Energy Diversification Economic aspects of biofuels

Although more a national security objective than an economic issue, a key strategic objective associated with biofuels is the achievement of greater energy security through a diversified energy portfolio. Indeed, reduced reliance on imported oil was the main driver behind the earliest experiences with biofuels in Brazil and the US.

The volatility of world oil prices, uneven global distribution of oil supplies, uncompetitive structures governing the oil supply (i.e. the OPEC cartel) and a heavy dependence on imported fuels are all factors that leave many countries vulnerable to disruption of supply. This may impose serious energy security risks, in particular to those countries that are heavily dependent on energy imports. In 2000, oil imports of OECD countries accounted for 52 per cent of their energy requirements, but this is expected to rise to 76 per cent by 2020. Almost all least developed countries are oil importers. Crude oil imports to ACP countries were expected to increase to 72 per cent of their requirements in 2005. Non-OECD countries share 41 per cent of the world oil consumption. Oil supplies, on the other hand, are very unevenly distributed and concentrated in few countries (75 per cent in the Middle East) and are governed by uncompetitive structures.

The above factors, together with the current high oil prices; the future oil demand of new large economies such as China and India, causing uncertainty about future oil availability; the recent dispute between Russia and Ukraine over the price of natural gas (which put EU gas supplies at risk), suggest that the energy security issue will become a higher priority on government agendas.See more about biodiesel project.

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Special and Differential Treatment (SDT) and the “infant industry argument”

Special and Differential Treatment (SDT) had its origins in a view of trade and development that questioned the desirability of developing countries’ liberalising border measures at the same pace as industrialised countries. It emphasises graduation of trade liberalisation according to the development level of the country Involved.

There is a considerable gap between those countries already exporting biofuels and those that are just starting to produce them. Disparities exist both in terms of the development of their biofuel industries and the development level of the countries themselves. There are those countries that are at the forefront of the development of these industries, such as Brazil, the US and the EU and those that, despite having a significant amount of feedstock, still have some way to go in the development of the technology. Many developing and least developed countries can be found within the latter group. These countries may possess significant advantages for biofuel production and trade but need the right incentives for the industry to develop. Many of these countries are those in which the impacts of biofuels, especially in terms of social and economic development, are likely to be felt most strongly.

The countries that today have well developed biofuel industries owe their progress to a set of economic incentives and domestic policies that have fostered the development of their biofuel industries.

The trading system should recognise these differences and allow sufficient policy space for coherent domestic policy mechanisms to allow the development of the biofuel industry in the poorest countries above all. Policies also need to implement measures that support climate change issues.

From the mix of policy tools available to support industry development, it is necessary to identify those that are the most effective but also the least trade distorting, or to create new tools if those available are insufficient.

Agreement on Technical Barriers to Trade

The Agreement on Technical Barriers to Trade (TBT) aims to ensure that regulations, standards, testing and certification procedures do not create unnecessary trade obstacles. While technical regulations are governed by the main body of the TBT, the Annex contains a Code of Good Practice regarding international voluntary standards such as those elaborated by the International Organization for Standardization. Standards administered by the private sector and other non-governmental entities fall outside the scope of the WTO rules.

The TBT permits technical standards that fulfil legitimate environmental objectives, such as climate change goals. Only product-related barriers are permitted and they should not discriminate against other members’ products, or create unnecessary barriers to trade.

As suggested earlier, at present there are several initiatives underway aiming to address environmental and social practice in biofuel production. To the extent that these are non-governmental voluntary initiatives, they would fall outside the scope of the TBT. However, there is growing concern about the impact of the proliferation of private environmental and social standards on market access for developing countries. These standards are driven by Northern countries’ concerns and are considered a new form of protectionism or so-called ‘market entry’ barriers. Though it is important to have guidance to ensure compliance with minimum environmental and social standards on biofuels, as there is potential for environmental and social damage, these initiatives need to be created in such a way that they do not constitute unnecessary barriers to trade. The complex procedures and high costs usually associated with these assurance schemes also raise concerns about the regressive effect these may have on small producers in developing countries.

Agreement on Subsidies and Countervailing Measures

If biofuels are considered industrial goods, their trade is governed by the rules of GATT and domestic support from the Agreement on Subsidies and Countervailing Measures (SCM).

The SCM monitors the use of subsidies in order to reduce or eliminate their trade distorting effect. The Agreement provides a definition of the term “subsidy”, which contains three basic elements: (i) a financial contribution (ii) by a government or any public body within the territory of a Member (iii) which confers a benefit. All three of these elements must be satisfied in order for a subsidy to exist.

