An overview of biofuel policies across the world

Energy Policy 38 (2010) 6977–6988

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Energy Policy journal homepage: www.elsevier.com/locate/enpol

An overview of biofuel policies across the world Giovanni Sorda a,n, Martin Banse b, Claudia Kemfert c a

E.ON Energy Research Center, Institute for Future Energy Consumer Needs and Behaviour (FCN), RWTH Aachen University, Mathieustraße 6, 52074 Aachen, Germany Johann Heinrich von Th¨ unen-Institute (vTI), Federal Research Institute for Rural Areas, Forestry and Fisheries, Institute for Market Analysis and Agricultural Trade Policy, Braunschweig, Germany c Deutsches Institut f¨ ur Wirtschaftsforschung (DIW), Energy, Transportation and Environment Department, Berlin, Germany b

a r t i c l e in fo

abstract

Article history: Received 14 April 2010 Accepted 30 June 2010 Available online 4 August 2010

In the last decade biofuel production has been driven by governmental policies. This article reviews the national strategy plans of the world’s leading producers. Particular attention is dedicated to blending targets, support schemes and feedstock use. Individual country profiles are grouped by continent and include North America (Canada and the US), South America (Argentina, Brazil, and Colombia), Europe (the European Union, France, and Germany), Asia (China, India, Indonesia, Malaysia, and Thailand) and Australia. & 2010 Elsevier Ltd. All rights reserved.

Keywords: Biofuels Policy Renewable energy

1. Introduction The objective of this paper is to provide a concise but exhaustive overview of the policies that have fostered the expansion of the biofuel industry across the world. The largest producing countries are discussed individually. Key laws, action plans and incentive schemes of the past decade are reviewed. Current output targets, subsidies and import tariffs are highlighted. We also identify the principal feedstock employed for biofuels manufacture in each nation. These elements should allow policy analysts and socio-economic researchers to identify the driving forces behind the recent growth of biofuel production, single out the agricultural products that are directly affected by local support schemes as well provide a basis for further and more detailed investigations on the implications of current policies. Over the last ten years biofuels production has increased dramatically. Between 2000 and 2009 fuel ethanol output experienced an increase from 16.9 to 72.0 billion liters while biodiesel grew from 0.8 to 14.7 billion liters (Fig. 1). The increment in production has been driven by governmental interventions. In the US, the world’s largest fuel ethanol producer, strong financial incentives are guaranteed for biofuel manufacturers. In the European Union, the world’s largest biodiesel producer, biofuel consumption is mostly driven by blending mandates in both France and Germany (see Tables 1 and 2 for the output levels of individual countries). External incentives are required to achieve the biofuel targets set by national administrations. Production is unprofitable

n

Corresponding author. Tel.: +49 241 80 49837. E-mail address: [email protected] (G. Sorda).

0301-4215/$ - see front matter & 2010 Elsevier Ltd. All rights reserved. doi:10.1016/j.enpol.2010.06.066

(Brazil being the only exception) and it needs to be promoted via tax exemptions, subsidies or other forms of financial incentives (Rajagopal and Zilberman, 2007). The OECD estimated that in its member countries biofuel subsidies amounted to US$ 15 billion in 2007 (OECD, 2007; OECD/ITF, 2008). Biofuel policies are strongly distortionary. Due to the characteristic of their manufacture, commercially available biofuels employ almost uniquely food crops as their feedstock (predominantly sugar cane and sugar-beet, corn and oily seeds; Larson, 2008). In 2006 20% of the total US corn supply was reallocated to fuel ethanol production (EIA, Energy Policy Administration, 2007). Consequently biofuels have been at least partially blamed for the increment in food prices between 2003 and 2008 (Mitchell, 2008; UNCTAD, United Nations Conference on Trade and Development, 2008; Schmidhuber, 2007; Johnson, 2007; Mercer-Blackman et al., 2007). In the second half of 2008 the FAO’s food-price index substantially dropped, while 2009 witnessed again a steady increment (OECD/FAO, 2009. In January 2010 the indexes for cereal grains, oils, and sugar prices were, respectively, 70%, 69% and 276% higher than the 2002–2004 average values.1 In addition to criticisms for the increased linkages between the food and energy sectors, studies that measured the life-cycle assessment (LCA) of biofuels have highlighted a negative net contribution to a reduction in GHG emissions for specific types of feedstock crops and processing techniques (Macedo et al., 2004; Pimentel and Patzek, 2005; Farrel et al., 2006; Crutzen et al., 2007). Whereas the results of LCA studies may vary considerably (for an overview see OECD, 2008), corn-based ethanol consistently showed the most harmful LCA profile. 1 See the FAO Food Price Indices, retrived on 1 March 2010, available on http://www.fao.org/worldfoodsituation/FoodPricesIndex/en/.

