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
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
- 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
- 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
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
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.
3.2 How is biofuel production expected to evolve in the future?
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
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.
Table 9: Land requirements for biofuel production
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
In the EU and in several other countries
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.
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.
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
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
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.
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.
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
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
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
climate change mitigation
because they save energy and
greenhouse gas emissions
that would otherwise have been needed to produce the feed by
Most studies have found that producing first generation
biofuels usually yields
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
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
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.