Evaluating U.S. and EU policies
The last couple of months I’ve been busy preparing two major reports on government support for biofuels, both for the Global Subsidies Initiative (GSI) of the International Institute for Sustainable Development (IISD). These reports follow on from our October 2006 report on support for biofuels in the United States, which we commissioned from Doug Koplow of Earth Track, and which has been cited numerous times on these pages.
Last month, we issued what we call our “Synthesis Report,” our overview of government support for biofuels in selected OECD countries. Coming out right on the heels of the so-called “OECD Paper” (actually, a discussion document for a meeting of the Round Table on Sustainable Development, to which I contributed), “Government Support for Ethanol and Biodiesel in Selected OECD Countries” hasn’t yet attracted much attention in the press. It is rather dense in parts, I’ll admit. But it contains some crunchy numbers.
For example, we estimate that total support to biofuels in OECD countries was at least $11 billion in 2006, with most of that provided by the U.S. and the EU. Expressed in terms of dollars per greenhouse-gas emissions avoided, the levels vary widely, but in almost all countries, whether for ethanol and biodiesel, they exceed $250 per tonne of CO2-equivalent. That is several multiples of the highest price of a CO2-equivalent offset yet achieved on the European Climate Exchange.
Then, last week, we released our long-awaited report on “Government Support for Ethanol and Biodiesel in the European Union” …
The release of the EU report took place at a luncheon hosted by GLOBE-EU, an organization of European legislators with an interest in environmental policy. Some 11 Members of the European Parliament (MEPs) showed up to the luncheon meeting, as well as at least one reporter, and of course a member of the European Commission. The corresponding story, posted by the Inter Press Service, can be read here. (And for those of you who understand Swedish, you can check out the news coverage on SVT by clicking here and scrolling to 19’25”.)
The reaction from the European Commission representative (Directorate General for Agriculture) was one that we did not expect: the EU’s policies supporting (mainly domestically produced) biofuels have nothing to do with supporting the incomes of crop farmers, he insisted. Truly! Our guess is that the Commission, seeing that Brazil is now starting to challenge the U.S.’s ethanol support policies at the WTO, may feel the need to maintain a consistent story that their biofuel subsidies are all about, and only about, energy and the environment.
Even if one were to accept that the EU promotes biofuels primarily as a way to reduce greenhouse-gas emissions, it is an expensive policy. The study finds that transfers (i.e., subsidies and related support) per tonne of CO2-equivalent removed in 2006 were between 575 and 800 euros for ethanol made from sugar beets (and far higher than that for ethanol made from grains), around 215 euros for biodiesel made from used cooking oil, and over 600 euros for biodiesel made from rapeseed. So, as we found for the United States, EU subsidies to biofuels also fare poorly in terms of cost effectiveness.
Here, in brief are the recommendations we make to the EU and the Member states:
- Resist instituting new consumption mandates for biofuels, at least without first undertaking a thorough examination of the costs and benefits of doing so.
- Eliminate all tariffs on imported fuel ethanol.
- Avoid providing new specific subsidies to the industry, and move to re-instate fuel-excise taxes on biofuels where this has not already been done.
- Improve the information available on support provided to the biofuels industry, and the effects of such support, as well as on production, capacity and trade in biofuels.
- Put in place an evaluation process that can thoroughly assess the cost-effectiveness of each Member State’s support policies in attaining all three of the objectives behind the EU biofuels policy.
Meanwhile, unbeknownst to us at the time we were working on the EU report, the International Food & Agricultural Policy Council (IPC) was also working on a report critiquing U.S. and EU biofuel policies. That report, “An Examination of U.S. and EU Government Support to Biofuels: Early Lessons,” by Charlotte Hebebrand and Kara Laney, was released yesterday. It is nice and concise. Here is a quote from its executive summary (italics are in the original):
U.S. and EU policies that shelter domestic agriculture risk limiting efforts to expedite cost-effective and sustainable uses of biofuels.
Although energy demand is increasing most rapidly in emerging economies, the United States and the European Union remain by far the largest energy consumers. The transport sectors in these economies rely on oil, but this comes with the price of high greenhouse gas emissions. Biofuels, produced from agricultural feedstocks, have come to the forefront of the energy agenda on both sides of the Atlantic as a means of decreasing reliance on oil. However, because biofuels are more expensive than fossil fuels, their utilization in the U.S. and EU depends upon government incentives. While these policies should promote biofuels that have an economic and environmental comparative advantage, the political reality is that domestic agricultural interests want policies that support the use of domestic feedstocks, regardless of energy efficiency or environmental sustainability. The objective of promoting domestic production, therefore, may undermine efforts to rapidly develop the most efficient, sustainable energy resources.
The absence of internationally agreed and scientifically valid biofuels standards will further increase the disproportionate focus on domestic production. Moreover, a lack of clarity about whether and, if so, how international trade obligations apply to the biofuels sector could strengthen this tendency. An overemphasis on domestic production by the United States and the EU risks trumping their policy objectives to improve energy efficiency, increase energy security, and reduce environmental degradation. Additionally, given the size of their economies, the ramifications of insular policies could have significant ripple effects worldwide, particularly for food and feed prices and for biofuel and agricultural opportunities in developing countries.
I won’t repeat all of the IPC’s observations and recommendations here, but list the first three by way of a teaser:
Governments must clarify their intent for supporting the biofuels industry:
- It is unrealistic to view biofuels alone as a panacea for achieving energy security, reducing GHG emissions, and establishing new markets for politically powerful agricultural sectors
- Energy security should not be mistaken for energy self-sufficiency.
This intent should be mirrored in the setting of EU and U.S. mandates, tax incentives, and tariffs:
- In the absence of viable second-generation biofuels, incentives, tariffs, and standards that are structured primarily to promote domestic production of certain biofuels will retard the procurement and development of other more energy — and cost-efficient — biofuels.
And the reports keep on coming. Just today, the National Research Council has come out with a study that concludes that if projected increases in the use of corn for ethanol production occur in the United States, “the harm to water quality could be considerable, and water supply problems at the regional and local levels could also arise.”
Another group, the Meadowland Project, has produced a rather dystopian-optimistic set of future scenarios for the rural northern Great Plains region in 2050. Here’s a taste of two of the four:
There’s No Place Like Home
This is a world in which a long-term drought caused by climate change has a catastrophic impact on the robust ethanol industry, which leads to economic and social collapse within the northern Great Plains. This collapse and struggle spawns renewal and a new, more equitable and just way of life for all people and species.
The Big Empty
This is a world in which the region sees an expansion of ethanol and biofuel production, which provide short-term growth for rural communities. But advances in technology lead to improved efficiency and increasing economies of scale. As the ethanol facilities grow larger, fewer and fewer employees are needed to operate them. Family farms disappear and rural economies falter as corporate farming and mega ethanol plants take over. A third of the region’s population dies and is not replaced. Lack of proper services and loss of rural communities lead to a region empty of people and hope.
I’d better stop there. I’ll have some more reports to report on in a couple of weeks.