# Presentation: 670186

## Support for biofuels: Considerations for policymakers

- International Biofuels Economic Outlook Panel
- Global Conference on Agricultural Biofuels:Research and Economics
- August 21, 2007
- Masami Kojima, The World Bank

## Political economy ofliquid biofuels

**Divergent groups favor liquid biofuels**
- Agribusiness, farmers
- Governments: energy security, rising oil import bills, job creation, growing fuel subsidies
- Some environmentalists – a wide range of views
- General public appeal of renewable fuel
**Complexity of interactions** between energy, agriculture, environment, and macro-economy makes it difficult to see the issues clearly

## Questions

- How has biofuel economics fared historically?
- Are subsidies a viable policy option for developing countries?
- Can Brazilian experience be replicated?
- Can biofuels mitigate oil price increases and price volatility?
- How are biofuels expected to affect, and be affected by, crop prices in the future?

## First-generation liquid biofuels

- Limitations in economics and production potential widely acknowledged
- More than half of production cost due to feedstock
- Domestic production and consumption of biofuels economic under few favorable circumstances (Brazil in 2005 and 2007), but uneconomic most of the time
- Hence heavily protected, mostly domestic, limited trade
- Types of support
- Fuel tax and other fuel charge/fee reduction (universal)
- Mandatory blending or consumption requirements
- Import tariffs (primarily on ethanol)
- Production-linked subsidies
- Upstream (OECD agricultural policies) and downstream subsidies

## Economics of ethanol production from sugarcane

- *83% sugar and 17% molasses, and molasses priced at 25% of sugar; 20% fuel economy penalty for ethanol

## Landlocked economies with sugar production cost of $225/tonne

- *83% sugar and 17% molasses, and molasses priced at 25% of sugar; transport costs $100 per tonne of sugar & $150 per tonne of gasoline; 20% fuel economy penalty

**Economic**

- % of months: 15% since 1990
- 70% since Jan 2004

## International price of sugar in 2006 averaged US$326/tonne, up from $158/ tonne in 2004, but fell to $222/tonne during 1H 2007

## Vegetable oil vs. diesel prices

- *Price data from USDA FAS, World Bank and Energy Intelligence

## Government support for consumers and domestic producers

**Location****	****Tax reduction in US$ per liter of biofuel**		**Ethanol****	****	****Biodiesel**
- Germany	0.83 			0.60   (to end-July 2006)
- Australia	0.33		 	0.33
- USA (credit)	0.135			0.26 or 0.13
**Thailand****	****0.65 (April 2006)**
**S****ão Paulo****	****0.30 (June 2005)**      	***European premium gasoline **
**	****	****	****	****	****	****in 1H 2007 $0.49/liter**
**High tariffs on ethanol** to prevent subsidies from going to imports
- USA:	$0.1427 per liter + 2.5/1.9%
- EU:	US$0.26 / 0.14 per liter
- Brazil:	20%

## Accounting for environmental externalities

- GHG emission reduction: at $8-20 per tonne of CO2-equivalent, expect about $0.01-0.04 per liter
- Much smaller than tax reductions provided to biofuels today
- Calculations on US subsidy per tonne of CO2 equivalent (IISD)
- $520 in 2006 for maize to ethanol
- $118–147 for cellulosic ethanol if the current subsidy structure is maintained

## Factors contributing to large-scale use of ethanol in Brazil

- Extremely favorable natural endowments in the center-south, enabling very low-cost sugarcane production
- Entirely rain-fed
- Seemingly unlimited supply of land (although concerns about displacement of virgin cerrados)
- Outstanding agricultural research
- Each mill uses about 15 varieties of cane
- Constant development of new commercial varieties
- Precise computer optimization of every step in the ethanol production process
- Functioning capital market, availability of managerial and technical skills, reasonable infrastructure
- Mandate and fuel tax reduction

## Replicability

- About 100 countries grow sugar cane, but none matches Brazilian center-south’s low cost
- Land and water requirements –
- Zambia has both plentiful land and water, but not necessarily at the same locations
- Capital market and infrastructure development, availability of managerial and technical skills
- Requirement for large fuel tax reductions today ↔ petroleum fuels an important source of government revenue in low-income countries

## Can biofuels provide a solution to high oil prices?

- Biofuel production a small fraction of petroleum fuel production for the foreseeable future  biofuels will be price takers
- Marginal demand and marginal supply set prices  1–2% *net* displacement of global oil demand (2–7% of transportation fuels) might moderate oil price increases

## Land requirements

| First generation biofuels (LMC International) | Displacing 5% of gasoline and diesel worldwide would be a challenge – if distributed globally, 15+% more land (100+ million hectares) |
| --- | --- |
| Second generation biofuels | Much greater potential because of ability to use wastes, residues, and non-food crops |

## Will high oil prices help biofuel economics?

- More room for cost recovery
- Higher production and market delivery costs (e.g., pre-FOB) because of higher energy prices
- If biofuels significantly increase demand for feedstocks, their prices will be driven up
**Increasing link to oil prices**

## Impact of higher biofuel demand

- Higher production of biofuels will raise food prices
- Good for producers, bad for consumers, especially the poor
- Most evidence suggests poor farming rural households are ***net buyers*** of food
- On balance, food security of the poor will be reduced
- Price increase in 2005-2006:
- 67% increase for maize, 45% for palm oil, 26% for rapeseed oil, 33% for sugar
- Higher crop prices already hurting biofuel industry (e.g., South Africa)
- Correlation with gasoline and diesel prices
- 75% for sugar and 30% for palm oil since Jan 2002, 75% for rapeseed oil since Jan 2003.
- Threshold diversion level for strong correlation to emerge?

## Concluding remarks

- Reasons for supporting biofuels are attractive: rural development, reducing global warming, enhancing energy security. But a biofuel program may not be a good vehicle for addressing them; separate policy solutions may be more cost-effective.
- The economics of first generation biofuels is very much location-specific, as are environmental benefits.
- Legitimate government support for biofuels is R&D, and useful especially in developing country context.
- For energy security, it would be helpful to view liquid biofuels in context.

## Additional thoughts and materials

- Available at:
- http://siteresources.worldbank.org/INTOGMC/Resources/Considering_trade_policies_for_liquid_biofuels.pdf