OECD report: stop biofuels subsidies

From the Summary and Discussion:

Biofuels have been championed as an energy source that can increase security of supply, reduce vehicle emissions and provide a new income stream for farmers. These claims are contested, however. Critics assert that biofuels will increase energy-price volatility, food prices and even life-cycle emissions of greenhouse gases. This paper presents salient facts and figures to shed light on these controversial issues and asks whether biofuels offer a cure that is worse than the disease they seek to heal.

The information gathered in this paper gives rise to two fundamental questions:

1. Do the technical means exist to produce biofuels in ways that enable the world to meet demand for transportation energy in more secure and less harmful ways, on a meaningful scale and without compromising the ability to feed a growing population?

2. Do current national and international policies that promote the production of biofuels represent the most cost-effective means of using biomass and the best way forward for the transport sector?

The rush to energy crops threatens to cause food shortages and damage to biodiversity with limited benefits

The OECD Round Table on Sustainable Development has just released a thorough 57-page study on the costs, efficiency and environmental impact of biofuels. The full text of the report is here: Biofuels: is the cure worse than the disease? [PDF].

I’m very pleased with the quality of the work, and the conclusions — which I’ll paraphrase as “stop the subsidies, carbon tax each fuel for its externalities, then get government out of the way and let the markets work”.

If you agree that the damaging U.S. ethanol tariffs and subsidies should be stopped, please write your representatives. Stopping the handouts will be extremely difficult due to the concentrated benefits/diffuse costs which motivates politicians to reward their corn state contributors.

I recommend section 8 “An alternative policy agenda” for a summary of the report’s reasoning and conclusions:

136. There is little doubt that current patterns of fossil fuel-based energy use are unsustainable and that a change in direction is needed. There is, however, no obvious technological fix available that will supply the world with a source of automotive fuel that is cheap, clean, flexible and easily scalable. Hydrogen has been discussed, but many problems are yet to be overcome. In such a situation, when technological change is unpredictable, a prudent policy would be to keep as many options open as possible while at the same time letting prices adequately reflect environmental and natural-resource scarcities.

137. The current push to expand the use of biofuels is creating unsustainable tensions that will disrupt markets without generating significant environmental benefits. The upward pressure first-generation biofuels create on food prices, and the increasing burden their subsidisation places on taxpayers, are likely to make policies that support them indiscriminately less and less acceptable to the public.

138. Current biofuel support policies are placing a significant bet on a single technology notwithstanding the existence of a wide variety of different fuels and power trains that have been posited as options for the future. Those policies – that support high blends of ethanol, in particular – necessitate major investments in vehicles and fuel-distribution infrastructure — investments that, once made, put pressure on policy-makers to protect them.

139. Governments should cease creating new mandates for biofuels and investigate ways to phase them out. Mandating blending ratios, market shares or volumes creates certainty for investors in biofuel production capacity, but in so doing simply transfers risk to other sectors and economic agents. Mandates do not save motorists money: biofuels still account for only a tiny fraction, perhaps 1%, of the total world market for petroleum-derived transport fuels — not enough to substantially affect prices. In any case, if prices of petroleum products were to rise above the cost of producing biofuels, the mandates would not be needed. If petroleum prices were to fall, mandating biofuels means that transport fuels containing them would cost more.

140. Mandates are blunt instruments for reducing net petroleum use and greenhouse gas emissions. Despite large differences in the contributions that particular feedstock/technology combinations can make in achieving these objectives, almost all of the mandates currently used by OECD countries make no distinction among biofuels except between ethanol and biodiesel. Some countries have started to investigate ways to differentiate biofuels according to their life-cycle GHG emissions, but it is still unclear how they can do this in a way that is compatible with WTO rules. Setting mandatory targets is risky when the potential supply of biofuel feedstocks that can be sustainably produced is unknown and the commercialisation of second-generation technologies remains uncertain.

141. To the extent that subsidisation of biofuels reduces the retail prices of transport fuels in some countries, biofuel-support policies are also insulating drivers from the true costs to society of their fuel consumption, be it reduced national security or increased emissions of CO2. A far more neutral and efficient policy tool would be to tax fuels according to the externalities they generate.

142. Attempts to quantify support provided to biofuels also point to a more disturbing problem: that governments are providing billions of dollars or euros to support an industry about which they have only scant information. Yet without good statistics, it is difficult to imagine that policy makers are obtaining the feedback they need to respond to new developments in a timely fashion. In many countries, the only statistics available on production of biofuels are those collected by producers’ associations. Statistics on consumption are even harder to obtain. And the fact that support is provided by multiple levels of government, in diverse forms, suggests that new policies are being introduced in the absence of comprehensive information on how they are affecting the marginal rate of assistance.

143. A number of other policies that governments could pursue would be less risky than those typically used by OECD countries. One would be to remove tariffs on imported biofuels. Tariffs are especially high on ethanol, and the longer they remain in place, encouraging inefficient investments in expensive productive capacity, the harder will be the adjustment needed once they are removed. Moreover, the countries most affected by import tariffs are generally developing countries with a comparative advantage in biofuel production.

144. The second would be to co-ordinate internationally on developing agreed standards for sustainable biofuels. Certification of biofuels to sustainability standards would not solve all the negative environmental consequences of expanded biofuel use, but it might help reduce some of the worst direct effects. At the least, international co-ordination would avoid an even worse situation where countries each require conformity to different standards.

145. If technology is the main barrier to the commercialisation of second-generation biofuels, supporting R&D is likely to be more cost-effective than supporting production from first-generation facilities. Koplow (2006) points to the United States Energy Policy Act of 2005 as a good policy example. The Act calls for reverse auctions for cellulosic ethanol production, where the bidder requiring the lowest amount of public money per gallon produced will get the subsidy. Such an approach keeps development risks within the private sector and it reduces the chance of overcompensation.

146. The demand side of the transport fuel problem should receive proportionally more attention than the supply side. A litre of gasoline or diesel conserved because a person walks, rides a bicycle, carpools or tunes up his or her vehicle’s engine more often is a full litre of gasoline or diesel saved at a much lower cost to the economy than subsidising inefficient new sources of supply. The IEA (2006a) points out that significant benefit can be achieved by improving vehicle efficiency. If all technical means of engine, transmission and vehicle technologies are implemented, a 40% improvement in the fuel economy of gasoline vehicles could be achieved at low costs by 2050.

147. Biofuels may well play a part in expanding the range of energy sources available in the future. The extent of their penetration will be limited by the opportunity cost of biofuel feedstocks being applied to competing end uses, and the extent to which second-generation technologies can significantly lower the costs of production. But in view of the fact that even the most optimistic studies posit no more than 13% of liquid fuel needs in 2050 being supplied by biofuels, it must be asked whether the diversion of such large amounts of public funds in support of this single technological option can be justified. Given that a much larger supply of clean transportation energy will be needed than biofuels can supply, governments need to apply their regulatory interventions and fiscal resources in ways that enable the widest array of technology options to compete.

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