OECD report questions benefits of subsidies for biofuels

Oct. 8, 2007
Governments subsidizing biofuels could support a fuel that is more expensive and more environmentally harmful than its corresponding petroleum product, a group in the Organization for Economic Cooperation and Development said in a report issued from Paris.

Governments subsidizing biofuels could support a fuel that is more expensive and more environmentally harmful than its corresponding petroleum product, a group in the Organization for Economic Cooperation and Development said in a report issued from Paris.

“The current push to expand the use of biofuels is creating unsustainable tensions that will disrupt markets without generating environmental benefits,” said a September report entitled, “Biofuels: Is the Cure Worse than the Disease?”

The overall environmental harm from ethanol and biodiesel easily can exceed those of petroleum products when increased fertilizer use, biodiversity loss, and agricultural pesticides associated with biofuels are taken into account, the report said.

Meanwhile, the volume of imported fossil fuels displaced by a country’s domestically produced biofuels will be small in most cases, said the report issued by the OECD’s Round Table on Sustainable Development (OGJ, Sept. 24, 2007, p. 17).

“What’s more, an augmented biofuels market will tend to increase the positive relation between oil prices and biofuels costs,” it said. Higher oil prices increase agricultural production costs and consequently raise biofuels production costs because feedstocks become more expensive.

Without subsidies, most biofuels cannot compete on price with petroleum products throughout most of the world, said report authors Richard Doornbosch and Ronald Steenblik.

Biofuels are not the only competition for traditional petroleum products. Oil from tar sands and coal-to-liquid fuels also will vie for market share.

Government policies analyzed

“Government policies play a large role in the financial attractiveness of biofuels production and trade,” the report said. “Quantifying and assessing these policies is not an easy task.”

Subsidies directly linked to output include protection from foreign competition by tariffs on ethanol and biodiesel, exemptions from fuel-excise taxes, and tax credits related to the volume produced, sold, or blended.

Regulations mandating usage or blending percentages and fuel-tax preferences stimulate production directly as well.

The leading OECD countries producing crop-based ethanol apply a most-favored nation (MFN) tariff that adds at least 25% or 14¢/l. to the cost of imported ethanol. That’s often enough to discourage imports of cheaper, foreign-produced ethanol.

The US charges a 2.5% ad valorem tariff plus an additional 14.3¢/l. secondary duty for fuel ethanol vs. ethanol destined for beverages and other end uses. The European Union applies a lower MFN tariff of €0.00192/l. on pure ethanol and €0.00102/l. on denatured ethanol.

Taxes and subsidies also can be used to discriminate between foreign and domestic production. Australia has a 27¢/l. excise duty on imported ethanol. Worldwide, biodiesel is subject to much lower tariffs than ethanol.

The sustainable development report suggested governments encourage lower transportation fuel demand rather than encouraging biofuels production.

“A liter of gasoline or diesel conserved...is a full liter of gasoline or diesel saved at a much lower cost to the economy than subsidizing inefficient new sources of supply,” the report said.