Liquid Biofuels for Transport Prospects, risks and opportunities
2. What are the economic and policy factors influencing biofuel development?
- 2.1 How are agricultural, energy and biofuels markets linked?
- 2.2 What are the drivers of biofuel policies?
- 2.3 What policy measures are influencing biofuel development?
- 2.4 How costly are biofuel policies?
- 2.5 How viable are liquid biofuels?
2.1 How are agricultural, energy and biofuels markets linked?
Agriculture both supplies and uses energy, so agriculture and
energy markets are closely linked.The rapidly increasing demand
for liquid biofuels is
connecting agriculture and energy more closely than ever, both
through market forces and government policies encouraging
Liquid biofuels such as
bioethanol and biodiesel
which are derived from agricultural crops compete with
fossil fuels on
energy markets. As
biofuel volumes produced
remain small compared to the global market of petroleum fuels,
oil prices are an important driver of the prices of biofuels and
of their agricultural
Agricultural crops grown for energy production also compete
with food crops for resources. For example, a given plot of land
can be used to grow maize for
ethanol or for food.
Farmers will sell their harvest to an ethanol or
biodiesel processor if the
price received is higher than what they could obtain from other
sources such as food processing. As a consequence, when the
value of biofuel
feedstocks is high, prices
for other agricultural crops tend to rise. For this reason,
producing second generation
biofuels from non-food
crops, such as wood or grasses, will not necessarily eliminate
the competition between food and fuel.
With the exception of bioethanol from sugar cane in Brazil,
biofuels have not generally
been competitive with
fossil fuels without active
government support to promote their development
and subsidise their use, even at high crude oil prices. In
general, granting subsidies
to a sector that cannot ultimately achieve economic viability is
not sustainable and may
simply transfer wealth from one group to another while imposing
costs on the economy as a whole Subsidies can also have complex
impacts on producers and consumers in other countries.
2.2 What are the drivers of biofuel policies?
The main drivers behind government support for
OECD countries are
climate change and energy
security, and the political will to support the farm sector
through increased demand for agricultural products.
Energy Security Secure access to energy is a longstanding
concern in many countries. The recent increases in oil and other
energy prices have increased the incentive to promote
alternative sources of energy. Strong demand from rapidly
developing countries, especially China and India, is adding to
concerns over future energy prices and supplies. The transport
sector depends mainly on oil. Liquid
biofuels represent the main
alternative source that can supply fuels suitable for use in
current vehicles, without radical changes to transport
Climate change There is
increasing concern about human-induced climate change, and the
effects of greenhouse gas
emissions on rising global temperatures. Bioenergy is often seen
as a way to reduce greenhouse gas emissions.
However, the extent to which the production and use of a given
greenhouse gas emissions
compared to the production and use of petroleum based fuels
varies significantly depending on factors such as land-use
change, type of feedstock,
agricultural practices, conversion technology and end use.
Recent analyses suggest that large-scale expansion of
biofuel production could
even cause a net increase in
Farm Support Supporting the farm sector has been a key
objective of biofuel
policies in several developed countries, and rural development
is also being cited as a driver by developing countries. In
countries with heavily subsidised farm sectors, bioenergy is
seen as a way of revitalising agriculture. The possibility of
boosting farm incomes while reducing income support and
subsidies has considerable
appeal for policy-makers, although the latter part of this
strategy has been difficult to achieve.
2.3 What policy measures are influencing biofuel development?
Policies on agriculture, energy, transport, environment and
trade all have an influence on
biofuel production. Schemes
to promote and support
biofuels have been
introduced both in OECD
and developing countries. Without these incentives, widespread
biofuel production would in most cases not have been
The policies used by governments to promote and support
biofuel development include
various instruments. They can support the biofuel supply chain
at different stages.
- Agricultural policies existed well
before the introduction of
biofuels. They include
and price support mechanisms which directly affect
production levels and prices of
biofuel crops as well
as production systems and methods. These policies also have
implications at international level for agricultural trade
and geographical pattern of agricultural production.
- Blending mandates defining the
overall amount or proportion of biofuel that must be blended
with petrol and diesel are increasingly being imposed.