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Fig. 1. World annual ethanol and biodiesel production, 1975–2009*. Note: Original data in US gallons; 2009 values are projections. For more information and a free download of the book, see Earth Policy Institute on-line at www.earthpolicy.org. Note that all data was in US gallons, and were later changed by authors into liters (also see below for exact values used in the figure, already converted into liters). Source: F.O. Licht; Lester R. Brown, Plan B 4.0: Mobilizing to Save Civilization (New York: W.W. Norton & Company, 2009) Brown (2009).

Exact values of data in the figure

1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009*

Ethanol (million liters)

Biodiesel (million liters)

551 658 1456 2504 3499 4325 4929 7079 9190 12,755 13,991 13,065 14,457 14,757 15,043 15,064 16,214 15,729 15,746 16,712 17,898 18,569 20,317 19,017 18,637 16,940 18,269 20,318 24,104 28,231 31,022 38,583 49,154 65,690 72,072

11 87 142 280 404 541 564 581 712 797 993 1436 1911 2301 3835 6680 9836 14,574 14,716

Note: 2009 is a projection

In order to reduce the impact of biofuels production on food commodities and improve their GHG emission-balance, greater attention has been devoted to the development of second-generation ethanol and biodiesel. Second generation simply refers to biofuels that are manufactured from non-food feedstock. The input of choice may be biomass rich in lignocellulose (such as woody crops or energy grasses, i.e. switchgrass and

miscanthus) or oily plants (e.g. jathropa).2 Hamelinck and Faaij (2006) provide an overview of second-generation processing techniques.

2 Note that biofuels derived from algae may sometimes be referred as third generation or advanced biofuels.

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Table 1 World fuel ethanol production by country (2008–2007) in million liters. Source: RFA, Renewable Fuel Association, Statistics, Annual World Ethanol Production by Country (based on F.O. Licht estimates) (RFA, Renewable Fuel Association, 2010). Original version in US gallons and here converted in liters. Available at http://www.ethanolrfa.org/pages/statistics#E as of 29/06/2010. Country

2008

2007

USA Brazil EU 27 China Canada Thailand Colombia India Australia Other

33,737 24,261 2748 1882 892 337 296 247 97 480

24,360 18,815 2138 1822 830 297 281 198 99 311

World

64,981

49,112

Table 2 World biodiesel production by country (2008–2007) in million liters. Source: OECD/FAO, Agricultural Outlook 2009–2018. In particular, Agricultural Outlook 2009-2018 database, where data was originally published in tonnes. Conversion rate: 1 liter of biodiesel ¼0.88 kg (OECD-FAO Database, 2009). Data available available at: http://www.agri-outlook.org/document/6/0,3343, en_36774715_36775671_40969158_1_1_1_1,00.html. Country EU 27 US Argentina Brazil Australia Malaysia Indonesia India Canada Other World