There are three subsidy categories: prohibited, actionable and non-actionable. Prohibited subsidies relate to two practices: (1)the use of export subsidies – which are currently used in the biofuel industry and; (2)having receipt of the subsidy contingent upon using domestic inputs over imports. This reduces expected market access benefits for foreign suppliers of competing inputs and, hence, is considered trade distorting. Several programmes of this nature are already in place and more could develop as the industry expands output. For example, the US Department of Agriculture has established a subsidy for refiners to use soya oil as a feedstock for biodiesel. As this subsidy is only available if soya oil is used as the input, firms negatively affected by this subsidy, either petroleum producers or competing input producers, could argue that the subsidy nullifies or impairs benefits accruing to them under the WTO. If the issue was brought to the WTO and argued successfully, the US would have to withdraw this subsidy.

Non-actionable subsidies and actionable subsidies are non-trade distorting and trade distorting subsidies, respectively. According to Loppacher (2005) almost every subsidy that exists in the biofuel industry today would fulfil the conditions necessary to be considered an actionable subsidy under the SCM Agreement. If a subsidy exceeds 5 per cent of a product’s value and is administered in such a way as to be trade distorting, it is an actionable subsidy. Subsidies in both the biodiesel and ethanol markets are significantly higher than the suggested 5 per cent of the value of the product – reaching over 100 per cent of the selling price in the case of US biodiesel.

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.

Future prospects for biofuels

While ten years ago there were only a handful of countries producing biofuels, by 2006 many countries around the world are using biofuels on a large scale. Forecasts for the future of this market are very optimistic as all types of countries, industrialised and developing, large and small, are implementing or planning to implement @directives to promote greater use of biofuels. Accordingly, production capacity is expected to rise as suggested by the establishment of many new projects around the World.

According to IEA (2004), with the entering into force of the Kyoto Protocol in 2005 and the first target period under the EU Biofuels Initiative coming into effect in December 2005, world biofuel production is expected to quadruple to over 120,000 ML by 2020, accounting for about 6 per cent and 3 per cent of world motor petroleum use and total road energy use, respectively. A more recent estimate from IEA increased this figure to 10 per cent of world fuel use for transport by 2025. Biofuels are not expected to totally replace oil-based fuel in the transport system; rather they are an alternative or a complement to it.

Brazil is expected to continue as the leading bioethanol producer and exporter. Although the internal market will still account for the largest part of production, exports will rise sharply. According to the São Paulo Sugar and Bioethanol Institute, the value of Brazil’s bioethanol exports are expected to jump from US$ 1 billion a year to US$ 8 billion by 2007.

The US is expected to continue demanding large quantities of bioethanol. The stronger demand will be served both by internal production and imports, mainly from Brazil and CBI countries. Other sugar-producing countries such as Indonesia and Southern Africa are also predicted to become exporters.

In order to implement the European Directive 2003/30/EC that sets a target of 5.75 per cent of biofuel within the mix of transport fuel by 2010, 18.6 million tonnes of oil equivalent of biofuels is needed. This will require imports to sustain the programme. Indeed, Malaysia and Indonesia are already expanding palm oil plantations to meet greater demand and are together expected to supply up to 20 per cent of this market. Brazil is also expected to be the main beneficiary of EU imports of soya for biodiesel.

Other promising import markets are likely to be Asian countries like Japan, Korea and Taiwan, which have very little land available for increased production. Japan, for instance, has been highlighted as potentially the world’s largest bioethanol importer.

Currently Japan allows a 3 per cent bioethanol content in gasoline, which requires 1.8 billion litres of alcohol-based fuel each year. Discussions are taking place on increasing the blend cap to 10 per cent, which would result in a 6 billion litres market. In order to secure this future supply, Japan and Brazil have recently formed a joint venture company that will produce bioethanol. Japan is also examining the options of palm and coconut oil from the Philippines to make B5 available from April 2006. In China, although supply capacity is increasing fast, growth in demand might well exceed growth in production. Projections show that 22.7 metric tonnes of biofuels will be needed to blend 10 per cent biofuels into all Chinese cars by 2020. The present target is only 11 metric tonnes capacity expansion. See more details about biodiesel project from http://www.biodieselproject.com.

Five Biofuel Policies

(1) Development of biofuels can not sacrifice the basic interests of the people (including access to food, water and land).
(2) biofuels must be sustainable environment.
(3) biofuels must truly help reduce greenhouse gas sources.
(4) the development of biofuels should be based on commercial principles, to be fair, the people’s rights to get a reasonable return (including labor rights and intellectual property).
(5) cost and profit of biofuels should be evenly distributed. Oil palm can do all five requirements.