these discussions and could possibly be used to this end.
• The WTO should also be used to step up efforts to lower trade barriers to biofuels imports, allowing developing countries that have ecological and climate systems more suited to biomass production to use their comparative advantage.
• More work needs to be done to assess the relative importance of biofuels in developing countries as an export commodity and as a means to provide excess to modern, more efficient and less polluting energy sources. It may be that in many developing country circumstances it would be more productive to channel efforts to developing other forms of bioenergy than liquid fuels. More help should be provided to developing countries in identifying opportunities to use biofuels to enhance economic progress.

The report will be discussed during a meeting of the Roundtable on Sustainable Development, to be held today and tomorrow.

References:
Richard Doornbosch and Ronald Steenblik, "Biofuels: Is the cure worse than the disease?", Round Table on Sustainable Development, Paris, 11-12 September 2007

Biopact: Sweden calls for international biofuels trade - August 11, 2007

Biopact: FAO chief calls for a 'Biopact' between the North and the South - August 15, 2007

Biopact: IEA chief economist: EU, US should scrap tariffs and subsidies, import biofuels from the South - March 06, 2007

Biopact: IEA study: large potential for biomass trade, under different scenarios - May 13, 2007

Biopact:Brazil initiates WTO case against U.S. ethanol and farm subsidies - August 20, 2007

Biopact: Subsidies for uncompetitive U.S. biofuels cost taxpayers billions - report - October 26, 2006

Biopact: A look at Africa's biofuels potential - July 30, 2006