Biofuel Support Policies: An Economic Assessment

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25 Aug 2008
9789264050112 (PDF) ;9789264049222(print)

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Governments in many OECD countries, as well as in a number of countries outside the OECD area, actively promote the production and use of alternative transport fuels made from agricultural commodities. This report, jointly produced by the OECD and the IEA and drawing on information from a number of other organisations, analyses the implications of this support from various perspectives. The report shows that the high level of policy support contributes little to reduced greenhouse-gas emissions and other policy objectives, while it adds to a range of factors that raise international prices for food commodities. It concludes that there are alternatives to current support policies for biofuels that would more effectively allow governments to achieve their objectives.
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  • Facts and Trends
    Biofuels - liquid transport fuels derived from biomass - attract substantial interest in many countries. Growth in biofuel production and demand has been stimulated by high levels of government support in many countries, as well as by recent surges in international oil prices. Processing costs to produce biofuels have declined markedly with increased experience and improved technologies, which together with the higher prices for fossil fuels have helped to improve the competitiveness relative to conventional fuels. Given that feedstock prices have increased as well, however, further reductions in costs will be needed for biofuels in most countries to be able to compete effectively with gasoline and diesel without subsidy. Land availability and food needs will also limit the growth in conventional biofuels production based on sugar, cereals and seed crops. New biofuels technologies being developed today, notably enzymatic hydrolysis and gasification of ligno-cellulosic feedstock, could allow biofuels to play a much bigger role in the long term, with potentially less land-use and environmental impact. Whether they can be viable in all but niche markets without subsidies is less clear.
  • Quantitative Analysis of Biofuel Policies and Developments
    To analyse the implications of support policies for biofuel supply and demand, as well as for agricultural commodity markets and land use, the OECD medium-term simulation model for world agricultural markets Aglink has been employed, complemented by the FAO-developed Cosimo model to cover a large set of developing countries. Aglink-Cosimo is a partial equilibrium model of domestic and international markets for major temperate-zone agricultural commodities, with detailed mapping of policies affecting these markets. In preparation of this analysis, the combined model has been extended to include the markets for sugar and other sweeteners. Furthermore, a specific module representing biofuel markets in major producing and consuming regions has been developed. At the same time, the FAO has developed biofuel modules for 13 developing countries.
  • Costs and Benefits of Biofuel Support Policies
    The preceding chapter presented and discussed the results of model-based analyses. Existing and new biofuel support policies were in the centre of the set of scenarios that were calculated using a large-scale economic modelling system Aglink-Cosimo, complemented by a stylised model on environmental implications of the policy changes, SAPIM. As for the results of any modelling system, those discussed above are subject to a certain degree of uncertainty, related to parameters and structures in the represented markets.
  • Summary, Conclusions and Policy Recommendations
    Production and use of biofuels – mainly ethanol based on cereals and sugar crops, and biodiesel based on vegetable oils such as rapeseed or canola oil – have grown rapidly over the past few years and are expected to further double in the decade to come. The United States and Brazil remain the largest ethanol producers while biodiesel production is particularly relevant in the European Union, but a large number of other countries have begun or are considering promoting biofuel production and use.
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