Biofuels: From agriculture to climate change policy tools

13 May 2016

Having worked for the last 12 years with biofuels, I can tell you that some convictions are difficult to overcome. This is exactly the case with biofuels: no matter how many papers are published or how much new scientific evidence comes to light, many people continue to think that all biofuels are bad for the environment, they cost money to taxpayers and, on top of this, they contribute to starving the food insecure population of this planet!

I’ve read with great interest the E15Initiative policy options resulting from the Expert Group on Agriculture and Food Security, written by Professor Tangermann, for whom I have great respect – he was part of the jury for my PhD thesis! However, I must say that I have quite a different vision regarding biofuels.

Let’s start with the impact of biofuels on food prices. Yes, in 2008 almost all international organisations blamed biofuels for being the main contributors to the agricultural price peaks. But we are in 2016 and, since then, biofuels production increased by 40 percent while agricultural prices dropped by 18 percent according to the FAO Food Price Index. A multitude of papers, produced by the World Bank, the European Commission and Ecofys, just to name a few, have recognised that biofuels play a minor role in the evolution of food prices. So, I think it is unfair to keep blaming biofuels for starving the poor urban citizens of this world.

Now let’s turn to the part I found more interesting: the support provided to biofuels. I cannot agree more with the criticism on the lack of transparency regarding the financial aid granted to the sector. But what kinds of subsidies are we talking about and how should we classify them?

Biofuels production is highly concentrated. The United States (US), Brazil and the European Union (EU) account for 85 percent of the world production. I fully acknowledge that, ten years ago, the US and the EU were heavily subsidising their biofuels industries. Tax credits and high import tariffs were in place in the US; and energy crop payments and tax exemptions were pervasive in the EU, while generous subsidies for the construction of plants thrived in both locations. But ten years later, very few of these measures remain in place. The US abolished its tax credits and import tariffs for ethanol in 2011,  while the EU eliminated the energy crops payments back in 2008. Tax exemptions are progressively disappearing for conventional biofuels and won’t be authorised after 2020. Not to mention support for new first-generation biofuels plants. The EU capped this type of alternative fuel in legislation passed in 2015, where the installed capacity is sufficient to supply the EU market. It would therefore be extremely interesting to have an up-to-date review of the current level of subsidies to biofuels.

But, beyond this point, how should we classify this support? Are we talking about agricultural products or about energy commodities?

Only first-generation biofuels will, in theory, qualify as agricultural goods, because second- and third-generation biofuels are made of waste, residues, algae, and anything originating from non-food sources. So how should we qualify the support for this type of more advanced biofuel? It can’t neatly be reported under the Agreement on Agriculture (AoA). However, I back the idea of notifying these subsidies under the Agreement on Subsidies and Countervailing Measures (ASCM). Although, in principle, these subsidies do not depend on the use of national content nor on export targets, and cannot be disciplined,  they should be notified to the WTO for the sake of transparency.

Let’s now come back to first-generation biofuels. Not all biofuels are created equal and it starts with customs classification. Biodiesel is considered a chemical product (classified in chapter 38) and is therefore out of the reach of the AoA, while ethanol is an agricultural good (chapter 22). However, the very same ethanol has different uses. For instance, it can be used as a fuel, as an ingredient for de-icing liquids, as the raw material to produce bioplastics, or it can be employed by the beverage industry. That is to say that it would be extremely complicated to report and discipline specific agricultural subsidies for biofuels.

You will tell me, what about the obligation to blend biofuels into fossil fuels?

I fully agree that there should be a flexibility mechanism for the mandates. Consider the Brazilian example. The mandate can vary from 18 to 27.5 percent, and the government decides which rate will apply depending on harvest conditions. The idea is that  the mandate can be lowered in case of tensions in the agricultural market. This flexibility has been used many times over the last ten years. In addition, free trade in biofuels is also essential to guarantee adequate supply and avoid market disruption. Thanks to the absence of import restrictions, the US was able to import large quantities of Brazilian ethanol in 2012-13 when it was hit by a record drought, with no impact on corn exports nor on fuel supply.

Providing that this flexibility exists, blending obligations is a key instrument for biofuels to have access to the market. The ideal situation would be to have a carbon tax that reflects the real cost of fossils for the society, but we are still far from there. Competition with fossil energy sources is too imperfect for biofuels to compete and they need a mandate to exist.

This takes me to my final point: biofuels are not agricultural products, but a tool in the climate change policy of countries. As such, only the good and sustainable biofuels should be promoted and supported. A policy based on the reduction of GHG emissions, neutral from a technology perspective, will help to promote the best alternative fuels, as is already the case in California or in Germany.

Greater transparency would be much appreciated, but I don’t think we should focus on how we should report and discipline declining support to biofuels. The real issue here is what we should do to encourage renewable energies and to promote sustainable biofuels that will help us to mitigate climate change.

Géraldine Kutas is Head of International Affairs at the Brazilian Sugarcane Industry Association (UNICA). Before joining UNICA, she worked as a researcher in agriculture and trade in different organisations such as the Inter-American Bank of Development, Global Subsidy Initiative, ICONE and Sciences Po.