OECD Observer

As the UN called recently on the world’s governments in an “extraordinary emergency appeal” for some $500 million to avert a food crisis in poor countries, many people were placing some share of the blame squarely on strong demand for grains from the biofuel industry.

The popular view of biofuels as an ecological panacea for everything from depleting oil reserves to global warming, has swung to widely-held scepticism in the past year or two. Do biofuels do more harm than good, environmentally as well as economically?

Biofuels are made from organic material of plant or animal origin and used mainly as a liquid energy source for cars, trucks and buses. They come in two main types: bioethanol, mostly derived from sugar cane, sugar beet and cereal crops, and biodiesel, derived from fatty acids such as soybean, rapeseed, vegetable oils and also animal fats and used frying oils.

If the biofuels market has become strong it is largely because of subsidies, and production and blending quotas. Governments have used a range of policies to promote biofuel production. Incentives to lower the cost to biofuel producers include tax credits, capital grants and subsidised loans. There are targets mandating the sale of a certain amount of biofuels, and fuel blending requirements imposed on petrol stations are other ways countries are encouraging the biofuel industry. The EU, for example, has set a target for its members that 10% of all fuel sold at petrol stations must be derived from plants within 12 years.

This backdrop, skyrocketing oil prices, rising demand for energy and the need to tackle climate change have all sparked biofuels into becoming more than just a brand new revenue earner for hard-pressed farmers, but a hot investment for energy and grain producers and traders. Production has been growing quickly in many countries, including Brazil, EU countries, the US, Canada, China and elsewhere in Asia. As well as for their environmental effects, some developing countries look to biofuels as a driver of economic growth, and others see them as a way to improve energy security.

But this is where the picture gets a little muddier. Governments have also put in place import tariffs and other trade restrictions that stimulate domestic biofuel production, while limiting competition from internationally competitive producers overseas. This hardly helps the goal of obtaining cost-effective fuel alternatives.

Farmers in many countries have been able to claim government subsidies for growing crops too, and not always for those best suited to biofuels. OECD countries together spend $13-15 billion a year in public money to support biofuel production. Brazil is one country that currently produces biofuel from sugar cane crops in an economically viable way. Even so, the Brazilian government supported the industry with $1 billion in subsidies in 2006.

To give some idea of the extent governments need to support biofuel production (at least in its current form): At a hypothetical crude oil price of $60 per barrel—which is markedly lower than the actual price at the moment—public support along the lines of $0.15-0.55 per litre of gasoline or diesel-equivalent biofuel in most OECD countries would be needed to make biofuel economically viable. And, as crop prices have been spiking sharply, there has been no offsetting improvement in the efficiency of biofuel production.

Of course, these subsidies might be worth it if there was a real payback in terms of lower CO2 emissions. But even this ecological case is weak.

For a start, though the amount of carbon dioxide that a particular biofuel releases when burned is generally no more than that captured during the life of the source plant, crops currently used to make biofuel have a very low energy density compared with fossil fuel sources. This means vast amounts of arable land are needed if biofuels were to fully substitute for fossil fuels, rendering the environmental benefits questionable at best. For biofuels to meet just 4% of the world’s transport fuel needs in 2030, it would take an area of arable land equal in size to France and Spain combined.

Another problem is that the very process of clearing land to sow crops releases large quantities of greenhouse gases from the soil. However, a more serious political concern now is that land being used to cultivate fuel, rather than food, is pushing up prices of all foodstuffs. “The shift to biofuel production has diverted lands out of the food chain,” remarked Josette Sheeran, chief of the World Food Programme, on a visit to the European Parliament in early March. Ms Sheeran lamented that the “bonanza” for farmers is hitting the world’s poor hard. OECD findings echo these concerns (see our article on food prices "The grain of truth").

Moreover, the clearing of tropical rain forests to grow biofuels in some regions has attracted particularly harsh criticism over skewed incentives. In Southeast Asia, palm oil plantations are replacing forests and damaging fragile biodiversity. The intensive land use changes for biofuel production also stress water levels, erode soil quality, and poison the ground with ill-controlled pesticides and fertilizers.

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Production costs also vary a lot by type of biofuel, and also by country, plant source, and even by soil type and how the plant is grown. In fact, a joint International Transport Forum-OECD roundtable in 2007 found that there is a wide variance in biofuel performance and, in the worst cases, biofuels produce far more emissions of greenhouse gases than petrol or diesel from well-maintained engines.

The overall picture for farmers is actually a mixed one. The rise in crop prices may bring some benefits for certain farmers, but those who rely on these crops as animal feed for livestock will suffer from the higher costs. At the same time, consumers are already paying more for food and will probably see firm energy prices continuing as long as tariffs and other trade protection jack up the cost of biofuel imports.

How can new policies help? The first step is to acknowledge that the environmental and economic benefits of many first-generation biofuels are at least smaller than had been expected, and in many cases the effects are negative. Support for ineffective biofuels should be stopped in favour of better alternatives.

There is no one right policy choice for all countries; policymakers should consider a range of alternatives and not just limit their hunt to biofuels. That said, “second-generation” biofuels, using technology that can produce energy from any plant material and not just food crops, may hold more promise as a lower cost, environmentally-friendly solution.

More research is needed here, and public funding to help R&D would be a sounder, more effective policy than lining the wrong pockets with public funds.  RJC/JB


  • ITF (2008), Biofuels: Linking Support to Performance, OECD, Paris.
©OECD Observer No 267 May-June 2008