Bridging Politics and Economics of Biofuels

Fredrik Wilhelmsson

AgriFood Economics Centre

Structure of the presentation

• Biofuel production and markets

• Evaluating environmental policy

• Biofuel policy

– Objectives of biofuel policies

– Selected EU policies for biofuels

– Evaluating current policies for biofuels

Biofuel production

• Policy driven rapid increase in production

• 88 % of World ethanol from USA and Brazil

• 53 % of world biodiesel from the EU

Source: REN21, Renewables Global Status Report 2011 http://www.ren21.net/Portals/97/documents/GSR/REN21_GSR2011.pdf

Production cost Biofuel 2007 (USD per gasoline or diesel equivalents)

Brazil sugar cane

USA corn

EU Biodiesel

EU sugar beet

EU wheat

Net cost 0.27 0.74 1.74 0.76 1.31 Feedstock 0.18 0.64 1.62 0.60 1.22

Source: OECD-FAO Agricultural Outlook 2008-2017

Evaluation of Environmental Policy

Policy evaluation criteria

• Cost-effectiveness

• Efficiency

• Incentives for innovations

• Enforceability

• Fairness

• Moral dimension

Cost effectiveness

• Definition:

– Maximum environmental improvement given available resources or,

– Lowest cost to reach a given environmental quality

• Ineffective policy result in higher emissions

• Cost effective policy not guaranteed to be efficient (Why?)

Efficiency

• Maximizes net benefits for society

– Cost effective

– Benefit of a measure higher than the cost of the measure to society

• Equalizes marginal abatement cost to marginal damage cost

An Efficient Solution

• Lowest cost measures to reduce emissions – Start with low-hanging fruits

– Marginal abatement cost is the same for all polluters

• Stimulate innovation and diffusion of new technology – External benefits

– Reduce costs

Policy Example 1: Price Incentives

• Emission tax allocate reduction to firms that can accomplish it at the least cost

– Cost of the last ton of emissions avoided is the same for all firms

• Mandatory cap of overall emissions but permits can be traded

– Caps total emissions but flexible in how the reduction is done.

– Cost of the last ton of emissions avoided is the same for all firms

Policy Example 2: Regulations (standards)

• Same reduction in all firms

– Marginal cost of last emission avoided varies across firms

• Not efficient

– A firm with high cost would gain from paying a low cost firm to reduce their emission

– The low cost firm would gain from receiving a payment to reduce its emissions.

Importance of Innovations An Example!

Source: OECD (2008), Climate Change Mitigation WHAT DO WE DO?

Biofuel policy

Why should biofuel production and use be

stimulated?

Policy in the EU

• Targets:

– 10 % renewable fuels 2020 (RED)

– 6 % reduction in GHG-emissions per unit of energy 2020 (FQD)

• Most Biofuel policies at the country level in the EU

– Command and control

• Fuel standards, quotas

– Market based incentives

• Taxes and subsidies

• Blending

• Import tariffs (imposed by the EU)

– R&D

– Additional incentives (f. ex. in the car market)

Pros and cons of policies

• Mandatory blending or sales quota of Biofuel

– Predictable consumption volumes

– No revenue loss for government

– Higher fuel price reduce total consumption of fuels

• Tax reductions

– Loss of revenue

• 1140 Mio Euro, 47 cent/l biodiesel tax reduction (Germany 2005)

• Mixed policy mandatory blending and tax reductions

– May increase fossil fuel consumption, thus increasing GHG emissions

• Import tariffs

– Increases domestic production

– Increases prices and reduces consumption

Conflicting policy objectives

• Increased use of Biofuel to reduce GHG emissions

– In some cases GHG emissions might increase

• Food security / poverty reduction

– Higher demand for feedstock from energy producers increases food prices and may reduce food production

• Energy security (?)

– Imported Biofuel might reduce GHG emission more than domestic Biofuel

• Increased biodiversity

– More intensive agriculture might be harmful to biodiversity

• Less pollutions from agriculture

– More intensive agriculture may imply higher applications of fertilizers and pesticides.

The effectiveness of the EU policy

• Obtaining its objectives

– Reducing GHG emission

– Improving energy security

– Creating new opportunities in rural areas

• Cost effectiveness

– Are the objectives reached at the lowest cost

• Compare to other policy options

Cost of the policy

• High cost production in the US and the EU with limited reductions in GHG emissions

– High cost per unit of emission reduction

• Resources diverted from more productive use

• Energy security

– Less expensive to keep fuel stored

– Fossil energy required to produce Biofuel

– Limited production capacity of Biofuel in Europe

• Rural development

– Indirect income transfer to farmers but not everyone in rural areas are farmers

Conclusions

• Inefficient policies will reduce the benefits of improved environmental quality!!!

• The efficiency of biofuel policies should be evaluated based on their costs and benefits

– Are the objectives reached in a cost-effective way?

• Could other less costly measures give the same result?

• The interaction of various objectives and policy measures should be taken into account

• If the most efficient policy cannot be implemented the cost of other policies should at least be compared to the most efficient policy

Source REN21, Renewables Global Status Report 2011

http://www.ren21.net/Portals/97/documents/GSR/REN21_GSR2011.pdf

Source REN21, Renewables Global Status Report 2011

http://www.ren21.net/Portals/97/documents/GSR/REN21_GSR2011.pdf

Emission reduction: Biofuel compared to fossil fuel (The numbers should be seen as an example)

Biofuel Feedstock Reduction (%)

Ethanol Sugar cane 71

Ethanol Sugar beet 61

Ethanol Wheat ethanol 32-69

Ethanol Corn 56

Ethanol Wheat straw 87

Biodiesel Rapeseed 45

Biodiesel Palm oil 36

Biogas Organic waste 84

Source EU Renewable energy directive