Last month the Global Subsidies Initiative of the International Institute for Sustainable Development issued its report on subsidies to biofuels in selected OECD countries (Australia, Canada, the European Union, Switzerland, the United States).

The report arrives at a time of tremendous growth in biofuels production and consumption. 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, however; rather, government policies, such as subsidies and blending mandates, have been the main drivers.

"The problem, as we saw it, was that nobody was really monitoring the situation, at least in respect of the levels and effects of subsidies and trade barriers," writes David Runnalls, President of the International Institute for Sustainable Development.

Border protection has heavily insulated producers of biofuels in the OECD from cheaper imports. Brazilian exporters, for example, face tariffs that add at least 25% to the price of their product in the United States, and over 50% in the European Union. Biofuels have also benefited from generous tax credits, and grants and loans to the biofuels industry for investment in productive capacity.

Mandates that set blending targets for biofuels with fossil fuels have also helped fuel the biofuels market. These mandates ensure that consumption will grow into the future, which in turn expands those subsidies tied to production. The risk of a fiscal blow-out is high, warns the reports author, Ronald Steenblik, Research Director for the GSI.
 
While governments have promoted biofuels as a means to lower GHG emissions, strengthen energy security and foster rural development, the GSI has been skeptical about whether subsidies to biofuels are an efficient means of achieving these policy goals.
 
In particular, the GSI warns against open-ended, production linked subsidies, such as full exemptions from fuel-excise taxes, which are "costly, arbitrary and inefficient."
 
"Policy makers with experience in either agriculture or energy should be well aware that market price support, direct production subsidies and volumetric controls generate rents that inflate the value of fixed factors of production," writes Mr. Steenblik. "This phenomenon, sometimes referred to as ‘the transitional gains trap', makes phasing out such forms of support very difficult and costly - the more so, the longer the policies remain in place."
 
The GSI recommends that governments rethink the overall rational for supporting biofuels, while dedicating more research into the consequences of current support to biofuels to determine their cost effectiveness and impacts on sustainable development.
 
There is also a need for greater transparency and coordination. Subsidies flow from different levels of governments, with little indication that they are coherent and well targeted.

"Considering how much effort went into assembling subsidy data for the GSI studies, it can be surmised that those proposing new incentives at the central government level do not have a clear understanding of the full gamut of support already provided by subsidiary levels of government, nor of the potential impact that government support for biofuels is having on the environment and the economy," concludes Steenblik.
 
The report is available on-line by clicking here.