G-20 to Press U.S. to End Aid for Biofuels Industry : Trading Partners Take Issue With Washington's Use of Policy to Promote Industry; EU Wants Tax Credit Scrapped

22 June 2011

THE WALL STREET JOURNAL

By John W. Miller

BRUSSELS—The U.S. will face new pressure from fellow Group of 20 nations to end government aid for the biofuels industry at a meeting of farm ministers in Paris on Wednesday and Thursday, said trade diplomats and analysts.

The biofuels industry turns corn, wheat, rapeseed, sugar cane and other crops into fuel. Last week, the U.S. Senate voted 72-37 to eliminate a 45-cents-per-gallon tax credit for blended biofuel and regular fuel and a 54-cents-per-gallon import tariff on imported ethanol.

The issue for trading partners isn't the government mandate that this year is forcing U.S. gasoline companies and drivers to use at least 12.6 billion gallons of ethanol—many countries have similar mandates—but that the U.S. is alone in actively using trade policy to promote its own industry.

European Union officials said they will continue to lobby the U.S. to eliminate the credit during the G-20 meeting, which is focused mainly on managing global food stocks.

However, the EU will continue to back domestic subsidies used by its 27 member states to achieve its goal of making 20% of its fuels renewable by 2020.

"We still think you can have an affordable food supply and biofuels at the same time," says Roger Waite, a spokesman for the European Commission.

The White House and Congress have said they continue to support the tax credit, which costs $6 billion a year and helps drive exports to the EU by keeping biofuels inexpensive.

Earlier this month, the World Bank, the World Trade Organization and other organizations teamed up on a report recommending that governments cut measures that "subsidize or mandate biofuels production or consumption."

The biofuels industry faces pressure whenever food and commodity prices spike. That happened three years ago, and it is happening again, notably helping to trigger revolutions in North Africa and the Middle East.

In the West, where people eat more processed foods, final prices aren't tied too much to commodity values. But in the developing world, the correlation is more direct.

The United Nations' Food and Agriculture Organization has forecast that cereals prices, when adjusted for inflation, could grow 20% over the next decade compared with the previous decade, meaning the focus on biofuels is unlikely to relent.

The biofuels industry is fighting back.

"It may be vogue to blame biofuels for global hunger issues as though they didn't exist before biofuel production, but that doesn't mean eliminating biofuels policies will somehow put more food on the plates in developing nations," said Geoff Cooper of the Renewable Fuels Association, a Washington-based lobby group. "We encourage G-20 leaders to reject its findings."

He added that "bioenergy production can provide the catalyst many nations need to invest in agricultural technology, thus improving productivity, food security and their own energy stability."

Meanwhile, a new study by the International Centre for Trade and Sustainable Development, an independent think tank in Geneva, concludes that food prices haven't so far been affected as much as feared by biofuels policies. For example, the biggest effect so far has been in 2007, when maize prices would have been 30 cents per bushel, or 7.1% lower without policies encouraging ethanol production. There are secondary effects on other foodstuffs, but these aren't hugely consequential, either. The biggest impact on egg prices, for example, was 5% in 2009.

However, the study finds that food prices are greatly affected when commodity supplies are tight, for example, during high oil prices and poor weather. In 2011, maize prices are expected to be 17% higher because of biofuels policies.

The solution, says Bruce Babcock, the author, is to eliminate the tax credit since it has no real effect on production, and to tie the mandate to commodity prices—increasing it when prices are low, and reducing it when prices are high. When supplies are tight, let companies and consumers go back to using more gasoline, and when they are plentiful, force more biofuel use.

There is "no rationale for the blender tax credit," he said. "It does little to help the biofuel industry as long as mandates are in place except in years when high gasoline prices have already stimulated demand beyond mandated levels."

That will require more cars able to run on either fuel, as are used in Brazil, said experts.

The biofuels industry "has spent far too much time lobbying for government handouts and far too little time showing people its benefits," said Kevin McGeeney, director of Starsupply Commodity Brokers, a Geneva-based trader in biofuels. "If the biofuels industry collapsed, it would only have itself to blame."

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