Taking Stock of the Biofuels Boom
By Doug Koplow, www.earthtrack.net

The biofuels boom has come as politicians the world over scramble to find alternative ways to meet growing energy needs. Biofuels appear to be an easy solution. The fuels seem to be renewable, since they are made from plants. Moreover, the diversity of potential feedstocks suggest they can be produced widely within most countries, theoretically addressing energy security concerns associated with rising reliance on oil imports. Throw into the mix the idea that these crops can boost farm incomes and it is no surprise that legislation aimed at supporting biofuels is introduced virtually every week.

Strong political support from many agricultural interests, along with high oil prices, has driven a tremendous growth in biofuels production around the world. This growth is quite fragile, however, as most biofuels investments would not be competitive if oil prices were to fall significantly, or plant feedstock prices to rise significantly – movements that are quite common in volatile commodity markets. Because of these risks, most analysts attribute the current growth in the biofuels sector primarily to generous and increasing public subsidies. Such government support may well not prove justified either from an economic or from a sustainable development perspective.

The Subsidy Angle

Within the United States, there were more than 200 incentives for biofuels as of October 2006. The GSI’s research in the European Union reveals that dozens of subsidies are in place across Europe, while numerous developed and developing world governments have also recently announced ambitious policies to promote biofuels. These subsidies support a host of activities: plant construction and site upgrades; biofuels production; biofuels blending with other fuels; distribution and retailing networks; special engines and fueling systems to handle the new fuels; and in some cases incentives to increase consumption as well.

The fragmented complexity of biofuels subsidies is further complicated by the fact that they are overlain atop long-standing and equally complex agricultural support programmes in the U.S. and Western Europe to subsidise key feedstock crops, land use for farming, and irrigation water.

These various support programmes operate from many different government ministries, and at three or more levels of government (federal/national, state/provincial, and local). The result is “subsidies stacking” where, often, only the recipient facility has a clear picture of the full gamut of public support flowing to any one plant!

A Growing Scepticism

News reports over the last year reveal a growing scepticism toward biofuels and the subsidies that support their production and consumption. Indeed, many of the supposed benefits of biofuels production have not materialised to the extent expected, while a host of related problems have emerged instead. Investigating and reporting on these problems can greatly improve the public’s understanding of the trade-offs, and the downsides, of the continued growth of government subsidies to biofuels. These include:

Carbon displacement. A study undertaken by this author for the Global Subsidies Initiative demonstrated that subsidies to corn ethanol cost more than $500 per metric tonne of CO2-equivalent displaced in the United States, even assuming the most favorable production conditions. This is roughly 100 times as expensive as simply buying these offsets on the Chicago Climate Exchange. While the feedstocks themselves are technically renewable, their production, refinement, and shipment actually require burning considerable amounts of fossil fuels. Land conversion also worsens the carbon tradeoff. Around the world, biofuels production has pushed cropping patterns on to marginal lands and even into biodiversity hotspots. Although these impacts have not been studied in detail, some of the land conversion impacts clearly increase CO2 emissions, and harm environmental quality.

Environmental impacts. The environmental consequences of biofuels production and use are critical to investigate, as they are both numerous and varied: Water depletion is a common concern, resulting from both feedstock cultivation and the operation of biofuels production facilities themselves. Air emissions are also an issue – again, both during the production process and when burnt to power vehicles. Conversion of ever vaster land areas to single fuel-crop farming is creating a further array of concerns, from biodiversity loss to soil depletion and increased vulnerability to insect infestations. Studies have shown that corn, the primary feedstock for ethanol in the United States, is a major consumer of water, insecticide and fertiliser, compared to other crops(3). Soil erosion and other negative environmental impacts are further exacerbated when corn is grown continuously, something to be expected as corn prices rise due to the biofuels boom.

Technological development. Biofuels promoters often argue that environmental problems of first generation biofuels will quickly disappear with second and third generation technologies. They point to using native species, diversified crop feedstocks, and cellulosic technologies to reduce the environmental footprint. However, a number of conversations with ethanol producers advise caution. They don't expect cellulosic processing plants to handle more than a single type of feedstock for many years to come. In addition, though better than corn, it is unlikely that large scale production of cellulosic crops will be environmentally benign. In fact, analysis by the World Resources Institute suggests that the largest first generation cellulosic feedstock may well be corn, due to existing cropping patterns and crop handling infrastructure. Stalk and leaves will supplement corn kernels as feedstocks.

Rural dislocations. Increased rural development is another oft-stated benefit of biofuels. However, there are losers as well as winners in the affected farming communities and the voice of those who lose out is getting progressively louder. Grain shipment and storage patterns have changed. For example, grains that used to be stored are now converted to fuel quickly. Farmers who have to pay more for animal feed, are no longer able to service export markets, or have seen the value of fuel byproducts such as soy meal drop in price. Land prices have also risen as a result of the biofuels frenzy, pricing some farmers out of the market. In Saskatchewan, Canada, prices for top-quality farm land rose by 20% last year, due in part to biofuels(4). Meanwhile, a recent study by the Canada’s Saskatchewan Institute of Public Policy of the University of Regina, says that the ethanol industry in Saskatchewan could create some 80 full-time permanent jobs. However, at an estimated cost of $20 to $60 million CDN in public funds, the authors ask whether there might well be other, more efficient ways to stimulate the rural economy(5).

Displacement of non-biofuels opportunities. Local press articles routinely mention economic development funds that are being used to help bring biofuels facilities to towns. Yet much of this reporting has been anecdotal rather than systematic, and it is therefore difficult to see how much of the total available resources are being absorbed by the biofuels sector. Similarly, it would be useful to determine which industries are no longer receiving government support, and how the current pattern of subsidies to biofuels might affect the long-term development of a diversified rural economy and, indeed, a diversified market for alternative energy sources.

Labour and trade issues. Bringing jobs to rural areas has been a rallying cry for subsidising the biofuels industry but the realities on the ground would warrant serious investigation. What are the actual numbers of jobs created and have they gone to members of the local community? Are plants routinely automating to reduce their need for labour? Do off-plant job losses (e.g., in feed or grain elevator segments) offset the in-plant gains?

In the developing world, a further set of issues applies, including emerging reports of slave-like conditions for workers. Clearly, additional investigative reporting would be useful here, not only on existing conditions but on potential solutions such as certification for environmental and labour practices. That said, some certification schemes could reduce the competitiveness of the southern hemisphere countries in the global biofuels market, and it is noteworthy that existing trade regimes keep imports from these regions out of the U.S. and Western Europe.

Perverse Incentives?

Subsidies sometimes have a way of promoting strange behaviour. In the former Soviet Union, for example, there were stories of children's clothes being used as rags because they were subsidised and therefore cheaper than plain, untailored fabrics. Whether actual or apocryphal, this story provides a useful insight for critically examining biofuels issues around the world. It is entirely possible that as a society we are spending far more in valuable land, water, or fossil fuel resources than what we get out in the form of a gallon of ethanol or biodiesel, simply because of the massive government incentives that promote their production and use.