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OECD analysis of biofuel policies is posted

29 August 2008

According to a report from the OECD’s trade and agriculture directorate ‘government support of biofuel production in OECD countries is costly, has a limited impact on reducing greenhouse gases and improving energy security, and has a significant impact on world crop prices’ . While the report argues that this latter effect should not be over-estimated, it cites likely price increases of 5% for wheat, 7% for maize and 19% for vegetable oil over the next ten years, with ‘13% of world coarse-grain production and 20% of world vegetable-oil production’ being shifted into biofuel production over the next ten years ‘up from 8% and 9% in 2007, respectively’.

The report argues that ‘biofuels are currently highly dependent on public funding to be viable’. Such support policies include:

  • budgetary measures such as ‘tax concessions or direct financial support for biofuel producers, retailers or users’;
  • the use of blending mandates to create a guaranteed market;
  • trade restrictions (tariffs) to limit competition from imports.

The OECD report calls on governments to ‘refocus policies to encourage lower energy consumption, particularly in the transport sector’ and to ‘focus on alternative fuels that maximise the reduction of fossil-fuel usage and greenhouse gas emissions’. It further calls for more funding on research into second-generation biofuels.

It notes that greenhouse gas emissions from sugar-cane-based biofuels are far greater than options based on sugar beet, wheat or maize.

The USDA has also posted its annual assessment of EU biofuels policy. It notes that high feed-stock costs and competitively priced imports, alongside over-capacity have reduced profit margins in the sector after good profits in 2005 and 2006. Currently biofuels are ‘not competitive with diesel or gasoline in the EU’, with demand being dependent on ‘mandates and incentives’. A four-page summary of incentives deployed by EU member states is set out in annex I to the report. Despite worsening profitability EU bio-diesel production reached 5.4 million tonnes and is expected to rise further to 5.7 million tonnes in 2008, while ethanol production is expected to rise from 1.4 to 1.7 million tonnes. It notes that biofuel targets ‘could substantially increase EU27 vegetable-oil demand’ in the coming years. Indeed, meeting EU biofuels targets by 2020 will require ‘15% of all agricultural land’, with prices increasing due to biofuel demand. In order to enhance the environmental effects of biofuels, sustainability criteria for both domestic biofuel production and imports are being elaborated.

USDA offers the following projections for expanded EU feed-stock use up to 2010

Feedstock use for bio-ethanol production (in 1,000 tonnes)
2006 2007 2008 2009 2010
Wheat 1,530 1,460 2,040 2,180 3,000
Barley & rye 570 330 590 640 690
Corn 250 230 990 1,440 2,000
Sugar beet 270 880 2,160 2,670 3,260
Potatoes 300 120 300 350 400

 

In terms of trade it notes that EU member states ‘individually regulate their bio-ethanol imports by issuing import licences to importers’.

Editorial comment

The WTO acceptance of the public funding being deployed in support of biofuels policies, despite the trade- and price-distorting effects of these policies, highlights a certain inequality in the treatment of those policy instruments. As a matter of fact developing countries have limited options for using the kinds of financial support instruments for the promotion of public-policy objectives which OECD countries increasingly favour and have sought to retain the ability to use non-financial, trade-based policy instruments (import and export licences, export taxes, safeguards and infant-industry protection) for the pursuit of key public-policy objectives such as food security and sustainable agricultural development. Yet it is precisely these instruments that WTO rules and IEPAs rules will seek to limit the use of. This is despite the fact that the use of such tools in ACP countries has far smaller trade- and price-distorting effects than the financial instruments deployed in support of OECD biofuels policies.

This fundamental inequity in the treatment of the policy tools open to developing and developed economies remains one of the effectively unaddressed issues in moves towards trade liberalisation at both the multilateral and bilateral levels.

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