Why should biofuel production be stimulated?

Policies to support biofuels?

Fredrik Wilhelmsson AgriFood Economics Centre

Structure of the presentation

• Biofuel production and markets • Evaluating environmental policy

– Biogas from manure • Biofuel policy

– Objectives of biofuel policies – Evaluating 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

Delivered fuels in Sweden

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: 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

Production subsidy for biogas from manure

• Environmental benefits – Reduction of emissions from handling manure:

• Greenhouse gases • eutrophication (nitrogen leaching)

• Environmental costs – Increased emissions due to the production of biogas:

• Greenhouse gases • Acidification • Particular matters

• Compare benefits and costs – Assign a value to each effect and sum the values

Social value of biogas from manure

Region/Manure Cattle Swine

High Low High Low

South of Sweden (Kr/Kwh) 0,28 -0,07 0,44 -0,04

Mid-Sweden (Kr/Kwh) 0,09 -0,07 0,15 -0,05

Biofuel policy

Selected Policy objectives

• Share of renewable fuels 2020 (RED) • Reduction in GHG-emissions per unit of

energy 2020 (FQD) • The transport sector should be fossil

free by 2030 in Sweden

If erogenous policy objectives are used to

guide policy the policy may reduce welfare

Biofuel policies 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

• 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 – GHG emissions may increase & other emissions increases

• Food security / poverty reduction – Higher demand for feedstock, thus increased food prices

• Increased biodiversity – More intensive agriculture may reduce biodiversity

• Less pollutions from agriculture – More fertilizers and pesticides to increase production

• Domestic production (energy security) vs. import

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 biofuels – Limited production capacity of biofuels in Europe

• Rural development – Indirect income transfer to farmers but not everyone

in rural areas are farmers

Conclusions

• Use efficient policies for each objective – Inefficient policies will reduce the benefits

of improved environmental quality

• Biofuel policies should be evaluated based on their costs and benefits – All cost and benefits should be accounted

for

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