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Biofuel Support Policies: An Economic Assessment

image of Biofuel Support Policies: An Economic Assessment

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.

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