2008

2007

9164 3078 1550 1238 1051 609 405 227 114 1036

7377 2733 522 457 524 240 327 114 99 895

18,472

13,060

In an attempt to reduce oil dependency, increase the share of renewable energies and contribute to a reduction in declining farm income, governments across the world have approved legislative instruments that foster the biofuel industry. Concerns over rising food prices have led some countries to momentarily halt or reduce support programs (e.g. China), while others have decided to increment their investment in second-generation technologies (e.g. the US). Germany, on the other hand, has directly linked its future biofuel consumption to GHG saving targets. The dangerous linkage between energy needs and food consumption as well as the goal of cost-competitive manufacture remain key issues in the political agenda of biofuel producing nations. This article is meant to provide a useful overview of the current output targets and support schemes around the world in order to better understand some of the key factors driving biofuels production. The next sections present the largest producing nations (see Tables 1 and 2) grouped by continent. We include North America (Canada and the USA), South America (Argentina, Brazil and Colombia), Europe (the European Union, France and Germany), Asia (China, India, Indonesia, Malaysia and Thailand) and Australia. 2. North America 2.1. Canada The Canadian Environmental Protection Act Bill C-33 mandates a 5% renewable content in gasoline by 2010 and a 2% renewable

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content in diesel fuel and heating oil by 2012.3 In order to meet the proposed targets a minimum of 1.9 billion liters of ethanol should be produced given current trends on the sale of gasoline. The achievement of the 2% biodiesel federal mandate is presumed to require a production capacity of 520 million liters of biodiesel by 2012 (Dessureault, 2008). Ethanol production is almost uniquely based on cereal grains. In 2009 corn accounted for 69% of ethanol output, while wheat contributed to a further 30%. Biodiesel is obtained primarily from animal fats. It is estimated that in 2009 tallow grease was the leading biodiesel feedstock (49%), followed by yellow grease (37%). Canola’s relevance in biodiesel production has been increasing and in 2009 it accounted for 14% of the total (Dessureault, 2009). According to the Doyletech report, the production of renewable fuels has an aggregate positive impact on the Canadian economy of CAN$2 billion annually (Doyletech, 2010). Besides the federal share mandate, there are direct incentive payments for production since April 2008. Through the EcoENERGY for Biofuels Program ethanol manufacturers enjoyed a maximum incentive rate of CAN$0.10 per liter for three years from 2008 to the end of 2010. The payment declines by CAN$0.01 every year thereafter until it reaches CAN$0.04 in 2015 and 2016. The maximum incentive rate for biodiesel amounted to CAN$0.20 per liter from 2008 to 2010. The subsidy will then decrease by CAN$0.04 every year until it is valued at CAN$0.06 in 2016. In addition to the EcoENERGY program, several fund schemes are in place to expand biofuel production by targeting an enlargement of manufacturing facilities (econAGRICULTURE Biofuels Capital Initiative), granting support to research clusters (Agricultural Bio-Products Innovation Program and Sustainable Development Technology Canada) and accelerating the commercialization of innovative agricultural products and services (Agri-Opportunities Program). The federal biofuel mandates and support policies are further integrated by specific legislative measures imposed and financed by individual provinces. Dessureault (2008, 2009) provides a detailed account of the various regional polices in place. Trade protection of the national biofuel industry is limited in comparison to current custom polices set in the US and the EU. There are no import tariffs on alternative fuels manufactured in NAFTA countries. There is however a duty of CAN$0.05 per liter on ethanol imports from Brazil.

2.2. The United States In July 2010 the updated Renewable Fuel Standard (RFS2) went into effect, finalizing proposals made with the Energy Independence and Security Act of 2007. An aggregate of 36 billion gallons of renewables must be used in transport fuels by 2022.4 From 2015 onwards, the volume of conventional biofuels (e.g. cornethanol) should be 15 million gallons. Cellulosic biofuels are expected to amount to 0.1 billion gallons in 2010 and surge to 16 billion gallons in 2022, while the total contribution of advanced biofuels5 should not be less than 21 billion gallons by 2022 (see Fig. 2). RFS2 also require producers of advanced biofuels to reduce life-cycle greenhouse gas (GHG) emissions by at least 50%,6 while 3 The Government of Canada Biofuels Bill Receives Royal Assent, published in EcoAction on 26 June 2008 and available at http://www.ecoaction.gc.ca/newsnouvelles/20080626-eng.cfm. 4 This target is ultimately to be interpreted as the energy content equivalent of 36 billion gallons of ethanol. 5 Note that in the EPA definition, advanced biofuels include biomass-based diesel, cellulosic biofuels and non-cellulosic advanced biofuel. 6 Reductions in life-cycle GHG emissions for cellulosic biofuels must reach 60%.

