Article Series: Biofuel Subsidies

Biofuels - At What Cost?

The Biofuels - At What Cost? series of reports identifies and quantifies biofuel subsidies in a number of developed and developing countries. These reports offer some of the most comprehensive and robust estimates of biofuel subsidies currently available. 

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Biofuel Subsidies in Australia

This GSI report finds that the Australian government spent A$ 95 million on supporting biofuel production and consumption in 2006-07. That cost could grow to several hundred million dollars a year by the end of the decade if planned new ethanol and biodiesel capacity comes on-line over the next two years. Currently, biofuels contribute less than 0.5 per cent of Australia’s transport-fuel needs.

Under even the most optimistic scenario for Australian biofuels, the amount of funding required to achieve a one-tonne reduction of CO2 through biofuel subsidies could have purchased between 5 and 30 tonnes of CO2-equivalent offsets on the U.S. or European carbon markets. Biofuel subsidies are also an expensive way to reduce fossil fuel use, costing between A$ 0.50 and A$ 2.00 for every litre of petroleum-equivalent displaced.

Biofuel Subsidies in Canada

This reports finds that In the three-year period ended 2008, total government transfers to biofuels approached $1 billion CAD, with an average of around $300 million CAD per year in Canada. The subsidies accounted for 20 to 70 per cent of the retail market prices for the biofuels. While transfer payments are levelling off, ethanol from corn (maize), the most common product in Canada, requires subsidies of between $0.50 and $0.70 a litre to replace an equivalent litre of fossil energy—enough to purchase the displaced fuels with the subsidy alone.
To remove one tonne of greenhouse gases from the atmosphere via corn- or wheat-based ethanol costs between $200 CAD and $400 CAD. By comparison, one tonne of CO2 reductions cost $4.25 CAD on the Chicago Climate Exchange or $33.85 CAD on the European Climate Exchange.

Biofuel Subsidies in China

This report finds that China provided a total of RMB 780 million (US$ 115 million, roughly US$ 0.40 per litre) in biofuel subsidies in 2006. Total support is expected to reach approximately RMB 8 billion (US$ 1.2 billion) by 2020, according to official sources. This is likely to be a significant underestimate, as it does not include support to feedstocks, such as the RMB 3000 (US$ 437) per hectare per year available from 2007 for farmers growing feedstock on marginal land.
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 and the potential for negative unintended consequences is high, including for vulnerable rural communities.  

Biofuel Subsidies in the European Union

This report finds that annual support for biofuels provided by EU governments reached € 3.7 billion in 2006. Government support is provided through a multitude of policies at the local, regional, national and Community levels. These policies include exemptions from or reductions in fuel-excise taxes; direct payments to producers in some Member States; capital grants or cheap loans for infrastructure; area payments for growing energy crops; and funding for research and development. Some Member States that have regulated minimum market shares for biofuels have started to move away from exempting them from fuel-excise taxes.  

The cost-effectiveness of biofuels to meet these objectives is questionable. For example, the cost of obtaining a unit of CO2-equivalent reduction through biofuel subsidies is estimated to be € 575 to € 800 for ethanol made from sugarbeet, around € 215 for biodiesel made from used cooking oil, and over € 600 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.

Biofuel Subsidies in the European Union: 2010 Update

This report finds that, in 2008, total transfers in support of biofuels associated with the policies of the EU and its Member States amounted to € 3.01 billion. The decline in support per litre is significant: where in 2006 it was equal to € 0.74 and € 0.50 per litre of ethanol and biodiesel consumed, by 2008 it had decreased to € 0.24 and € 0.22 per litre consumed, respectively. Several factors are responsible for this change. One of the most important is that excise tax exemptions, which represent the largest share of support, have been reduced in several Member States, while mandatory blending targets gained in importance - and the latter are difficult to measure in terms of financial support.

Biofuel Subsidies in Germany

Currently, the German government plans to achieve the EU’s renewable transport target mainly through the use of mandatory blending targets applied to the mineral oil industry for the use of biofuels. This study highlights that the prevalent policy interventions in Germany—mandatory blending requirements and tax exemptions—have a number of related costs. The study provides an overview of Germany’s biofuel market and discusses current trends and developments in German biofuel support schemes. A number of issues linked to the use of blending mandates and other biofuel support measures are investigated and, where possible, an estimate of the potential costs provided.

Biofuel Subsidies in Indonesia

This report finds that total government allocations by the Indonesian government for biofuel development between 2006 and June 2008 reached up to IDR 1 500 trillion (US$ 1.6 billion). However, it is unlikely that all of these funds were disbursed. Low budget transparency in Indonesia makes it difficult to assess amounts committed in the budget and progress with implementation. Actual subsidy levels are likely to have been in the neighbourhood of IDR 1 800 billion (US$ 200 million).

