41382 AGRICULTURE FOR DEVELOPMENT POLICY BRIEF Biofuels: The Promise and the Risks Biofuels offer a potential source of renewable energy and could lead to large new markets for agricultural producers. However, few current biofuel programs are economically viable, and most have social and environmental costs: upward pressure on food prices, intensified competition for land and water, and possibly deforestation. National biofuel strategies need to be based on a thorough assessment of those opportunities and costs. Globally, lower tariffs and subsidies in industrial countries will be essential for ensuring efficient allocation of biofuels production and guaranteeing social benefits to small farmers in developing countries. Biofuels could become big markets The country uses about half its sugarcane to produce ethanol and for agriculture--with risks. mandates the consumption of ethanol. Many other developing countries are launching biofuel programs that rely on sugarcane or With oil prices near an all-time high and with few alternative fuels such oil-rich crops as oil palm, jatropha and pongamia. for transport, Brazil, the member states of the European Union, the United States, and several other countries are actively supporting Although assessments of the global economic potential of biofuels the production of liquid biofuels from agriculture--usually maize have just begun, current biofuel policies could, according to some or sugarcane for ethanol, and various oil crops for biodiesel. estimates, lead to a fivefold increase of the share of biofuels in Possible environmental and social benefits, including mitigation of global transport--from just over 1 percent today to around 6 climate change, and contribution to energy security are cited as the percent by 2020. main reasons for public sector support of the rapidly growing bio- fuel industries. As the economic, environmental, and social effects Are biofuels economically viable-- of biofuels are widely debated, they need to be carefully assessed and what is their effect on food prices? before extending public support to large-scale biofuel programs. Governments provide substantial support to biofuels so that they Those effects depend on the type of feedstock, the production can compete with gasoline and conventional diesel. Such support process used, and the changes in land use. includes consumption incentives (fuel tax reductions); production Global production of ethanol as fuel in 2006 was around 40 billion incentives (tax incentives, loan guarantees, and direct subsidy pay- liters. Of that amount, nearly 90 percent was produced in Brazil ments); and mandatory consumption requirements. More than 200 and the United States (figure 1). In addition, about 6.5 billion liters support measures, which cost around US$5.5 billion to US$7.3 bil- of biodiesel were produced in 2006, of which 75 percent was pro- lion a year in the United States, amount to US$0.38 to US$0.49 per duced in the European Union (figure 1). Brazil is the most compet- liter of petroleum equivalent for ethanol. Even in Brazil, sustained itive producer and has the longest history of ethanol production. government support through direct subsidies was required until recently to develop a competitive industry. Domestic producers in the Figure 1. Fuel ethanol and biodiesel production is highly concentrated European Union and the United Ethanol (40 billion liters) Biodiesel (6.5 billion liters) States receive additional support Other European through high import tariffs on 8% Union ethanol. 4% Other Biofuel production has pushed up 12% feedstock prices. The clearest exam- United States ple is maize, whose price rose by 13% United States over 60 percent from 2005 to 2007, 46% largely because of the U.S. ethanol European program combined with reduced Brazil Union 42% 75% stocks in major exporting countries. Feedstock supplies are likely to remain constrained in the near Source: F.O.Licht Consulting Company, personal communication, July 17, 2007. term. However, unless there is Note: Percentages of global production of fuel ethanol and biodiesel in 2006. another major surge in energy prices, it is likely that feedstock prices will rise less in the long term. reducing GHGs by 50 to 60 percent. In contrast, the reduction of Farmers will respond to higher prices by increasing the planted GHGs for ethanol from maize in the United States is only in the areas and supply of these feedstocks. At the same time, rising prices range of 10 to 30 percent, at best. In such cases, fuel-efficiency will lower the demand for feedstocks because of the falling prof- measures in the transport sector are likely to be much more cost- itability of producing biofuels at these higher prices. effective than biofuels in reducing GHGs. Rising agricultural crop prices caused by demand for biofuels have Benefits to smallholders. Biofuels can benefit smallholder farmers come to the forefront in the debate about a potential conflict by generating employment and increasing rural incomes, but the between food and fuel. The grain required to fill the tank of a scope of those benefits is likely to remain limited with current tech- sports utility vehicle with ethanol (240 kilograms of maize for 100 nologies. Ethanol production requires fairly large economies of liters of ethanol) could feed one person for a year; this shows how scale and vertical integration because of the complexity of the pro- food and fuel compete. Rising prices of staple crops can cause sig- duction process in the distilleries. Likewise sugarcane production is nificant welfare losses for the