Are biofuels bad for business?

14 March 2012

As significant renewable energy mandates for transport in Europe loom, there has been another round of soul-searching about the costs and benefits of biofuels, which are expected to be the main source of renewable energy to meet these mandates.

The European Commission (EC) is taking a cautious but reasonably optimistic position on biofuels and says that it has ‘no problems with sustainable biofuels – and there are sustainable biofuels’. In a leaked document, it appears to be focusing its attention on indirect land use change (ILUC) and wants to incorporate that into any estimates of greenhouse gas (GHG) emission reductions from different types of biofuels.

In other quarters, however, while the long-running concerns about GHG emissions, land grabs and food security are highlighted, new emphasis is placed on the increased cost to the consumer that will arise as a result of mandated use of renewable energy in transport by 2020. Drawing on two reports on the UK and Germany commissioned from the Global Subsidies Initiative of the International Institute for Sustainable Development (IISD),  a briefing paper published by Action Aid and Friends of the Earth states that: ‘In 2020, bioethanol is forecast to be 41 cents (16-35 pence) more expensive than petrol per litre; biodiesel 35-50 cents (29-42 pence) more expensive than a litre of diesel’, depending on the projected oil-price scenario (ranging from US$60 per barrel in 2020 in the low oil-price scenario to US$120 per barrel under a high oil-price scenario or US$150 per barrel in a ‘high-high’ oil-price scenario).

In reaction to this, the paper urges a closer look at alternatives to biofuels. It advocates measures to:

  • reduce fuel demand, through encouraging alternatives to car use, reducing speed limits and promoting cars powered by electricity from renewable sources
  • improve fuel efficiency through tougher legislation on EU car fuel efficiency standards.

So, will European pump prices soar if biofuels are used to meet European countries’ renewable energy mandates?

Well, yes, if you assume, as the papers do, that biofuels will be produced in the EU, where land and labour are more expensive and feedstocks are not the most efficient available. The papers assume that ethanol will be produced from wheat and, to a lesser extent, maize; and that biodiesel will be produced mainly from rapeseed oil, or palm oil and soya oil, the latter two being imported with tariffs. As such, the projected biofuel prices represent the upper limit of the cost of biofuels in Europe.

However, biofuels don’t have to be this costly: biofuels produced primarily from tropical feedstocks, such as sugarcane and palm oil, can be much cheaper than fossil fuels when crude-oil prices are over US$90 per barrel. For example, sugarcane produces far more ethanol per hectare than wheat or maize, and ethanol could be imported from other, mainly developing, countries instead of producing it domestically.

Some countries such as Brazil are subject to tariffs on biofuel exports to the EU, which makes it harder for them to compete with domestically produced biofuels. Countries not subject to these tariffs, such as the least developed countries under the Everything But Arms (EBA) agreement, could potentially supply at lower prices, subject to meeting the EU’s sustainability criteria and increasing production capacity.

The other thing that we need to look at carefully is the projected oil price. Since the IISD report was published, oil price projections have risen while feedstock prices have remained relatively unchanged, making biofuels more attractive than fossil fuel. According to the Department of Energy and Climate Change’s latest projections , the oil price in 2020 is now estimated to be US$92 per barrel under the low-price scenario, a 53% increase compared to the projections used in the original price-differential calculations, and US$135 per barrel under the high-price scenario, a 13% increase compared to the price used in the original calculations.

So are biofuels bad for business and should we be looking for alternatives? Are there ways to bring the cost of biofuels down?

Certainly, with the prices projected, biofuels appear to be a high-cost option for UK consumers. However, the numbers underpinning these price projections must be treated with caution and biofuels should not be written off on these grounds alone. The rise in projected oil prices already narrows the price differential and further rises could eradicate it, while projections of biofuel costs need to look at cheaper alternatives to EU production.

Nonetheless, this needs to be handled with great care. Sourcing biofuels from countries such as Indonesia or Mozambique could provide much-needed jobs and income. However, this could also lead to large areas of tropical forest being felled to make way for oil palm plantations or to land used for growing food being used for cane. And in either case, there are risks that poor people who depend on the land either for farming or for other income sources (such as gathered produce) may lose their livelihoods.

The poverty and environmental impacts of biofuels are complex and need to be discussed carefully for each country and feedstock, rather than being presented in general terms. Building on research that tries to do this is an important step, as well as thinking carefully about what support such countries need in order to deliver impacts that are good for local people and the environment as well as the economy.  And we mustn’t lose sight of complementary actions, such as how to economise on fuel use and the relative costs of different options. Action Aid and Friends of the Earth are right to insist that money be channelled towards this aim.