Biofuels: Could the Cure Be Worse Than the Disease?

The frequency and intensity of these claims appear to be on the rise, in part due to reports such as the one recently released by the Organisation for Economic Co-operation and Development (OECD).  The intergovernmental trade organization, based in Paris, recently held its 20^th Round Table on Sustainable Development. The report, "Biofuels: Is the cure worse than the disease?,"written by Richard Doornbosch and Ronald Steenblik, garnered a lot of press for its claim that biofuels may be causing more problems in the world than they are supposed to be solving.

The authors echo others' concerns that the enthusiasm behind government support, private investment, and dramatic rises in production and consumption of biofuels is often misguided and even risky.

I caught up with one of the authors, whom I've had the occasion to work with recently, and challenged him to defend the hard-hitting report.

Frickel: Ron, you claim that currently only three production methods --Brazilian ethanol made from sugarcane, ethanol produced as a byproduct of cellulose production, and biodiesel made from animal fats and used cooking oil - can substantially reduce green house gas (GHG) emissions compared with gasoline and mineral diesel. That's a pretty narrow field. Care to elaborate?

Steenblik: It depends on one's definition of "substantially." Some would consider even improvements of 15% compared with gasoline or diesel as "substantial." But for the next decade or more, biofuels will largely be consumed as low-percentage blends. So it takes a biofuel that cuts life-cycle emissions by 80% or more to really make much of a difference.

Frickel: What about the argument that production of 1^st-generation biofuels is paving the way for 2^nd-generation biofuels?

Steenblik: It is mainly the producers of 1^st-generation biofuels who are making this argument, not people trying to develop 2^nd-generation biofuels. The reality is that few existing ethanol plants will be able to be upgraded to cellulosic ethanol plants - at least not cellulosic ethanol plants able to get the kind of GHG reductions that are often claimed.

The other part of the argument is that meanwhile infrastructure for using biofuels is being built. But is that a good investment? Should a low-cost way to produce, say, cellulosic ethanol be discovered, it will still be many years before a substantial industry based on that technology is up and running - plenty of time for the rest of the infrastructure for distributing it to be created.

Frickel: What about the billions of dollars which has been spent and which will continue to spent on mills, equipment, other capital goods and infrastructure? These represent a huge investment and sunk costs. How do you figure in these economic losses into your analysis?

Steenblik: First and foremost, governments should not throw good money after bad. Continuing to support an industry that cannot survive without subsidies will only make the pain worse when the inevitable adjustment comes.

There are ways that governments can extricate themselves from supporting the industry. In the United States, for example, almost all of the major support elements - the volumetric ethanol excise tax credit, the small ethanol producers' credit, the import tariff on ethanol - are due to expire within a few years. It is within Congress's right to let them expire. If some investors assumed those policies would be renewed indefinitely, that was a gamble that they took, and as a gamble they should have been prepared to lose.

At the very least, governments could declare that volume-related subsidies will stop being available for new biofuel plants.

Would there be huge economic losses if governments pulled the plug on subsidies? Some producers might go out of business. But others would be able to continue selling their product as long as they could cover variable costs. As long as petroleum prices remain at current levels, that would include quite a few existing producers.

Frickel: Many readers will point out that enormous subsidies are given to the petroleum industry. Why not give biofuels a fair shake?

Steenblik: So, what is the story one is supposed to tell: that biofuels deserve matching billions? If the biofuels industry expects taxpayers to make it competitive through subsidies, they will quickly break the bank. Subsidies to oil need to be eliminated as well, of course. But we doubt doing so would change the relative competitiveness of biofuels. What do subsidies to gasoline and diesel work out at on a per-litre basis? The estimates we've seen suggest that in the USA the value of the various tax breaks are worth around 3% of the current price of oil. That comes out to a big number in terms of total transfers. Perhaps they are as high as 10%. But that would still put them far below subsidies as a percentage of market value for biofuels, which are typically on the order of 50% of the retail price, or more.

Also, the direct transfers in support of biofuels are only part of the picture. To the extent that their demand for raw materials drives up prices for grains and oilseeds, that drives up food prices, which adds to the burden on society.

Frickel: Okay, the competition between energy crops and food crops has stirred up a very important debate. We've recently witnessed significant increases in grain and vegetable oil prices as a result of increased demand for biofuels. Is this an undesirable by-product that will be less damaging over time given price stabilization?

Steenblik: Grain and vegetable-oil prices will adjust eventually to a new equilibrium. In the mean time, the OECD and FAO (Food and Agriculture Organization) expect that various pressures will probably keep up prices for these commodities for several years. Over the long run, part of the question comes back to how much intensification of and expansion of land devoted to agriculture is the world prepared to accept?

Frickel: Governments are notoriously slow to respond to alarming reports such as yours unless they foresee an immediate threat. What do you think it will take to trigger a change in attitude and cutbacks to biofuels?

Steenblik: In the United States, it will probably take a big crop failure or a big drop in the price of oil. In the EU, people are already realizing that the main argument for biofuels - that they can substantially reduce greenhouse gas emissions - is not holding up to scrutiny.

Frickel: Ron, many thanks for your time and insight.

Steenblik: Thank you.

Ronald Steenblik serves as the Director of Research for the Global Subsidies Initiative (GSI) of the International Institute for Sustainable Development (IISD). Prior to joining the IISD, in January 2006, Ronald was a Senior Trade Policy Analyst in the Trade Directorate of the Organisation for Economic Co-operation and Development (OECD).

Co-author Richard Doornbosch serves as the Principal Adviser of the OECD's Round Table on Sustainable Development.

Mark Frickel runs Enamarus Consulting, an independent consulting and research firm. Mr. Frickel recently worked with the IISD to develop studies on government support to biofuels in Brazil, Canada, and Australia.