Indonesia's experience with petroleum pricing has clearly demonstrated that fuel subsidies can become a major drain on the economy, and politically difficult to reduce once in place. Recent steps to liberalize fuel prices have been a major advance for the Indonesian economy. Letting fuel prices rise to levels prevailing in international markets would reduce consumption and improve efficiency, resulting in improved energy security. The report suggests that adding an additional layer of subsidies for biofuels to an already distorted system makes little economic sense.

Biofuel Subsidies in Malaysia

This report finds that while 92 biodiesel projects were approved in Malaysia during 2006-2007, there were only 14 functional biodiesel plants in 2008, and only eight had produced biodiesel. The remainder had cancelled plans or suspended operations due to high feedstock prices and a further four had closed. Prospects for international export opportunities have also diminished. In addition, but policy changes in the future could limit access for Malaysian biodiesel to U.S. and EU subsidies and lock out all but certified sustainable biodiesel and feedstocks.
In light of the limited economic, social and environmental benefits of promoting biodiesel in Malaysia, the report recommends that the government refrain from intervening in the market for biofuels, through such measures as offering direct price support or imposing mandatory blending. Rather, the biofuel industry should be allowed to function in response to market signals—consistent with environmental and social standards—so that the industry establishes itself on a sustainable rather than a government-dependent basis.

Biofuel Subsidies in Selected OECD Countries

This report provides an overview and analysis of subsidies to biofuels in Australia, Canada, the European Union, Switzerland and the United States. It provides the first comprehensive study of support policies in economies that account for over 95 percent of biofuel production within the OECD region.

It is based on the individual country studies carried out for the GSI — studies which have adopted a common analytical framework so as to allow cross-country comparisons — but also provides additional analysis. As a result of applying a common framework, this synthesis is able to highlight the similarities and differences among support policies, and some of the fiscal, economic and environmental consequences of those policies.

Biofuel Subsidies in Switzerland

This report finds that in 2007 the Swiss federal government spent (or exempted from taxes) around CHF 12 million supporting the production and consumption of biofuels. This number could grow tenfold, to more than one hundred million Swiss francs a year within the coming decade if currently planned expansion of the industry comes to pass.
The report finds that it costs up to CHF 1500 in subsidies to reduce one tonne of carbon using rapeseed biodiesel.  For the same cost, the government could purchase roughly 30 tonnes of CO2-equivalent offsets on the European Climate Exchange. Even under the “best-case scenario,” biodiesel made from recycled waste oil, the government could purchase six times more CO2-equivalent offsets on the European Climate Exchange than through subsidies. In short, if carbon emission reductions are the primary policy objective, then subsidizing biofuels is costly and inefficient.

Biofuel Subsidies in the United Kingdom

The U.K. government is currently considering what policies will ensure it meets the European Union’s Renewable Energy Directive (RED) commitment of using 10 per cent by energy of renewable transport fuels by 2020. This study examines the potential fiscal burden on the U.K. government and the additional costs imposed on consumers and other sections of the economy if the U.K.’s blending mandate of 4 or 5 per cent (in 2011/12) was increased to 10 per cent or 15 per cent in order to satisfy the EU’s renewable transport target. A number of important areas were investigated and, where possible, an estimate of the potential costs provided.

Biofuel Subsidies in the United States

This report finds that subsidies to biofuels were between $5.5 billion and $7.3 billion in 2005. Those figures are expected to grow significantly if current policies remain in place, as the bulk of biofuels subsidies are tied to output and output is increasing at double-digit rates of growth.
The report finds that biofuels are an extremely high-cost means for reducing greenhouse-gas emissions. Under optimistic projections, it costs some $500 in federal and state subsidies to reduce one metric ton of CO2-equivalent through the production and use of corn-based ethanol. Moreover, the sheer levels of government support to biofuels appear out of proportion to their ability to satisfy domestic transport-fuel requirements. Current forecasts are that biofuels would account for less than 5 percent of total transport fuel use in 2010.

Biofuel Subsidies in the United States: 2007 Update

This report revises an earlier report issued in October 2006 and details the extent of current government support to biofuels in the United States. The report also analyzes the potential impact of forthcoming legislation, namely the Energy and Farm Bills, which are poised to expand government support even further. It finds that under existing policies, the biofuels industry will, in aggregate, benefit from support worth over $ 92 billion within the 2006 - 2012 time frame.