How EU Subsidies Inflate Biofuel Prices

Published 08 May 2013, updated 10 May 2013 Public subsidies constitute a powerful market intervention that indirectly inflate biofuel prices, argues Chris Charles. Industry criticisms of the International Institute of Sustainable Development’s research on the subject fall wide of the mark, he writes. Chris Charles is a project manager with the International Institute for Sustainable Development’s Global Subsidies Initiative. The costs and benefits of biofuels have been hotly debated in the European Union, where the EU and member states both have ambitious renewable fuel targets – to be met largely through biofuels. Some have charged that supporting biofuels is not a cost-effective way to replace oil-based liquid fuels, reduce greenhouse-gas emissions, or support rural and innovative development. Others argue that the economic and environmental benefits make biofuels a ‘win-win’ source of energy. So where does the truth lie? It was with that question in mind that the International Institute for Sustainable Development’s Global Subsidies Initiative recently published ‘ Biofuels – At What Cost, A review of costs and benefits of EU biofuels policy ’ . The study found that the EU spent €9.3 billion to €10.7 billion subsidising biofuels in 2011. The study questions whether the current use of biofuel support measures is the most efficient means of addressing climate change and promoting economic growth.   A number of issues have been raised about the study by Eric Sievers and Rob Vierhout, both of whom represent the EU ethanol industry, in a commentary published last week by EurActiv ( Biofuels: Who’s subsidising whom? ). Their commentary questioned IISD’s subsidy estimates, and suggested that the method used to determine them was flawed. I would like to address some of the more serious critiques by Sievers and Vierhout with respect to our research. IISD contributes to sustainable development by advancing policy recommendations on a range of key issues, such as international trade and investment, economic policy, climate change and energy. The IISD is independent of all governments, suppliers and consumer groups.  Its focus is on providing high quality, independent, freely available policy research to improve transparency and debate. The Institute established the Global Subsidies Initiative (GSI) in 2005 to analyse subsidies and how they support or undermine efforts to achieve sustainable development. The GSI has a comprehensive program on energy subsidies that includes fossil-fuels (oil, coal and gas production and consumption), and parallel programmes on biofuels and renewable electricity. Its research is guided by the use of the best available information, using data from public accounts and state-of-the-art literature. Factual information is supported by references, with assumptions supporting calculations clearly stated, so stakeholders are able to critique, disagree, or provide alternative analysis. Independent peer-review of research is an important quality control measure. The report in question was peer-reviewed by respected non-governmental organisations, inter-governmental and governmental organisations, such as the Department for Environment, Food and Rural Affairs (United Kingdom), the Fraunhofer Institute for Systems and Innovation Research, the International Council on Clean Transportation (ICCT), Imperial College London, and the Organisation for Economic Co-operation and Development (OECD) . The GSI follows a three-stage approach to subsidy analysis: define, measure, and evaluate.  Different approaches to one or more of these stages, and how they are combined, lead to different interpretations of the scale and impact of support measures. Sievers and Vierhout question our approach to measuring the size of the subsidy to the EU biofuel industry. The subsidy definition applied by the IISD in developing the 2011 subsidy estimate of €9.3 billion to €10.7 billion follows the WTO’s Agreement on Subsidies and Countervailing Measures (ASCM) negotiated by 158 member countries. Following the WTO definition, our analysis includes market price support and market transfers, which include government’s policies that mandate transfers between consumers and producers. It also includes excise tax exemptions, where biofuels are exempted from taxes applied to petrol and diesel, and the use of biofuel mandates requiring the use of biofuels in road transport markets. Mandates require that a certain percentage of road transport fuels must come from biofuels, with the share often rising over time. These are a powerful market intervention that provides the biofuel industry with an important financial benefit in the form of market security, which in turn raises biofuel prices. Some in the biofuel sector view mandates as a technical policy resulting from the application of the Renewable Energy Directive (RED). While we are confident in our methodology – and have consistently applied it other studies – we have also encouraged discussion on the range of approaches that are available. For example, the International Energy Agency (IEA), which applies a method that multiplies the volumes of biofuels consumed by the difference of their cost to the reference price of comparable petroleum-based product, estimates support to the EU biofuel industry in 2011 at $11 billion (or €8.4 billion). Different subsidy estimates will result in differing carbon abatement costs for reducing emissions and different calculations of the per litre subsidy for biofuels. And not all biofuels are the same – the costs and benefits of biofuels differ, including by feedstock and production process. The IISD seeks to encourage a full debate on whether subsidies represent the best use of public funds against public policy objectives, based on both its own research and the work of others.   Research put forth by the biofuel industry should also be transparent, referenced, and ideally reviewed by independent organisations. This includes issues such as job numbers, where it is often not clear if figures developed by the biofuel industry include direct, indirect or induced jobs, or gross or net jobs. Tax payments also provide an example where data provided by the industry would benefit from greater transparency and information sharing. The question should not be ‘who‘s subsidising whom?’ but how best to invest public funds for an environmentally, socially and economically prosperous future. Taylor Scott International