IMF calls for free trade in biofuels to tackle rising food prices

The International Monetary Fund (IMF) joins the call for the EU and the US to remove the trade barriers and subsidies that protect their inefficient biofuels. If they do not do this, it writes in its twice-yearly World Economic Outlook, food prices will rise further, damaging the world's poor who spend most of their budget on this most basic of goods.

The US and EU make biofuels out of food crops like corn and wheat. These fuels are not efficient, not competitive, do not tackle greenhouse gas emissions and are not very environmentally friendly. Biofuels from countries in the South, such as sugarcane ethanol made in Brazil, on the other hand are "cheaper, more efficient and environmentally less damaging." In fact, the difference is stark: biofuels in Brazil have had no impact on rising food prices and have helped push inflation down because they are much cheaper than petroleum fuels. In the EU and the US, biofuels only survive with high levels of subsidies, tax breaks and protectionist measures.

The IMF therefor pleads for free trade in biofuels:

If tariffs and subsidies in the United States and EU were eliminated, biofuels would likely be produced largely by lower-cost producers such as Brazil and other Latin American countries. Similarly, under such a scenario, biodiesel would be produced mostly by Malaysia, Indonesia, India, and some African countries.

In sum, while we wait for more efficient fuel technologies to emerge, the first-best policy would be to allow free trade in biofuels. This would benefit the environment as well as make biofuel economically more viable.

The IMF recognizes the potential of biofuels to help social and economic development in poor countries:

developing green fuels could provide poor, largely agrarian countries with new sources of income and employment, while reducing polluting emissions from aging vehicles.

In rich countries, the future of the biofuel sector depends largely on the provision of tax breaks to agricultural producers. Without such advantages, according to the IMF, production costs would be prohibitive:
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The current rise in food prices reflects a combination of factors, says the IMF. Higher biofuel demand in the United States and the European Union (EU) has not only led to higher corn and soybean prices, it has also resulted in price increases on substitution crops and increased the cost of livestock feed by providing incentives to switch away from other crops.

Poor harvests in many countries and outbreaks of animal diseases (for example in China) have led to further price hikes. Adding to these pressures on commodity prices is increased demand from emerging markets, particularly China and India.

Higher international food prices have put upward pressure on inflation, both directly and through their impact on nonfood prices. The direct first round contribution of food to inflation for the world as a whole has risen from about one-fourth in 2000-06 to more than one-third in the first four months of 2007, with the impact being higher for poorer countries.

The IMF's analysis finds that food prices have had a discernible impact on non-food price inflation in many emerging and low-income countries.

Using biofuels to supplement transportation fuels at modest blends—under current technology—has its pros and cons. Biofuels can supplement traditional fuels while contributing to rural development. However, until new technologies are developed, using food to produce biofuels might further strain already tight supplies of arable land and water all over the world, thereby pushing food prices up even further.

Realizing the potential benefits of biofuels requires better policies. Brazilian ethanol derived from sugarcane, for example, is less costly to produce than corn-based ethanol in the United States, and also yields greater environmental benefits. However, generous tax credits for blenders, tariffs on imported biofuels, and agricultural support for grain farmers in the United States and the EU make it difficult for low-cost foreign biofuel producers to compete in these markets.

References:
IMF: World Economic Outlook - October 17, 2007.