- Subsidies and support for the
distribution and use of biofuels are key policy components
in most countries that promote the use of biofuels. Several
countries are subsidising or mandating investments in
infrastructure for biofuel storage, transportation and use,
especially towards bioethanol which requires major
investments in equipment.
- Tariffs or import barriers are duties
usually imposed on imported goods. They are widely used on
biofuels to protect the national agriculture and biofuel
sectors, support domestic prices of biofuels and provide an
incentive for domestic production.
- Tax incentives or penalties are among
the most widely used instruments for stimulating demand for
biofuels and can drastically affect the competitiveness of
biofuels compared to other energy sources.
- Research and development is generally
aimed at improving the efficiency and cost-effectiveness of
biofuel production, and identifying sustainable
developed countries an increasing proportion of public
research and development funding is directed towards
second-generation biofuel technologies, in particular cellulosic
alternatives to petroleum-based diesel.
Support measures directly linked to levels of production and
consumption are considered to have the greatest
market-distorting effects, while support to research and
development is likely to be the least distorting.
2.4 How costly are biofuel policies?
Estimates of total support for
biofuels in the
OECD countries show that biofuel
subsidies are already
relatively costly for taxpayers and consumers. In 2006, the USA
spent an estimated 6.3 billion US$ to support biofuels, while
the EU spent 4.7 billion US$. These figures include the cost of
blending mandates, tax credits, import barriers, investment
subsidies and general support such as public research
investment, but exclude support to agricultural
Per litre of biofuel,
support ranged from about US$0.20 to US$1.00 per litre in the
OECD countries in
Table 6: Total support estimates for biofuels in selected OECD countries
Table 7: Support per litre of biofuel in selected OECD countries
Because the level of support is to a large extent linked to
expenditures will increase as biofuel output grows.
In short, policies to promote and support
biofuels have in most cases
been costly. They have tended to introduce new distortions to
national and international agricultural markets which are
already severely distorted and protected. This has not
encouraged an efficient international production pattern for
2.5 How viable are liquid biofuels?
In terms of litres of
biofuel produced per
hectare, sugar beet and sugar cane are currently the most
productive crops. However, the costs of biofuel production vary
widely depending on the type of
feedstock, the country and
various factors such as energy costs, processing costs and the
value of co-products. Brazilian sugar-cane
ethanol has a much lower
total cost than other
biofuels. Costs for other
liquid biofuels exceed the market price of
fossil fuels and require
subsidies. The feedstock
accounts for the largest share of total biofuel production
costs. The energy costs of biofuel production can be offset by
the value of by-products which may be burned for energy or sold.
ethanol has a much lower
total production cost than other
biofuels due to the high
efficiency of the production process. Sugar production costs
have decreased over the last decades and bagasse, the major
by-product of sugar-cane processing provides the energy
necessary for the production process. In 2004 and 2007, costs
for other liquid biofuels, such as sugar beet, wheat and maize
ethanol in the EU or, rapeseed and soybean, all exceeded the
market price of
fossil fuels and required
subsidies to remain
competitive. Future profitability will depend on how these
biofuels evolve in relation to fossil fuel prices.
The price that biofuel
producers in the USA can pay for maize while remaining
profitable varies both with and without government
subsidies. It is estimated
that for a crude oil price of US$60 per barrel, maize
ethanol remains competitive
on an energy basis as long as the market price for maize remains
below US$79.52 per tonne, but the subsidies, which amount to
about US$63 per tonne of maize, enable processors to pay up to
US$142.51 per tonne and still remain profitable. When comparing
observed monthly maize and crude oil prices with the maximum
price that biofuel producers could pay for maize, it can be
noted that maize ethanol in the USA has rarely been competitive
with fossil fuels without
Feedstock prices usually
change with crude oil prices because energy is a significant
cost factor in agricultural production and transport and rising
crude oil prices contribute to a surge in demand for
agricultural crops as feedstock for
biofuels. For instance,
between 2003 and 2008, prices for maize, rapeseed, palm oil and
soybean have been highest when crude oil prices were high.
However, prices of agricultural products are also influenced
by biofuel policies. For
instance, the price of maize in the USA rose steadily during
2006, partly because of increasing
ethanol production, while
the price of crude oil remained stable