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The bio-fuel debate

Shahid Khalil

Bio-fuel is produced in the developed economies, as being surplus in food crops, they can afford to set aside the bulk of their production for bio-fuel production. However, bio-fuel is a villain for food-starved under- developed countries, as it creates food shortages and increase in food prices.

The G20 countries recognized the need to examine the role of bio-fuels in food, but failed make more definitive statements about bio-fuels and their link to food prices because of disagreements between large producers (like Brazil) and net food importers (like China) on the importance of these links.

The role of the policy support to domestic bio-fuels sectors - in the form of tax credits, subsidies, and tariffs against imported ethanol (for the United States and the European Union) - remains a concern for key stakeholders.

Indeed, key countries display different social preferences in handling the delicate issue of food - fuel links depending on the local dynamics of agricultural demand and supply. In Brazil, the flexibility of sugar-ethanol mills allows producers to shift easily between ethanol and sugar production based on prevailing market conditions for food (sugar) and fuel (ethanol/gasoline) and provides them with constant, year-round outputs in their supply chain. Since 2008, Brazil has reduced its exports of ethanol to the world markets, in part because of rising US production and exports, increased demand for sugar from large consumers like India, and high and uncompetitive prices in its domestic ethanol market. As a result, in 2010 and 2011, Brazil found itself importing ethanol from the United States, boosting US bio-fuel revenues, and making the US tariff against Brazilian ethanol imports inconsequential.

China has backed off from the aggressive expansion of bio-fuel production in the past five years because of concerns about domestic grain markets and prices. China's bio-fuel production started rapidly with the building of four state-owned ethanol plants in 2001. By 2007, it had produced a total of 1.35 million tons of ethanol, placing it third in the world. At that point, this rapid rise was halted and the use of cereals in bio-fuel production was capped.
Despite some attention to the impact of bio-fuels on food security, much of the policy discussion over bio-fuels in 2011 focused on environmental concerns. 5 International bio-fuel markets are dominated by the European Union and the United States, the largest consumers and producers of bio-diesel and ethanol, respectively. While neither adopted major policy changes in 2011, the year was still one of intense debate, paving the way for potentially important decisions in 2012. Although the policy debate focused on the environment, any decisions made regarding bio-fuel production will have implications for global food markets, given the volume of crop-based feed stocks that are converted annually.

In the European Union, the consumption of bio-fuels is a key component of a decision to reduce greenhouse gas emissions from the transport sector by replacing fossil fuels with renewable energy.

In 2003, a European Union directive set a target of 5.75 per cent for renewable-energy use in the transport sector by 2010. In 2009, the European Union adopted the Renewable Energy Directive, which has a target of 10 per cent by 2020. Although renewable energy can include electricity, hydrogen, or second-generation bio-fuels (that is, ethanol and bio-diesel made from non-food feed stocks such as agricultural residues and switch grass), the main mechanism for meeting this target is, and will remain, first-generation bio-fuels.

The directive also established environmental sustainability criteria for bio-fuels, including a minimum rate of direct greenhouse gas emission savings (35 per cent in 2009, rising to 50 per cent in 2017) and restrictions on the types of land that may be converted to production of bio-fuel feedstock crops. This restriction covers direct land-use changes only. The revised Fuel Quality Directive, adopted at the same time as the Renewable Energy Directive, is more technical, includes identical sustainability criteria, and targets a 6 per cent reduction in greenhouse gas emissions from transport fuels by 2020.

One study, conducted by the International Food Policy Research Institute (IFPRI), analyzed the impact of the European bio-fuels mandate and possible changes in Europe's bio-fuel trade policies on global agricultural production and the environmental performance of the European bio-fuel policy, as spelled out in the Renewable Energy Directive. The report suggested that indirect land-use change was a valid concern but that there was a high degree of uncertainty regarding its magnitude. Following these investigations and public consultation, in December 2010 the Commission published a report acknowledging that indirect land-use change can reduce greenhouse gas emissions savings associated with bio-fuels.

Bio-fuel producers disagreed with the concept of indirect land-use change and claimed that even the debate and uncertainty about future legislation deters investments and is costly to Europe's economy and climate change strategy.
On the other hand, many members of the European scientific community and observers from the United States asked the European Commission to reconsider its position regarding bio-fuels and urged it not to make emissions accounting mistakes regarding bio-fuels. Nongovernmental and environmental groups actively highlighted the social risks linked to bio-fuels (such as "land grabbing" and competition between food and fuel uses) as well as environmental risks (such as increased emissions). Although the European Commission had not yet released its impact evaluation report by the end of 2011, it did release a new modelling exercise conducted by IFPRI on the land-use issue in October. Reflecting the fact that the merits of first-generation bio-fuels are highly disputed, the Commission also stated that it would no longer support bio-fuel projects in its overseas development policies.
In the United States, discussions of bio- fuel policy take place at two levels. At the federal level, the US Environmental Protection Agency regulates bio-fuel blending through the Renewable Fuel Standard. At the state level, some ambitious states have set up their own bio-fuel policies (such as California's Low Carbon Fuel Standard), seeking to improve upon the Renewable Fuel Standard in terms of environmental performance.

In 2011, there were a number of policy discussions at the federal level about whether the bio-fuel tax credit - called the Volumetric Ethanol Excise Tax Credit - should be repealed. In an atmosphere of increasing fiscal austerity within the United States, an unusual alliance of fiscal and social conservatives and environmentally minded opponents of bio-fuels emerged around the issue of repealing the tax credit. Researchers have pointed out the welfare and efficiency losses that result when such a tax credit is combined with a blending mandate, which is part of the federal Renewable Fuel Standard policy. Food security concerns have been raised over the effects of tax credits and subsidies on bio-fuel production and, in turn, on the level and stability of agricultural and food prices. Some have pointed out, however, that energy prices were a stronger driver of past growth in bio-fuel production than tax credits alone.

At present, a number of initiatives and studies are being conducted in the United States to see if it is feasible to scale up a California-like policy on a wider regional basis. A national low-carbon fuel policy would need to take into account the different fuel demands of the various sub regions of the country in order to come up with a standard that could both lead to reduced use of high-carbon fuels and meet the concerns about energy security and affordability that are major components in the US debate about energy policy.

-cuttingedge
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