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Fig. 2. RFS2 volume requirements. Source: Energy Policy Administration,‘‘EPA Finalizes New Regulations for the National Renewable Fuel Standard Program for 2010 and Beyond,’’ (February 2010) (EPA, Environmental Protection Agency 2010) available at http://www.epa.gov/otaq/fuels/renewablefuels/regulations.htm.

standard biofuels have to achieve a reduction in life-cycle GHG emissions of 20%.7 In addition, all renewable fuels should certify the type of feedstock used and comply with regulations on land-use. The obligatory consumption of given biofuel volumes was first implemented with the inclusion of Renewable Fuel Standards (RFS1) in the Energy Policy Act of 2005. The objective was to employ 4 billion gallons of renewables in transport fuels in 2006 and increment their share over the years. The new regulations (RFS2) further increase the biofuel targets, incentivise secondgeneration production and implement new criteria to ensure a more environmentally sustainable manufacture. The guiding principle of biofuel policies has been a reduction in the country’s dependency on oil. One of the aims of the Energy Independence and Security Act of 2007 was to decrease gasoline consumption by 20% in the next 10 years. The Biomass Program8 of 2008 had two primary objectivess. First, to decrease gasoline consumption by 30% when compared to 2004 levels by 2030. Second, to make cellulosic ethanol corn-derived ethanol. Historically, US biofuel policies have focused on the ethanol industry. In 1978 the Energy Tax Act established tax credits for ethanol blenders. Over the decades different degrees of credit have been guaranteed. However, some form of subsidies has been

7 The 20% threshold only applies to renewable fuel from new facilities that commenced construction after December 19, 2007, with an additional exemption from the 20% threshold for ethanol plants that commenced construction in 2008 or 2009 and are fired with natural gas, biomass, or any combination thereof (Federal Register, Regulation of Fuels and Fuel Additives: Changes to Renewable Fuel Standard, March 26, 2010, p. 14687). Interestingly, in California corn-based ethanol does not qualify as a fuel that sufficiently reduces GHG emissions. Cornbased ethanol/gasoline blends are not considered low carbon fuels (see the Low Carbon Fuel Standard enacted by the California Air Resource Board in May 2009). 8 DOE, US Department of Energy, Biomass Multi-Year Program Plan (March 2008), available at http://www1.eere.energy.gov/ biomass/pdfs/biomass program mypp.pdf.

present ever since.9 Today, ethanol is mainly derived from corn. Its importance to the corn industry is gauged from the statistic that 20% of the US corn supply was employed as ethanol feedstock in 2006 (EIA, Energy Policy Administration, 2007). In the past few years the main source of financial support for biofuels has been the Volumetric Ethanol Exercise Tax Credit (VEETC). The VEETC was enacted in 2004 by the American Jobs Creation Act and it is scheduled to expire in 2010. It is guaranteed for every domestic or imported gallon of ethanol blended with other fuels. It is awarded without quantity limits and independently of the price of gasoline. Blenders can claim 51 dollar-cent credit per gallon used (EIA, Energy Policy Administration, 2008). The Energy Information Administration estimated that the tax credit costed around US$2.4 billion in 2006. If in 2010 the annual production of ethanol exceeds 11 billion gallons, the tax credit alone would cost the government almost US$5 billion (EIA, Energy Policy Administration, 2007). Koplow and Steenblik (2008) calculated that the total yearly support for ethanol production (inclusive of local and state subsidy programs, present especially in the mid-west region) ranged from US$5.8 to US$7 billion in 2006 and could reach US$11 billion in 2008.10. The 2004 American Jobs Creation Act also guarantees tax credits for biodiesel under the VEECT. The subsidy amounts to US$1 per gallon for biodiesel produced from virgin oils (the main feedstock)

9 An important milestone in the development of the US ethanol industry was the 1990 Clean Air Act Amendments of 1990. The latter mandated the adoption of oxygenated fuels in areas with too high carbon monoxide levels (Hahn, 2008). Either ethanol or methyl tertiary butyl ether (MTBE) were used by blenders to add oxygen to gasoline in order to lower the engine’s carbon monoxide emission. Whereas initially MTBE was the oxygenate of choice, following claims of cancerous groundwater contamination it was later supplanted by ethanol. 10 Koplow and Steenblik, 2008, p. 96. For a review of individual state policies see Koplow (2006).

