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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 biofuel use.

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 feedstocks .

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. More...

2.2 What are the drivers of biofuel policies?

The main drivers behind government support for biofuels in OECD countries are concerns about 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 technologies.

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 biofuel reduces 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 greenhouse gas emissions.

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. More...

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 commercially viable.

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 agricultural subsidies 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 feedstocks. In developed countries an increasing proportion of public research and development funding is directed towards second-generation biofuel technologies, in particular cellulosic ethanol and biomass-derived 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. More...

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 feedstock production.

Per litre of biofuel, support ranged from about US$0.20 to US$1.00 per litre in the OECD countries in 2006.

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 biofuel production, 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 biofuels. More...

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.

Brazilian sugar-cane 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 subsidies.

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 More...

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