Regulatory Impact Analysis

1. Regulatory Impact Analysis Biofuels as an example By Senior Adviser Johan Nitter-Hauge Ministry of Finance, Norway

2. Rationale for intervention • Rationale for intervention • Markets don´t always secure efficiency • Eg. externalities, information failure, public goods. • Objectives defined to reflect outcomes (eg. crime reduction) rather than just outputs or inputs (eg. prosecutions, prison staff). • Cost-benefit analysis – some examples: • Transportation sector • Climate Change Programme • Supporting people programmes

3. Climate Change Programme - biofuels • According to the Kyoto protocol of 1997, Norway has commitments in relation to its Co2-emissions. • The transportation sector is responsible for about one quarter of energy-related greenhouse gas emissions. • Replacement of conventional hydrocarbon based fuels with fuels made from renewable bio-sources, e.g. rape seed or palm oil could be one way of reducing the emissions. • Appraisal looked at a scenario where 2 % of the fuels consists of biofuels. • The main biofuels today are ethanol and biodiesel. In Norway they are imported.

4. Biofuels - benefits • Biofuels have a ”lower carbon footprint” than conventional fuels. 100 % carbon savings assumed. • 2 % biofuels content results in a reduction in total Co2 emitted in Norway of 160 000 tons per year. • The social cost of Co2 is set at 25 euros per ton. • Thus, the value of the annual benefit in Norway is 4 mill. euros.

5. Biofuels - costs • Biofuels have a lower energy content than conventional fuels. • Resource costs of biofuels passed on to consumers. Other (non-monetary) costs: • Crops that otherwise would become food might instead become fuel. • Biofuel programmes could raise food prices. • Higher crop prices could harm the poorest people.

6. Costs of a 2 % biofuel scenario

7. Benefits and costs in summary • Reduced Co2 emitted: 4 mill. euros • Total additional cost (8,13+9,02)mill. euros: 17,15 mill. euros • Net benefit: - 13,15 mill. euros Cost-efficiency: • Reduced Co2-emissions: 160 000 tons • Cost per ton of Co2 abated: 107 euros • Social cost of Co2 per ton: 25 euros

8. Sensitivity analysis • A cost decrease of 30 % means that the cost per ton of Co2 abated could be 64 euros. • According to the Stern report, the social cost of Co2 should be about 60 euros. • An oil-price of 80 dollars per barrel makes biofuels competetive with conventional fuels.

9. Conclusion - biofuels • The measure does not pass a cost-benefit test with today´s prices of Co2. • However, a measure should be included in a climate change programme even though it does not pass a cost -benefit test if it is anticipated that it will help to secure access to less costly carbon savings in the future. • Thus, the greatest potential for reducing costs lies in the development of next generation technologies to utilize the cellulosic content of the plants.

10. Biofuels – what did the government decide? • There will be a biofuel obligation where the fuel sellers have to ensure that at least 2 % of the fuel they sell for road transport is biofuel by 2008. • By 2009 at least 5 % of the fuel sold for road transport shall be biofuel. • New regulations circulated for comments. In addition: • Tax reliefs for biofuels and so-called flexi-fuel cars are already in place.

11. The Preservation of Climate