25 Figure 2: Economics of ethanol from sugarcane and comparison of feedstock prices for biodiesel <!-- Start of picture text -->
1.8 1.6<br>1.6 Northwest Europe premium gasoline 1.4<br>1.4 Gasoline equivalent cost of ethanol<br>1.2<br>1.2<br>1.0<br>1.0<br>0.8<br>0.8<br>0.6<br>0.6<br>0.4<br>0.4<br>0.2 0.2 Diesel, Europe Rapeseed oil<br>Soybean oil Palm oil<br>0.0 0.0<br>US$ per liter  US$ per liter<br>Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13<br><!-- End of picture text -->

_Sources_ : Author’s calculations based on data from World Bank (2013), various issues of USDA (2013), and industry sources.

_Note_ : Opportunity costs of ethanol are calculated based on the following parameters used to compute the equivalencies between sugar and ethanol in Brazil: 1.0495 kg of sucrose equivalent to 1 kg of sugar, and 1.8169 kg sucrose equivalent to 1 liter of anhydrous ethanol. Sugar cane is assumed to yield 83 percent sugar and 17 percent molasses. Prices of molasses are assumed to be equal to 25 percent of sugar prices on a weight basis, and the sucrose content of molasses is 55 percent that of sugar. A fuel economy penalty of 20 percent is assumed for ethanol. Sugar prices are raw, FOB, and stowed at greater Caribbean ports. Soybean oil prices are in Decatur, Illinois; rapeseed oil prices are Dutch, FOB, ex-mill; and palm oil prices are for palm oil from Malaysia delivered in Northwest Europe.

As a result of weak economics in many parts of the world, most liquid biofuel programs have required subsidies, mandates, or both. The subsidies can be substantial. In Thailand, the total reduction in taxes and charges on E10 for gasoline with 91 RON was US$0.63 _per liter of ethanol blended_ (US$0.06 per liter of blend) in February 2007. By mid-2008, the overall reduction rose to US$2 per liter of ethanol blended, and remained above US$2 in 2012 (EPPO 2012a), or triple the FOB price of gasoline in Singapore. From the point of view of mitigating the adverse effects of high oil prices, a program requiring large subsidies for alternative fuels to combat high oil prices raises questions about efficacy. Another concern is the competition for fertile land and water, which could contribute to food price increases. Concerns about food security have prompted China to ban grains for ethanol production, India to restrict ethanol production to molasses, and South Africa to exclude maize and _Jatropha curcas_ (which is not edible but may nevertheless compete for water and land) from its national biofuel policy (South Africa 2007).

In rare circumstances, biofuels are claimed to lower prices. Ethiopia, which makes ethanol from sugarcane, switched from E5 to E10 in March 2011 and lowered the price of gasoline in Addis Ababa by 0.45 birr (US$0.027) per liter. The economics of this move are not clear. Sugarcane cultivation is water-intensive but farmers do not pay for irrigation water, and the government has been subsidizing sugar to keep its price low ( _Capital_ 2012).

# **5. Mitigating Adverse Effects**

There have been supply-side responses to lower prices paid for oil, as well as helping consumers cope with high oil prices. Among the supply-side measures are fuel price hedging, negotiating price discounts, bulk procurement, other means of lowering supply costs, and