Biofuels: Who’s subsidising whom?

Land-use change arguments against biofuels are based on shifting sands, and neglect the massive contribution that fuel crops such as bioethanol make to Europe's economy, argue Eric Sievers and Rob Vierhout.

"A new issue now tops EU biofuels debates: subsidies. First reports suggest that EU biofuels policy is costly, and that subsidies paid to biofuel producers are lush. A fuller exploration of the economics (and subsidies) of EU biofuels reveals that biofuels are among the best economic development - and cheapest carbon abatement - vehicles we have. In other words, the biofuels industry welcomes a serious economic debate.

Unfortunately, serious debate is unlikely if the past is any guide.

Earlier the year, the main issue was land-grabbing, a potent and even stomach-wrenching argument whose only flaw is that there really isn't any, absolutely zero, land-grabbed biofuel being exported to Europe.

While the facts of land-grabbing prove that EU biofuels policy was unfairly maligned by NGOs on this issue, the public has never received this update.

Prior to that, the major issue was food v fuel, driven by inexorable rises in food prices coinciding with biofuels mandates.

The first major problem with that argument is that science increasingly rejects it, and the best available science (accepted by the European Commission) concludes that EU biofuels mandates are responsible for about a 1%-2% increase in corn, wheat and sugar prices over an entire decade. The second major problem is that corn and wheat aren't actually expensive.

While NGOs were quick to point out a spike in corn prices last summer, none have bothered to point out that the corn price has quietly and steadily fallen; and is now lower than before the drought. One other fact also not well publicised, according to Oxfam's own methodology, is that the cost to feed someone for an entire year on Hungarian-grown biofuel feedstock would be €0.09/day at today's prices.

European biofuels provide jobs to the poorest communities in Europe, encourage agricultural investments, and provide a reason for farmland to be farmed, thereby helping (without subsidies) to stop a two decade decline in agriculture. Europe’s ethanol producers use only home-grown crops that do not result in net decreases in exports of feed crops from Europe to the rest of the world.

Therefore, the amount of ILUC created from expansion of the renewable ethanol industry within Europe is exactly zero. Farmers respond to biofuels mandates by growing more crops on the same land, and ethanol plants produce just as much high-protein animal feed as biofuel, in the process lowering imports of high-ILUC soymeal from South America, thereby serving to decrease net global ILUC.

The recent "Biofuels - At What Cost?" report from the International Institute for Sustainable Development (IISD), funded by NGOs, is the opening statement in a debate about the economics of EU biofuels.

This report was peer reviewed by peers with the same ideological biases and no academic qualifications in industrial and agricultural sciences. The authors expressly prevented review by industry experts with appropriate academic credentials, on the pretext that industry reviewers would have leaked the report to the press.

Their report contains severe methodological errors, often contradicting IISD's own methodology and/or previous research. The report also contains an array of material factual errors, the unavoidable consequence of a team effort that intentionally excludes both researchers and reviewers with practical knowledge of the report's subject matter.

The major problem with the IISD report is that it is almost entirely about excise tax exemptions, a subsidy paid to fuel suppliers. With the introduction of the Renewable Energy Directive, member states now overwhelmingly use mandates to achieve their binding renewable transport energy obligations.

So, if they decide to pay fuel suppliers to buy biofuels through excise tax exemptions (such exemptions being a policy tool appropriate for the voluntary biofuels-blending policies of the past and simply redundant in the face of a binding mandate), then it's fuel suppliers that are skinning governments and consumers.

That’s why only a minority of Member States have such excise tax exemptions today and why those exemptions are quickly disappearing, facts conveniently omitted from IISD’s report. Indeed, if all excise tax exemptions disappeared tomorrow, the EU biofuels industry would see its market stay the same as it is today.

Further correcting IISD's report to bring it into line with IISD's own definition of "subsidy" and its own prior work on the subject, we discover that the level of subsidy of ethanol in the EU is around €0.05/liter, an order of magnitude lower than suggested by IISD.

The same exercise also results in an ethanol carbon abatement cost of €58 per tonne and annual cost to EU society from ethanol (whose massive GHG savings, with or without ILUC, are not in question) of €614 million, numbers that suggest success and that we believe would be hard for any renewable energy source in Europe to beat.

They certainly beat any of the alternatives IISD suggests, namely more fossil fuels, advanced biofuels (whose abatement costs IISD does not calculate) or more fuel efficient cars with an abatement cost of €133 per tonne.

But don’t get us wrong, the ethanol industry is a huge proponent of higher fuel efficiency; those fuel efficient engines require high octane fuels, and ethanol is the safest and best octane enhancer, an industrial reality that highlights the dead ends in IISD’s efforts. IISD’s favoured alternative to ethanol is a technology that requires ethanol.

Moreover, we note that the IISD study ignores our sector's GDP impact. If we factor in such GDP increase using peer reviewed numbers and then use Eurostat data on tax payments, the resulting more-than-€3 billion in tax receipts annually by EU governments mean that ethanol is no longer a very good product whose cost is lower than other environmental reforms.

Rather, when GDP impacts are included, every tonne of CO₂ abated by ethanol actually creates €216 million in new value (meaning that it more than pays for itself), and ethanol results in a net benefit in the EU of €2.6 billion annually.

These are amazing numbers, but, we stress, these are the numbers resulting from IISD’s own approach. However, they are broadly consistent with other research. For example, a recent study from PriceWaterhouseCoopers looked at the social-economic impact of bioethanol in France.

It showed a net gain for the French economy (after subtracting away subsidies) of €305 million.

So, let’s start asking serious questions about EU biofuel policy and subsidies. Why is big oil getting subsidised in the name of biofuels?"

Rob Vierhout Secretary-General of ePURE Chief Executive of , Eric Sievers Ethanol Europe Renewables