Download: Biofuels at What Cost? Government Support for Ethanol and Biodiesel in the European Union
GENEVA, Switzerland, October 2007: Total annual support for biofuels provided by EU governments reached € 3.7 billion in 2006. Considering that many subsidies are difficult to track down, this is probably an under-estimate. Currently, biofuels contribute less than 2 percent of the EU’s supply of fuel for road transport, a percentage that the Community wants to increase to 10 percent by 2020. As a consequence of this policy, and because many forms of support to the industry are not budget-limited, support levels could escalate rapidly in the future.
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. That means that the higher costs of biofuels will simply be passed onto consumers. Meanwhile, stiff tariffs on ethanol imports protect EU producers from international competition and push up domestic prices.
On a volumetric basis, support for ethanol, at € 0.74 per litre, is about 50 percent higher than for biodiesel, at € 0.50 per litre. When adjusted for differences in energy content, the support for ethanol (€ 1.10/ litre of petrol equivalent) is twice that of biodiesel (€ 0.55/ litre of diesel equivalent).
Such high levels of assistance for biofuels have been defended by governments and the industry as justifiable in light of the contribution they can make to several important policy objectives — most notably, reducing emissions of greenhouse gases and improving energy security. Such alleged benefits have enabled those promoting biofuels to assemble unusually broad support for fiscal and regulatory relief.
But the cost-effectiveness of biofuels to meet these objectives is questionable.
Greenhouse reductions: The cost of obtaining a unit of CO2-equivalent reduction through biofuel subsidies, for example, 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.
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 and € 5.00 per litre of petrol equivalent for ethanol, and between € 0.60 and € 1.20 per litre of diesel equivalent for biodiesel.
Thus, at the rate at which the EU and Member States supported the displacement of fossil fuels through biofuels in 2006, they could in many cases have purchased as much or even more fossil fuels as they were avoiding.
Key Recommendations:
The forthcoming EU policy review provides an opportunity for the Commission and Member States to recognise that mandatory domestic production and consumption of biofuels is an expensive and inefficient means to achieve the stated policy outcomes.
The authors of the report recommend that the EU and its Member States should:
- avoid instituting new consumption mandates for biofuels;
- eliminate all tariffs on imported fuel ethanol;
- resist providing new specific subsidies to the industry, and move to re-instate fuel-excise taxes on biofuels where this has not already been done;
- improve the information available on government support provided to the biofuels industry, as well as enhance transparency on the effects of such support on production, capacity and trade in biofuels;
- put in place an evaluation process that can thoroughly assess the cost-effectiveness of each Member State’s support policies in attaining all three of the objectives underlying the EU biofuels policy.
