The high cost of subsidies to biofuels in China
By Tara Laan, Global Subsidies Initiative

China has made strides in recent years to shed its status as one of the world’s largest contributors to environmental degradation. However, in China, as elsewhere, well-intentioned policies can have negative unintended consequences for the environment. China’s recent efforts to boost its biofuels industry through subsidisation are a case in point.

According to a report* published in November by the Global Subsidies Initiative, China provided a total of RMB 780 million (115 million dollars) in biofuel subsidies in 2006. Total support is expected to reach approximately RMB 8 billion (1.2 billion dollars) by 2020, according to official sources, although this is likely to be a significant underestimate.

China’s support for its biofuels industry is based on a number of laudable goals: improving energy supply for China’s soaring transport needs, reducing air pollution and building a “new socialist countryside” by creating alternative markets for grain and opportunities in China’s poor rural areas.

Biofuels may help achieve some of these objectives. Benefits could include higher farm incomes and rehabilitation of degraded land. The use of marginal land for feedstock production, for example, may offer new opportunities in rural areas by providing a source of cash income for farmers. However, there is evidence that small landholders can be at risk of displacement due to illegal or unjust land acquisitions, as local government and investors establish large-scale plantations for biofuel feedstocks.

There is also the risk that biofuel subsidies will encourage cultivation of feedstocks in conservation areas. Indeed, areas of Southwest China, which have been earmarked for jatropha plantations to produce biodiesel, are some of China’s most ecologically important regions, containing most of China’s remaining natural forests as well as the headwaters of the Yangtze and the Mekong rivers. The development of large-scale jatropha plantations could threaten biodiversity and harm important waterways, through erosion and agricultural runoff.

While the negative repercussions associated with a large-scale biofuels industry could, potentially, be large, the environmental benefits appear relatively minor. Even under the most optimistic scenarios for Chinese biofuel production, soaring private vehicle ownership means domestic production of biofuels would have a negligible effect in reducing China’s oil consumption or increasing energy security. The net benefits for pollution reduction also appear to be limited.

For these reasons, the Chinese Government should re-evaluate its biofuel policies, particularly to ensure that biofuels genuinely do not compete with food or undermine the government’s social or environmental objectives. More generally, China should hasten the liberalisation of transport fuel prices. China’s current price caps undermine the government’s energy-efficiency goals. If improving energy security and reducing urban pollution are genuine priorities, then allowing domestic fuel prices to rise to those established in international markets would be the most effective step that China could take to curb demand, particularly if such action is accompanied by policies to improve vehicle efficiency and slow growth in car ownership.

* "Biofuels – At What Cost? Government support for ethanol and biodiesel in China"