Subsidies to biofuels – large and getting bigger

Globally, ethanol production has grown at double-digit rates in each of the last four years. This expansion has not been solely in response to market forces; rather, government policies, such as subsidies and mandated use of biofuels, have been key factors.

In a new report, Biofuels — At What Cost? Government support for ethanol and biodiesel in selected OECD countries, the Global Subsidies Initiative (GSI) has estimated that OECD economies subsidised biofuels to the tune of at least 11 billion dollars in 2006. This year the total is likely to climb towards 13-15 billion dollars. For the years ahead, governments seem to have signalled that the sky is the limit. Open-ended, production related incentives could drive this number well above 50 billion dollars a year by 2020.

Subsidies to biofuels have been promoted as a means to make energy supplies more secure and mitigate our environmental footprint. But the GSI questions whether the current subsidy programmes in OECD countries are the best way to achieve those policy aims. The GSI study on subsidies to biofuels in the European Union, released this month, found the following:

Greenhouse reductions: The cost of obtaining a unit of CO2-equivalent reduction through biofuel subsidies, for example, is estimated to be 575 euro to 800 euro for ethanol made from sugarbeet, around 215 euro for biodiesel made from used cooking oil, and over 600 euro for biodiesel made from rapeseed. Governments could achieve far more reductions for the same amount of public funds by simply purchasing the reductions in the marketplace. For the price of one tonne of CO2 reduction through EU biofuel subsidies, more than 20 tonnes of CO2-equivalent offsets could be purchased on the European Climate Exchange.

Energy security: Biofuel production is energy intensive, often requiring significant inputs of fossil fuels. Consequently, although the net reduction in petroleum use through the displacement of petrol or diesel by biofuels could be significant, the overall displacement of fossil fuels would remain small. The actual rates vary considerably by feedstock and production process. In terms of public transfers, however, displacing fossil fuels through biofuels comes at a high cost to consumers and taxpayers — depending on the feedstock, that cost ranges between 1.70 euro and 5 euro per litre of petrol equivalent for ethanol, and between 0.60 euro and 1.20 euro per litre of diesel equivalent for biodiesel.

While subsidies to biofuels are expanding quickly, other forms of energy are also heavily subsidised. Subsidies to fossil fuels are of particular concern to the GSI, given the immense environmental and economic impacts. In a forthcoming phase of work, the GSI will be analysing the scale and impacts of subsidies to fossil fuels globally. Please visit contact info@globalsubsidies.org for more information.