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Liquid Biofuels for Transport Prospects, risks and opportunities

3. How are biofuel markets and production evolving?

  • 3.1 How are prices for agricultural products evolving?
  • 3.2 How is biofuel production expected to evolve in the future?
  • 3.3 What are the impacts of biofuel policies on international markets and trade?

3.1 How are prices for agricultural products evolving?

During the 40 years up to 2002 food prices generally declined – taking into account inflation –but in recent years the prices of agricultural products have risen sharply. By early 2008 they were 64%above the levels of 2002, with vegetable oil and cereal prices showing the biggest increases, followed by dairy products and rice. However, those prices remained well below the levels reached in the 1970s and early 1980s once adjusted for inflation.

The following factors are contributing to the increase in prices:

  • Rapid economic and population growth in many emerging countries which have led to an increased demand for agricultural products.
  • Increased use of food crops for the production of biofuels, with twice as much wheat and coarse grain used for ethanol in 2007 compared to 2005. Most of this growth in demand for grain occurred in the USA.
  • Depreciation of the US dollar compared to many other currencies.
  • Poor cereal harvests in major exporting countries in 2005 and 2006 and decline of the amount of grain held in storage since the mid-1990s.
  • Higher petroleum prices increasing production costs of fertilisers and transportation costs, thus leading to higher overall costs for importing countries.
  • Increasing fuel prices also contribute to the surge in demand for agricultural crops to produce biofuels.

In short, high prices were the result of a combination of factors including a rising demand coupled with a decline in agricultural production at a time when reserve stocks were at a relatively low level. The exact contribution of individual factors is nevertheless difficult to quantify.

As well as being higher, prices have also fluctuated more than in the past, especially for cereals and oilseeds. This volatility results from increased links between agricultural and energy markets, driven by policy support for biofuels and high energy costs.

Long-term projections suggest that prices for agricultural products will decline from their peak over the next few years. However, some pressures including biofuel demand will influence prices on the long term. Prices for grains and oilseeds are likely to remain above the levels seen during the previous decade. Future trends will also be highly dependent on crude oil prices. More...

3.2 How is biofuel production expected to evolve in the future?

3.2.1 In the long term, the International Energy Agency (IEA) foresees a significant expansion of the role of liquid biofuels for transport. From 19 million tonnes oil equivalent (Mtoe) in 2005, biofuel production could increase to 102 Mtoe or even 164 Mtoe in 2030 if all measures and policies currently under discussion are implemented. Nevertheless, even these large increases represent only a very small portion of the total transportation energy needs in 2030.

In contrast, current and projected production levels of crops to make biofuels are substantial compared to total agricultural production. Increased biofuel production could come from using more cropland for biofuel production and from improved yields. IEA projects an increase in the share of worldwide cropland devoted to biofuels from 1% in 2004 to 2.5% in 2030 with current policies and measures. With second generation biofuel technologies becoming available, this share of cropland could reach 4.2%. Most of the increased production would occur in the EU, the USA and Canada . However, if grasslands or forests are brought into agricultural production for this purpose, this would have environmental consequences. More...

Table 9: Land requirements for biofuel production

3.2.2 For the medium term, various projections have been made in the OECD-FAO Agricultural Outlook 2008-2017 for future supply, demand, trade and prices for ethanol and biodiesel.

In the EU and in several other countries ethanol production is expected to grow rapidly. On the basis of current government policies, worldwide ethanol production is projected to double between 2007 and 2017. Brazil and the USA are expected to remain the largest producers, but strong production growth is forecast for China, India, Thailand and several African countries. In the EU, total production increase will likely not be sufficient to keep up with the growing demand, and increased imports are forecast.

Global biodiesel production is expected to grow at an even higher rate than ethanol, but the absolute volumes are lower – about 24 billion litres by 2017. Production is dominated by the EU, which accounts for about half of the total followed by the USA. Significant growth is also projected for biodiesel from soya in Brazil and from palm oil in Indonesia and Malaysia. In Africa and India there has been some investment in biodiesel production from jatropha. More...

3.2.3 Current trends in biofuel production, consumption and trade are strongly influenced by existing policies, especially those implemented in the EU and the USA, which promote biofuel production and consumption while protecting domestic producers with trade restrictions.

If all trade barriers and subsidies were removed, it is estimated that global ethanol production and consumption would decline by about 10 to 15%. The largest reductions would occur in the EU, where ethanol support measured in per litre terms is very high, and in the USA, the largest ethanol producer. Imports would increase significantly in markets that are currently protected.

For biodiesel, the impact of removing trade barriers and subsidies would be larger in percentage terms than for ethanol, leading to reductions in production and consumption by around 15 to 20%.

Elimination of trade-distorting policies would increase global ethanol prices by about 10% because production in several heavily subsidised countries would decline more than consumption. In contrast, biodiesel prices would fall slightly because a reduction in EU consumption would reduce imports. Vegetable oil and maize prices would decline by about 5% and prices for sugar, the most cost-efficient biofuel feedstock, would rise.

Current biofuel support policies risk repeating past mistakes in the field of agricultural policies which led to misallocation of resources at international level. Biofuel policies of OECD countries have indeed various negative consequences. They impose large costs on their own taxpayers and consumers. They discriminate against producers in developing countries and impede the emergence of biofuel processing and exporting sectors in these countries. They also distort biofuel and agricultural markets. As a consequence, production of biofuels may not occur in the most economically or environmentally suitable locations.

The future development of an economically efficient biofuel sector at international level will therefore depend on the establishment of appropriate non-distorting national policies as well as trade rules that encourage an efficient geographical pattern of biofuel production. More...

3.3 What are the impacts of biofuel policies on international markets and trade?

To assess the net effect on greenhouse gas emissions of replacing fossil fuels by biofuels, we need to analyse emissions throughout the whole process of producing, transporting and using the fuel. Life-Cycle Analysis is the main tool used to do this. It compares a specific biofuel system with a reference system – in most cases petrol .

Greenhouse gas balances differ widely depending on the type of crop, on the location, and on how feedstock production and fuel processing are carried out. Biofuels from some sources can even generate more greenhouse gas emissions than fossil fuels.

A significant factor contributing to greenhouse gas emissions is the amount of fossil energy used for feedstock production and transport, including for fertilizer and pesticide manufacture, for cultivation and harvesting of the crops, and or in the biofuel production plant itself.

Emissions of nitrous oxide are another important factor. It is released when nitrogen fertilizers are used and its greenhouse gas effect is about 300 times stronger than that of carbon dioxide.

By-products from biofuel production such as proteins for animal feed make a positive contribution to climate change mitigation because they save energy and greenhouse gas emissions that would otherwise have been needed to produce the feed by other means.

Most studies have found that producing first generation biofuels usually yields reductions in greenhouse gas emissions of 20 to 60% when fossil fuels are replaced provided the most efficient systems are used and carbon dioxide emissions from changes in land-use are excluded.

Ethanol produced from sugar cane in Brazil and second-generation biofuels typically reduce emissions by 70 to 90%, again excluding carbon releases related to land-use change.

However, changes in land use can have dramatic effects on greenhouse gas emissions. When forest or grassland is converted to farmland to produce feedstocks, or to produce crops that have been displaced by feedstock production, carbon stored in the soil is released into the atmosphere. The effects can be so great that they negate the benefits of biofuels. Repaying this ‘carbon debt’ could take decades or even hundreds of years. In some cases it would be more cost-effective to strive for greater fuel efficiency and carbon sequestration through reforestation and forest conservation. More...

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