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Drivers for biofuel

Drivers for biofuel

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Drivers for biofuel

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  1. Drivers for biofuel • Energy security – • Diversification • Self-sufficiency • Climate change • Agriculture and rural development • Support for domestic farmers • Increasing demand, higher income for farmers and agribusiness, job creation, more opportunities for trade

  2. First-generation liquid biofuels • Limitations in economics and production potential widely acknowledged • More than half of production cost due to feedstock • Domestic production and consumption of biofuels economic under few favorable circumstances (Brazil in 2005 and 2007-08), but uneconomic most of the time • Hence heavily protected, mostly domestic, limited trade • Large price distortions and forward and backward linkages with other price-distorted markets.

  3. Impact of higher biofuel demand • Correlation with gasoline and diesel prices • Threshold diversion level for strong correlation to emerge? • Second generation biofuels may present different challenges for developing countries. Food vs. fuel conflict may persist. • Potentially adverse impact on climate change where land use changes occur → Large subsidies and mandates are driving these consequences

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

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

  6. Vegetable oil vs. diesel prices *Price data from USDA FAS, World Bank and Energy Intelligence

  7. Vegetable oil vs. diesel prices *Price data from USDA FAS, World Bank and Energy Intelligence

  8. Price dynamics Oil price Weather

  9. Support policies • Mandates • Create inelastic demand, introducing potential for large price shocks without an escape clause • Are politically difficult to reverse • Subsidies • Either taxpayers pay, or consumers pay if mandated • Concern that some developing countries are following the U.S. and EU subsidy policies

  10. Additional thoughts • Reasons for supporting biofuels are attractive: rural development, reducing global warming, enhancing energy security. But a biofuel program may not be a good vehicle for addressing them; separate policy solutions may be more cost-effective. • Support policies in OECD countries raise many questions, but are being copied in developing countries. • Removing border restrictions in OECD for biofuels • would enhance competition and bring down prices in currently protected markets • but could prolong current market distortions • could force governments to ask openly about the objectives and costs of biofuel support policies.