IISD report challenges EU biofuel subsidies, calls for end to tariff

A new report gives yet another boost to the idea of a Biopact, which consists of wealthy countries in the North importing efficient and sustainable bioenergy and biofuels made in the South, as a way of creating a new trade relationship in which development, poverty alleviation and energy security take center stage. In order for such a pact to succeed, trade reform is needed and subsidy schemes in the EU and the US must be changed.

The European Union's support for biofuels may not be the most cost-effective way for the 27-country bloc to tackle climate change, the new study concludes. Its lead author argues that the EU better import sustainable biofuels made in poor countries like Brazil, because they are highly energy efficient, reduce greenhouse gas emissions far more and are highly competitive compared to biofuels made in the EU. The same researchers, working for the Global Subsidies Initiative (GSI), earlier analysed biofuel subsidies and their trade distorting effects in the US and came to similar conclusions (previous post).

Last year EU governments spent at least €3.7 billion ($5.2 billion) on subsidising biofuel production. Such support is likely to grow in the coming years because the Union has set a strategy of raising the quantity of road fuel generated from biofuels from its present level of 2 percent to 10 percent by 2010.

But the International Institute for Sustainable Development (IISD) in Geneva has queried if allocating large amounts of public funds to EU biofuels is desirable. In a study titled Biofuels At What Cost? Government Support for Ethanol and Biodiesel in the European Union [*.pdf] it calculates that the cost of using ethanol from sugar beet to avoid emitting one tonne of carbon dioxide (CO2) - the main gas blamed for climate change - ranges from slightly less than €600 to €800 ($760 to $1,000).

Producing biofuels from crops grown in the EU is generally an energy-intensive business, which in itself makes use of considerable quantities of fossil fuels. As a result, the study says, the overall saving of fossil fuels brought by biofuels may be low, and introducing carbon or pollution taxes may prove more effective.

Generally, biofuels made from high-sugar crops such as sugar cane or high yielding oil crops like palm oil can contribute to higher savings on fossil fuels than those made from oilseeds or grains. More than 90 percent of the 6 million tonnes of biofuels produced in the EU during 2006 was made from rapeseed oil.

Ron Steeblik from the GSI urged the Union to eliminate tariffs on imported ethanol, a fuel made from sugar. Ethanol with an alcohol content of 80 percent is subject to a tariff of 19.20 euros (27 dollars) per 100 litres. 'Denatured' alcohol, which has a lower content, is taxed at just over half that level.

These taxes are inimical to poor countries like Brazil. This is contrary to the EU's general policy of trying to reduce tariffs. It is far higher than any tariff on industrial goods and is an old-fashioned instrument for protecting agriculture.

Import tariffs on ethanol from Brazil, one of the most efficient producers of biofuels, reduce the amount of sales that can be made by a developing country. The EU's policy is incoherent. If biofuels are so good, why is it taxing them so heavily at the border? - Ron Steenblik, lead author, Global Subsidies Initiative

The EU executive, the European Commission, is expected to propose a new law setting down the criteria for supporting biofuels by the end of this year:
energy :: sustainability :: ethanol :: biodiesel :: biomass :: bioenergy :: biofuels :: subsidies :: trade :: tariff :: EU ::

Officials are examining how to prevent support for biofuels in cases where their production involves the emission of more greenhouse gases than would eventually be saved by using them instead of pure fossil fuels.

However, there are some who support biofuel subsidies. Lena Ek, a Swedish Liberal member of the European Parliament (MEP), said that "biofuels will be there as part of the solution" to global warming. She asked, therefore, if subsidising them is "really a bad thing."

Ethanol has proven economically beneficial to Brazil, she added. "Brazil has got out of the fossil economy," she noted. "Last year it paid off the debt it owed to the World Bank."

Swedish conservative MEP Anders Wijkman said: "We need subsidies if we want new energy in the market place. But the question is how do we lock ourselves into a production scheme that is really feasible. The logical question is how to ensure the end result really eliminates carbon dioxide."

A European Commission official said that there is a "serious misunderstanding" about the factors motivating biofuels policy in the Union. One widely held view, he said, is that the principal objective is to support the income of crop farmers. "It has nothing to do with that," the official said.

The real issue for the Union, according to the official, is having a "policy in place" to meet an increased demand for biofuels.

But Ron Steeblik said that high subsidies for biofuels "could potentially create a lot of instability for other markets, including the agriculture market."

His colleague at the Global Subsidies Initiative David Runnalls said that the EU should beware of aping the support system for biofuels in the U.S. He argued that it is preferable to support research into biofuels, as has been done in Canada, than to link support for them to the level of production, the method favoured in Washington.

In some parts of America, he said, subsidies account for 2.40 dollars of the price of a three-dollar gallon of biodiesel.

"There is a potentially distorting effect of biofuels wrongly applied in the wrong place and the wrong time," said Runnalls. "We are not opposed to subsidies. What we are opposed to is governments spending them in an ill-advised fashion."

References:
IISD: International Institute for Sustainable Development's Global Subsidies Initiative releases Biofuels – At What Cost? Government support for ethanol and biodiesel in selected OECD countries - October 3, 2007.

Global Subsidies Initiative: Biofuels At What Cost? Government Support for Ethanol and Biodiesel in the European Union [*.pdf] - October 3, 2007?

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