Biofuel policies criticised by OECD

Agra Europe Weekly
Wednesday July 16 2008

A new report from the Organisation for Economic Co-operation and Development argues that existing policies for biofuels in OECD countries are costly, and that their impact on decreasing greenhouse gas emissions is limited, writes Dr Alan Bullion, deputy editor of F.O. Licht’s ‘World Biofuels Report’.

Futhermore, the report fuels the debate over food prices by suggesting that existing support mechanisms are having a significant impact on global commodity prices, although concluding that this should not be exaggerated, as some recent press reports have done.

The OECD report, ‘Economic Assessment of Biofuel Support Policies’ contends that alternative policy approaches may offer greater benefits. It specifically argues for the accelerated introduction of ’second-generation’ biofuels that do not rely on current commodity feedstocks, such as cellulosic sources, algae, waste and forestry, as well as fuel cell and hydrogen vehicles.

It also recommends that existing trade barriers to biofuels should be lowered or removed, chiming with similar calls from Sweden, a large importer of ethanol, and Brazil, a leading producer and exporter.

With record gasoline prices in the United States, there is a growing clamour for the removal of the 54 cents a gallon import tariff currently applied to Brazilian ethanol. Opponents of existing US policy, such as Republican Presidential contender John McCain, are arguing that it would make much more economic sense for the US to import more ethanol from Brazil and drill more offshore oil, a stance vigorously opposed by his Democrat rival Barack Obama.

Looking seven years ahead, the report calculates that policies in the United States, Canada, and the European Union would only save between 0.5% and 0.8% of GHG emissions from transport in 2015. It further estimates that these mechanisms would cost some US$25 bln a year in 2015. In effect, the OECD says that these supports cost between $960 to $1,700 per tonne of GHG (CO2 equivalent) saved, and are thus expensive to maintain.

The report is also critical of blending policies and mandates. It argues that while these measures generally are neutral for public budgets, the higher production costs of biofuels result in increased fuel prices for the final consumer who therefore makes a transfer payment to biofuel producers. This of course overlooks the argument from the International Energy Agency and others that without biofuels petrol prices would actually be higher.