The report is the first of four studies commissioned by the European Commission in response to the Council and Parliament’s request to examine the indirect land use change effects of biofuels. The Commission decided to release this study immediately after its completion in order to ensure full transparency on this important issue. The other three studies are still underway.

Background. In 2009, the European Union adopted the Renewable Energy Directive (RED) which included a 10% target for the use of renewable energy in road transport fuels by 2020. Renewable energy options for road transport included first- and second-generation biofuels and electricity. The RED also established environmental sustainability criteria for biofuels consumed in the EU: a minimum rate of direct GHG emission savings (35% in 2009 and rising over time to 50% in 2017) and restrictions on the types of land that may be converted to production of biofuels feedstock crops (direct land use changes only).

The revised Fuel Quality Directive (FQD), adopted at the same time as the RED, includes identical sustainability criteria and targets a reduction in lifecycle greenhouse gas emissions from fuels consumed in the EU by 6% by 2020. The European Parliament and Council asked the Commission to examine the question of indirect land use change (ILUC), including possible measures to avoid this, and report back on this issue by the end of 2010. In response, the Commission launched the four studies.

The IFPRI study. The primary objective of this study were to analyze the impact of possible changes in EU biofuels trade policies on global agricultural production and the environmental performance of the EU biofuel policy as concretized in the RED. The study pays particular attention to the ILUC effects, and the associated emissions, of the main feedstocks used for first-generation biofuels production.

The study uses a global computable general equilibrium model (CGE)—an extensively modified version of the existing MIRAGE model—to estimate the impact of EU biofuels policies. The IFPRI team developed a new modeling of energy demand which allows for substitutability between different sources of energy, including biofuels.

They extended the underlying Global Trade Analysis Project (GTAP) database to separately identify ethanol (with four subsectors), biodiesel, five additional feedstock crops sectors, four vegetable oils sectors, fertilizers, and the transport fuel sectors. The model was also modified to account for the co-products generated in the ethanol and biodiesel production processes and their role as inputs to the livestock sector. Fertilizer modeling was also introduced to allow for substitution with land under intensive or extensive crop production methods.

Another innovation in the model is the introduction of a land use module which allows for substitutability between land classes, classified according to agro-ecological zones (AEZs), and land extension possibilities. The team assessed greenhouse gas emissions (focusing on CO₂) associated with direct and indirect land use changes as generated by the model for the year 2020, and separately quantified the marginal ILUC for each feedstock crop.

The team derived the 5.6% share for first-generation land-using biofuels by deducting the expected share in 2020 of other renewable road transport fuels from the 10% RED target. (Non land-using first generation biofuels such as recycled waste oil and animal fats are not included in the 5.6%). The authors also examined the impact of a change in the EU biofuels trade policy regime, with an elimination of import tariffs, in a full multilateral scenario and in a bilateral scenario (with the MERCOSUR countries only).

Among the findings:

• ILUC does indeed have an important effect on the environmental sustainability of biofuels. However, the size of the additional EU 2020 mandate, under current assumptions regarding the future evolution of renewable energy use in road transport, is sufficiently small (5.6% of road transport fuels in 2020) and does not threaten the environmental viability of biofuels. If the underlying assumptions should change however, either because the mandated quantities turn out to be higher and/or because the model assumptions and parameters need to be revised, there is a real risk that ILUC could undermine the environmental viability of biofuels.

• Nonlinear effects, in terms of biofuels volumes and behavioral parameters, pose a risk.

• In terms of trade policy, the main result is that biofuels trade liberalization would lead to slightly more ILUC effects through deforestation outside the EU (especially in Brazil). But this is compensated by the use of a more efficient biofuel (sugar cane ethanol) that improves emissions savings and results in an improved CO₂ emission balance. At the same time such an effect can take place only if the share of ethanol in total biofuel consumption can increase drastically from 19% to 45% by 2020.

• Effects on food prices will remain limited (maximum +0.5% in Brazil, +0.14% in Europe). Although EU biofuel policy has no significant real income consequences for the EU, some countries may experience small negative effects, particularly oil exporters (-0.11% to -0.18% of real income by 2020) and Sub-saharan Africa (-0.12%) due to the fall in oil prices and rise in food prices, respectively.

• Analysis of ILUC by crop indicates that ethanol, and particularly sugar-based ethanol, will generate the highest potential gains in terms of net emissions savings. For biodiesel, palm oil is the efficient feedstock in terms of CO2 emissions, even if peatland emissions are taken into account.

• The mix between ethanol and biodiesel is important. Depending on the flexibility allowed for the ratio between the two biofuels, land use effects and trade policy effects can be very different.

Resources

• Global trade and environmental impact of the EU biofuels mandate (March 2010)