OECD Report: Government Biofuel Policies Costly and Ineffective

16 July 2008

The estimated impact on ethanol production of the removal of biofuel support policies, 2013-2017 average. Click to enlarge.

Government support of biofuel production in OECD countries is costly, has a limited impact on reducing greenhouse gases and improving energy security, and has an impact on world crop prices, according to a new study by the OECD’s Directorate of Trade and Agriculture.

The report, Economic Assessment of Biofuel Support Policies, estimates that in the US, Canada and the European Union, government support for the supply and use of biofuels will rise to around US$25 billion per year by 2015 from about US$11 billion in 2006. It is estimated that these support policies would reduce greenhouse gas emissions from transport fuel by only 0.5% to 0.8% by 2015.

Support policies include budgetary measures, either as tax concessions or direct financial support for biofuel producers, retailers or users. Blending or use mandates require that biofuels represent a minimum share of the transport fuel market and result in increased fuel costs to consumers due to the higher production costs of biofuels. Trade restrictions, mainly in the form of import tariffs, protect the domestic industry from foreign competitors but impose a cost burden on domestic biofuel users and limit development prospects for alternative suppliers.

The report estimates that biofuel support costs between US$960 to US$1,700 per tonne of greenhouse gases (carbon dioxide equivalent) saved.

The sometimes predicted improved economic viability of biofuel production and use associated with higher crude oil prices so far has not materialized in many countries, the report notes.

Most production chains for biofuels have costs per unit of fuel energy significantly above those for the fossil fuels they aim to replace. Despite the rapid and substantial increase in crude oil prices and hence in the costs for gasoline and fossil diesel, the cost disadvantage of biofuels has widened in the past two years as agricultural commodity prices soared and thereby feedstock costs increased.

—Economic Assessment of Biofuel Support Policies

The report calls on governments to refocus policies to encourage lower energy consumption, particularly in the transport sector.

The stated rationale for support to biofuels generally includes the reduction of fossil energy use. A priority focus therefore needs to be given to reducing energy consumption. This is especially important in the transport sector where the growth in energy use and related environmental problems is most pronounced. In particular, this includes the gradual move from highly energy intensive modes of transport to less intensive ones, and improvement in fuel efficiency in all transport sectors. Generally the costs of reducing GHG emissions by saving energy are lower than by switching to alternative energy sources, in particular biofuels. It should also be clear that, while the strong increase of GHG emissions in the transport sector is of particular concern, the costs of emission reductions are often substantially lower in other sectors, e.g. by better insulation of buildings.

To the extent that a reduction of fossil fuel use and GHG emissions is intended to be achieved by means of alternative transport fuels, a clear focus needs to be placed on those alternative fuels that provide high improvement rates. Defining minimum criteria for these variables, as it has been done in the context of the US Energy Independence and Security Act and as foreseen for the new EU Directive on Renewable Energy, is an important step in the right direction. Given the uncertainties on, and the variability of, the performance of different biofuel chains, these minimum criteria should be set at rather ambitious levels and should be tightened over time to ensure the full deployment of technological progress in this rapidly developing area.

—Economic Assessment of Biofuel Support Policies

The reduction of greenhouse gas emissions is a primary reason for current biofuel policies but the savings are limited. Ethanol from sugar cane—the main feedstock used in Brazil—reduces greenhouse gas emissions by at least 80% compared to fossil fuels. But emission reductions are much smaller from biofuels based on feedstocks used in Europe and North America. Biofuels produced from wheat, sugar beet or vegetable oil rarely provide emission savings of more than 30 to 60% while savings from corn-based ethanol are generally less than 30%.

The impact of current biofuel policies on world crop prices, largely through increased demand for cereals and vegetable oils, is significant but should not be exaggerated, according to the report. Current biofuel support measures alone are estimated to increase average wheat prices by about 5%, maize by around 7% and vegetable oil by about 19% over the next 10 years.

Taking into account the 2007 US Energy Independence and Security Act with its 36 billion gallon renewable fuel mandate, and the proposed EU Directive for Renewable Energy, 13% of world coarse grain production and 20% of world vegetable oil production could shift to biofuel production in the next 10 years, up from 8% and 9% in 2007, respectively.

The report also calls for more open markets in biofuels and feedstocks in order to improve efficiency and lower costs. Further, research to accelerate development of second-generation biofuels that do not require commodity feedstocks is suggested.

The 30 member countries of the OECD (Organization for Economic Co-operation and Development) are: Australia, Austria, Belgium, Canada, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, Korea, Luxembourg, Mexico, the Netherlands, New Zealand, Norway, Poland, Portugal, Slovak Republic, Spain, Sweden, Switzerland, Turkey, the United Kingdom, and the United States.

Resources

• Economic Assessment of Biofuel Support Policies (report)

• Economic Assessment of Biofuel Support Policies (presentation)