poor, most of whom are net buyers of generally large scale, although in Brazil outgrower schemes have staple crops. But many other poor producers, who are net sellers of succeeded in ensuring some smallholder participation. Small-scale these crops, would benefit from higher prices. production of biodiesel could meet local energy demand (for exam- ple, biodiesel use in stationary electricity generators), but wider Future biofuel technology may rely on dedicated energy crops and markets require meeting consistent quality standards that can be on agricultural and timber waste instead of food crops, potentially reducing the pressure on food crop prices. But second-generation achieved with large-scale production. technologies to convert cellulose from these waste products into sugars distilled to produce ethanol or to gasify biomass are not yet Public policies for biofuels must be defined. commercially viable--and will not be for several years. Moreover, To date, biofuel production in industrial countries has developed some competition for land and water between dedicated energy behind high protective tariffs on biofuels, in conjunction with large crops and food crops will likely remain. subsidies paid to biofuel producers. Such policies are costly to developing countries that are, or could become, efficient producers Nonmarket benefits and risks in profitable new export markets. Poor consumers also pay higher are context-specific. prices for food staples as grain prices rise in world markets, a rise One of the main arguments cited in favor of expanding biofuel pro- that is largely induced by distortionary policies. duction is its potential to reduced reliance on imported oil, thereby Can developing countries, apart from Brazil, benefit from develop- contributing to energy security. The possible environmental and ing biofuel industries? The favorable economic conditions and the social benefits of biofuels are the other frequently cited arguments large environmental and social benefits that justify significant subsi- in support of public funding and policy incentives for biofuel pro- dies are probably uncommon for first-generation technologies. In grams. These benefits can be highly context specific. some cases, such as with landlocked countries that import oil and Potential to enhance energy security. With current technology, that could become efficient producers of sugarcane, the high costs biofuels can only marginally enhance energy security in individual of transport could make biofuel production economically viable countries because domestic harvests of feedstock crops meet only a even with current technologies. The much higher potential benefits small part of the demand for transport fuels. There are a few excep- of second-generation technologies, including technologies for tions such as ethanol in Brazil. According to recent projections, 30 small-scale biodiesel production, justify substantial privately and percent of the U.S. maize harvest could be used for ethanol by 2010, publicly financed investments in research. but it would still account for less than 8 percent of U.S. gasoline The challenge for governments in developing countries is to consumption. Second-generation technologies, using agricultural avoid supporting biofuels through distortionary incentives that biomass could make a higher contribution to energy security. might displace alternative activities with higher returns--and to Potential environmental benefits. Environmental benefits need implement regulations and to devise certification systems that to be evaluated on a case-by-case basis, because they depend on the will reduce environmental and food security risks from biofuel greenhouse gas (GHG) emissions associated with the cultivation production. Governments need to carefully assess economic, of feedstocks, the biofuels production process, and the transport environmental, and social benefits and the potential to enhance of biofuels to markets. And a change in land use, such as cutting energy security. forests or draining peatland to produce feedstock such as oil palm, Reducing potential environmental risks from large-scale biofuels can cancel the GHG emission savings for decades, according to the production could be possible through certification schemes to 2006 EU Biofuel Strategy. measure and communicate the environmental performance of bio- If Brazil's existing cropland were used and no land use change fuels (for example, a green index of GHG reductions). But the occurred, ethanol production in Brazil is estimated to reduce GHG effectiveness of certification schemes requires participation from all emissions by about 90 percent. Biodiesel is also relatively efficient, major producers and buyers as well as strong monitoring systems. This policy brief has been extracted from the World Bank's 2008 World Development Report, Agriculture for Development. Further information and detailed sources are available in the Report. The Report uses a simple typology of countries based on the contribution of agriculture to overall growth, 1990-2005 and the share of rural poor in the total number of poor (2002 US$2-a-day level). In agriculture-based countries (mostly Africa), agriculture contributes a significant (>20%) share of overall growth. In transforming countries (most- ly in Asia), nonagricultural sectors dominate growth but a great majority of the poor are in rural areas. In urbanized countries (mostly in Latin America and Europe and Central Asia), the largest number of poor people are in urban areas, although poverty rates are often highest in rural areas.