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or fats, and US$0.50 per gallon for recycled oils. Koplow (2006) estimated that the foregone tax revenue due to biodiesel exemption would reach almost US$1.4 billion in 2008. Import tariffs constitute an important measure to protect the national biofuels industry from more competitive foreign manufacturers (above all, Brazil). There are two taxes levied against imported ethanol: an ad valorem duty of 2.5% and a tariff of US$0.54 per gallon applied under the Most Favoured Nations (MFN) scheme. The latter hinders imported ethanol from enjoying the government subsidy granted by the VEECT. North America Free Trade Agreement (NAFTA) members (Canada and Mexico) can export ethanol to the States on a duty-free basis. Limited duty-free imports are allowed from countries of the Caribbean Basin Economic Recovery Act (CBERA), as long as their exports do not surpass 7% of domestic production. Finally, consumption of ethanol is directly proportional to the engine requirements and the availability of fuels with high alcohol content. Since the 1970s all gasoline powered vehicles sold in the US can run on E10.11 In particular, the 1988 Alternative Motor Fuels Act (AMFA) helps automakers counterweight Corporate Average Fuel Requirements (CAFE) when vehicles that run on alternative fuels are manufactured (Koplow, 2006).

3. South America 3.1. Argentina Gasoline and diesel are required to contain a 5% biofuel share starting in January 2010 (Argentine Biofuel Law 26.093 of April 2006, implemented in February 2007 under Decree 109/2007). The quality and technical requirements of fuel ethanol were specified in November 2008 with Resolution 1295/2008. Biodiesel’s quality specification were formalized as late as February 2010 with Resolution 6/2010. The pricing scheme for ethanol destined to the internal marked was established in 2008 with Resolution 1294/ 2008, while biodiesel’s domestic price was set up with Resolution 7/2010 in February 2010. Biofuel manufacturers that export their products do not enjoy tax incentives. Biodiesel and ethanol sold to the internal market are granted financial support. Producers can opt for the reimbursement of the value added tax or accelerated depreciation on capital investments. In addition, the government assures that the biofuel output will be purchased for the 15 years period that corresponds to the term of the Biofuel Law. However, financial incentives are reviewed annually (hence they are not guaranteed) and prices are set by the government (Rutz et al., 2009). Biodiesel production is based on soybean and centres on the existing soybean processing cluster in Rosario.12 In recent years biodiesel output and productive capacity have increased substantially (an output increment of 433% between 2008 and 2007—Argentine Renewable Energies Chamber, 2009). In 2009 production is estimated at 880 million liters while output capacity is expected to reach 2.4 billion liters (Joseph, 2009). Ethanol production is substantially less developed (45 million liters in 2009) and it is linked to the sugar industry. Until the end of 2009 almost the entire biofuel production was exported. While biofuel exports are not granted direct financial incentives, biodiesel receives favourable export tariffs in comparison to its feedstock (soybean and soybean oil). Soybean exports 11

E10 stands for fuels with 90% gasoline and 10% ethanol. The soybean industry plays an important role in the country’s agricultural sector. Argentina is the world’s third largest soybean producer and the world’s leading exporter of soybean meals and soybean oil (Joseph, 2009). 12

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are taxed at 35%, soy oil at 32% and biodiesel’s effective levy is 17.5% (a 20% export charge and a 2.5% tax rebate). The current high trade volumes may be hindered by new regulations in the importing countries. According to the EU’s Renewable Energy Directive of 2009, a minimum 35% reduction in GHG emissions is required from biofuels. The same document assumes that soybean oil reduces emission by only 31% (thus preventing its use in the European market).13 Similarly, Argentine producers are concerned about the revision of the National Renewable Fuel Standards in the US.

