Biofuels: Considerations for Developing Countries

1. Biofuels: Considerations for Developing Countries Todd M. Johnson World Bank May 7, 2008 Guadalajara, Jalisco

2. Biofuels • Liquid biomass fuels, such as ethanol from sugar, corn and biodiesel from soy, palm, and other vegetable oils • Hot topic • Record oil prices • Record agricultural and food prices • UN Monday called for freeze on biofuels investments • Is there are relation between biofuels and the prices of agricultural products?

3. Presentation will discuss…. • Factors behind the increase in biofuels production • Government policy • The economics of biofuels • Biofuels and energy security • Biofuels and rural development • GHG impacts of biofuels • Risks of biofuels development • Road ahead

4. Factors Driving Biofuels

5. Biofuel production pathways • Ethanol • Sugarcane (Australia, Brazil, China, Colombia, Ethiopia, India, Mexico, Thailand), sugar beets (EU) • Maize (US, China) • Wheat (Canada, EU) • Cassava (Thailand) • Biomass wastes: forest products (Canada), wood wastes, agricultural residues—maize stover, sugarcane trash • Energy crops—switch grass, hybrid poplar, willow • Biodiesel • Rapeseed (EU) • Soybeans (US, Brazil) • Palm oil (Colombia, Indonesia, Malaysia) • Coconut oil (Philippines) • Plants growing on marginal land—Jatropha, Karanja (India)

6. Government Policy • More than 20 developed and developing countries have announced some type of biofuel incentive program. • Two types of policies • i) mandates (binding) or targets (non-binding) on biofuels consumption. Brazil, Canada, and the United States have mandated future biofuels consumption levels, and China, India and the EU have set targets on biofuels consumption. • ii) subsidies to producers often combined with tariffs to limit imports. • U.S. tax credit of $0.51 per gallon available to ethanol blenders and an import tariff of $0.54 per gallon of ethanol, as well as a biodiesel blenders tax credit of $1.00 per gallon. • EU has a specific tariff of €0.192/liter on ethanol (€0.727 or $1.09 per gallon) and other incentives such as a subsidy of €45 per hectare on biofuel feedstocks produced.

7. Economics of ethanol production from sugar *83% sugar and 17% molasses, and molasses priced at 25% of sugar; 20% fuel economy penalty for ethanol

8. Vegetable oil vs. fossil diesel price Price data from USDA FAS, World Bank and Energy Intelligence

9. Energy Security and Prices • Diversify sources of fuel • Increase number of suppliers, including from domestic sources • Can biofuels help countries save money? • Biofuel production a small fraction of petroleum fuel production for the foreseeable future  biofuels will be price takers • Marginal demand and marginal supply set prices  1–2% net global displacement (min 3–5% of transportation fuels) might moderate oil price increases

10. Rural Development

11. GHG Reduction Potential for Ethanol from Different Feedstocks

12. Potential risks of biofuels programs(June 1, 2005 presentation) • Distortions of agricultural markets (international impacts if production large) • Reduce OECD agricultural subsidies • Requirement of large current and future government budgetary support and loss of tax revenue • Capture of biofuel subsidies by large landowners and industry • Environmental degradation of land and water • Volatility of crop prices and limited risk reduction from oil price volatility

13. Grain Prices (nominal $/ton) Impact on corn supplies and prices which in turn effects those commodities that use corn as an input, such as meat production.

14. Indirect Effect: Expansion of Sugarcane, Pasture and Crops Compared (2002 to 2006) • Source: IBGE; ICONE. Elaboration: ICONE. • Notes: • Calculated in State level. • Crops: temporary crops area without including sugarcane area. • N.a.: data not available.

15. Planted Area of Selected Crops: Absolute Variation from 2000-02 to 2006-08(million hectares) BRAZIL U.S. EU-27 Source: IBGE; CONAB; USDA. Elaboration: ICONE.

17. Linkage of petroleum and sugar markets Source: FAO, Food Outlook, June 2006

18. Potential Environmental Impacts • Replanting of degraded lands with biofuel feedstocks • Conversion of forests or other lands for biofuels • Water and soil degradation

19. The Road Ahead –Technology Development • Productivity increases in the production of crops • Lots of new biofuel technologies and more to come with oil at $120/bbl • Non-crop pathways for liquid biofuels -- wastes, grasses, algae, …

20. Governments Sustainable policies for land-use Limit subsidies, protectionist policies, and fuel tax exemptions Infrastructure and extension for rural development R&D Farmers Need clear rules of the game Flexibility – maintain options for sale of primary products Profit (or loss) is typically in agricultural production Investors Need clear rules of the game Have needed support policies (tax reductions, mandates, ….) Flexibility of feedstocks – changing support policies Upsteam linkage The Road Ahead -- Biofuel/Bioenergy Policies for Developing Countries

21. Concluding Observations • Land is not the issue – plenty of land available globally to grow food and fuel • But there are direct and indirect pressures on forests and other lands to be converted • Main problem for liquid biofuels today is the use of raw materials with alternative uses, including for food – will create both real and perceived problems for biofuels • The opportunity cost for farmers for raw materials will be equivalent to the higher-valued market (food or fuel) – thus the linkage of food and fuel markets