World Biodiesel Production And Potential

Given the potential impacts of biodiesel production on the edible oils market, Section 3 and 4 assess the potential implications in some detail.

The utilization of biodiesel is not new, since it has been used as a substitute for mineral diesel since early 20th century, but in small quantities. What is new is that from 2005 onwards biodiesel production and use has increased significantly, spearheaded by the EU (mostly in Germany and France), currently responsible for about 80% of the world production. Despite this European dominance, biodiesel production is expected to stabilize in the coming years in the EU, with substantial growth expected in South America (Brazil, Argentina and Colombia) and Asia, as explained in this study.

One of the most serious obstacles to the expansion of the biodiesel industry is the cost of the raw material which can easily represents 60 to over 80% of the total costs, though there are considerable geographical variations depending on the feedstock and local conditions. Therefore, availability of feedstock, cheaply and in large scale, is fundamental to the expansion of this industry. There are two major factors to take into consideration when dealing with feedstocks for biodiesel production. Firstly, is the source, and secondly is composition. In the first case it is important to know if the oil is derived from food on non-food crops; the second consideration is to know the composition of the oil and how appropriate it is as a feedstock (e.g., see Karman, Rowland & Smith, 2008).

Despite the considerable potential of biodiesel, given the growing demand for edible oils and the high cost of the feedstock, this potential may be rather limited in the future unless biodiesel can be extracted from other raw material. Other important constraint is its sustainability, as the extension of land required for biodiesel production is considerable larger than in the case of bioethanol. The extent to which biodiesel may become eventually a global commodity remains uncertain, but it is highly unlikely that it will reach the same level as bioethanol.

Trade barriers for biofuels

Tariff barriers
At present there is no specific customs classification for biofuels. Bioethanol is traded under the code 22 07 which covers both denaturated (HS 22 07 20) and undenaturated alcohol (HS 22 07 10). Both types of alcohol can be used for biofuel production. Biodiesel in the form of FAME (fatty acid methyl ester) is classified under the HS code 3824 9099. However, in neither of these cases is it possible to establish whether or not imported alcohol or FAME are used for biofuel production.

Despite this lack of specific customs classification, there is already evidence demonstrating that the use of tariffs is common practice in countries keen to protect their domestic agricultural and biofuel industries from external competition. According to IEA (2004), bioethanol import duties are US$ 0.10/lt in the EU, US$ 0.14/lt in the US, US$ 0.06/lt in Canada, US$ 0.23/lt in Australia and zero in Japan and New Zealand. In addition the US also applies an extra US$ 54 cents/gallon, an amount that equates to Brazil’s production costs. In Brazil, imports of bioethanol are taxed at 30 per cent. For biodiesel classified under HS code 3824 9099, on the other hand, the US applies duty of 6.5 per cent while the EU applies a 5.1 per cent tariff on biodiesel from the US. Furthermore, import tariffs on biofuel input materials, including feedstocks but particularly on other more value added materials such as oils and molasses are also substantial (see section 5.1.1.2 on Tariff Escalation). However, tariffs applied to different countries may vary as both the EU and the US have signed preferential trade agreements and have a Generalised System of Preferences that grant preferential market access conditions for certain countries and products.

Tariff escalation

The use of tariff escalation that favours production of crops over other more value added forms of biofuels is also common practice. In the case of soya, for instance, the EU, the US, Canada and Japan impose no tariffs on soyabean imports. However, the EU applies a tariff of 8.8 per cent and the US applies a 19.1 per cent duty on soya oil imports (both of which should be gradually reduced to 6.4 per cent to comply with WTO agreements). The US applies a 6.4 per cent tariff on rapeseed and Canada applies an 11 per cent duty. Canada also applies a 9.5 per cent tariff on sunflower seed oil80 and a tariff of 11 per cent on palm oil. The EU applies a 3.8 per cent tariff on imports of crude palm and 9.0 per cent and 10.9 per cent on imports of refined palm oil and stearin respectively, from Indonesia and Malaysia.

In the case of bioethanol, it is alleged that as a result of pressure from domestic producers, the EU has recently removed Pakistan – the second largest bioethanol exporter to the EU – from the General System of Preferences (GSP). This implies that a 15 per cent import duty has been levied on industrial alcohol and bioethanol produced in Pakistan, which favours the production and export of raw molasses over other more value-added products such as industrial alcohol and ethanol. As a result two of the seven operating distilleries have closed, and another five new distilleries will probably abandon plans to begin operations due to uncertainty market conditions.

Quotas

The use of quotas to regulate trade in biofuels is also a common practice in industrialised countries. The CBI and CAFTA, for instance, have established a complex import quota system for bioethanol from Caribbean countries. The use of quotas on feedstock trade is also important. For example, the EU regulates sugar imports through a complex system of duty free tariff quotas that favour imports from ACP countries and India.

Trends in global biofuel trade

At present only limited amounts of biofuels enter the international market as the bulk of production is consumed domestically. In the case of bioethanol, less than 10 per cent of global production enters the international market. However, international trade is expected to grow very rapidly in the coming years as the global increase in consumption and the scaling up of production will not coincide geographically.

Brazil as the largest bioethanol exporter, providing about 25 per cent of global bioethanol exports in this year. More recent data, however, suggest that Brazil has increased its exports to 50 per cent of global bioethanol exports. The second largest exporter of bioethanol is the US (14 per cent), followed by France (11 per cent) and UK (8 per cent). Exports from these EU countries are destined to other European countries. Countries from the Caribbean Basin Initiative (CBI) such as Guatemala, Costa Rica, El Salvador and Jamaica are also important exporters. Bioethanol is reprocessed in these countries and re-exported to the US. Peru exports to Japan and to the US under the Andean Pact. Other important exporters are sugar producing countries like Pakistan–the second largest exporter to the EU after Brazil, South Africa, Swaziland and Zimbabwe, which enjoy preferential access to the EU market.

As suggested above, Brazil now supplies about 50 per cent of the international demand for bioethanol. The main destinations for Brazilian bioethanol exports in 2004 were India (20 per cent), the US (18 per cent), Korea (10 per cent) and Japan (9 per cent).

The US is the main importer of bioethanol, accounting for 31 per cent of global imports. US imports represent 5 per cent of domestic production and they mainly come from Brazil (54 per cent) and CBI countries. Other significant importers are Mexico, Korea and Germany with 11 per cent, 10 per cent and 10 per cent of global bioethanol imports, respectively. These are followed by Italy (5 per cent), France (5 per cent), Netherlands (4 per cent) and Nigeria (4 per cent). Venezuela also imports bioethanol from Brazil. The EU imports a large proportion of the bioethanol it uses, mainly from Brazil and Pakistan. Other important EU suppliers are Guatemala, Ukraine and Peru. The main EU importer is Sweden. As suggested before, there are also significant intra EU trade flows of bioethanol.

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