Government support of  biofuel production in OECD countries is costly, has a limited impact on reducing greenhouse gases and improving energy security, and has a significant impact on world crop prices, according to a new study of policies to promote greater production and use of biofuel in OECD countries.

OECD’s Economic Assessment of Biofuel Support Policies says biofuels are currently highly dependent on public funding to be viable. In the US, Canada and the European Union government support for the supply and use of biofuels is expected to rise to around USD 25 billion per year by 2015 from about USD 11 billion in 2006. The report estimates that biofuel support costs between USD 960 to USD 1700 per tonne of greenhouse gases (carbon dioxide equivalent) saved.

Support policies include budgetary measures, either as tax concessions or direct financial support for biofuel producers, retailers or users.

Blending or use mandates require that biofuels represent a minimum share of the transport fuel market and result in increased fuel costs to consumers due to the higher production costs of biofuels. Trade restrictions, mainly in the form of import tariffs, protect the domestic industry from foreign competitors but impose a cost burdon on domestic biofuel users and limit development prospects for alternative suppliers.

The report calls on governments to refocus policies to encourage lower energy consumption, particularly in the transport sector.  It also calls for more open markets in biofuels and feedstocks in order to improve efficiency and lower costs.  The report recommends a clear focus on alternative fuels that maximise the reduction of fossil fuel useage and greenhouse gas emissions.  Further, research to accelerate development of second generation biofuels that do not require commodity feedstocks is suggested.

The reduction of greenhouse gas emissions is a primary reason for current biofuel policies but the savings are limited.  Ethanol from sugar cane - the main feedstock used in Brazil – reduces greenhouse gas emissions by at least 80 percent compared to fossil fuels. But emission reductions are much smaller from biofuels based on feedstocks used in Europe and North America.

Biofuels produced from wheat, sugar beet or vegetable oil rarely provide emission savings of more than 30 to 60 percent while savings from corn (maize) based ethanol are generally less than 30 percent.  Overall, the continuation of current biofuel support policies would reduce greenhouse gas emissions from transport fuel by no more than 0.8 percent by 2015.

The impact of current biofuel policies on world crop prices, largely through increased demand for cereals and vegetable oils, is significant but should not be overestimated. Current biofuel support measures alone are estimated to increase average wheat prices by about 5 percent, maize by around 7 percent and vegetable oil by about 19 percent over the next 10 years.

Taking into account the 2007 US Energy Independence and Security Act and the proposed EU Directive for Renewable Energy, 13 percent of world coarse grain production and 20 percent of world vegetable oil production could shift to biofuel production in the next 10 years, up from 8 percent and 9 percent in 2007, respectively.

OECD’s Economic Assessment of Biofuel Support Policies can be downloaded here www.oecd.org/tad/bioenergy. You may also wish to consult the Powerpoint presentation.