3.2. Brazil Brazil has the most developed and integrated biofuels program in the world. Its initiation dates back to the oil crisis of the 1970s. In 1975 Brazil introduced the National Alcohol Program Proa lcool focusing on the production of ethanol from sugar cane. The objective was to limit energy supply constraints, provide a stable internal demand for the excess production of sugar cane and counterweight variations in international sugar prices (Walter and Cortez, 1999). The government also made agreements with manufacturers in order to develop a market for purposely modified vehicles. In the next decade the commercialization of biofuels proved successful and 96% of automobiles sold in Brazil in 1985 were ethanol powered (Colares, 2008). The decline of oil prices that followed 1985 led to a set-back in the diffusion of fuel ethanol. Sales of ethanol powered vehicles plummeted to 1% by the late 1990s and the over-valuation of Brazilian currency (1994–1999) increased ethanol production costs. The government tried to limit these drawbacks by implementing legislation in 1993 that required 22% ethanol content added to gasoline. In 2003 this percentage was raised to 25%. During the 1990s further deregulatory decrees in the energy and fuel markets were implemented. In 1998 the government liberalized the price of hydrated alcohol to be used in fuels and in 1999 it stipulated that hydrated ethanol fuel sales were to be carried out through public auctions.14 The surge in oil prices that characterized the 2003–2008 period brought ethanol back to its initial success. Ethanol became once again a cheap and sought after alternative to oil. Furthermore, the introduction of Flex-Fuel engine technology, which allows drivers to run on gasoline or on ethanol, contributed to this resurgence. In 2006 83% of the cars sold in Brazil were Flex-Fuel Vehicles (FFV) and the country achieved oil independence (Colares, 2008). According to de Almeida’s et al. (2008) estimates, ‘‘FFVs could make up 27% of the Brazilian car fleet in 2010 and 43% in 2015.15’’ The success of the Proa lcool program is reflected in the importance that sugar and ethanol production play in the Brazilian economy. The two industries account for 3.6 million jobs and 3.5% of GDP, while ethanol production alone consumes 50% of the total sugar cane supply (de Almeida’s et al., 2008). The relevance of Brazilian biofuels production goes beyond its national borders. Brazil’s ethanol is recognized as the most price-competitive biofuel in the world. Macedo and Nogueira (2005) estimated ethanol costs in the Centre-South region of Brazil to be US$0.23 per liter. According to Kojima and Johnson (2006), fuel ethanol average production costs range between US$0.23 and US$0.29 per liter. These values would make ethanol 13 Directive 2009/28/EC of 23 April 2009, see Article 17 (on the sustainability criteria for biofuels and bioliquids) and Annex V. 14 World Trade Organization, Trade Policy Review—Brazil 2008 (2005). 15 de Almeida’s et al., 2008, p. 156.

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competitive with oil prices at about US$30 per barrel. de Almeida’s et al. (2008) calculated the average production cost of new ethanol projects to be around US$0.37 per liter. In this case an oil price of US$42 per barrel would make ethanol costcompetitive. Brazil’s low manufacturing expenses are the result of several elements. First of all the production feedstock, sugar cane, is relatively cheap. High levels of land productivity are combined with almost no needs for irrigation. In addition, the mills are able to satisfy almost all of their energy needs through co-generation power plants based on bagasse,16 a by-product of sugar cane (de Almeida’s et al., 2008). Finally, several years of governmental support allowed large investment in research and technology developments that perfected the transformation processes and lowered manufacturing costs. As of today, however, there are no direct subsidies for ethanol production. The government maintains nonetheless preferential treatment of the ethanol industry compared to gasoline producers. Since 2004 ethanol does not face any excise tax. Federal duties are also much higher for gasoline, which is charged at US$0.26 per liter, compared to US$0.01 per liter for ethanol. Fuel’s VAT is determined by state regulation and varies across the country. In the Sa~ o Paulo State, where most of production is located, the VAT component of gasoline’s consumer price is 47%, while ethanol’s duty remains at 22%. In the Rio de Janeiro State the difference is lower, with the VAT on gasoline accounting for 50% of the consumer’s price compared to 36% for ethanol. de Almeida’s et al. (2008) estimate that ethanol enjoys tax incentives for a total value of US$977 million per year. They also calculate that between 1979 and the mid-1990s government support amounted to around US$16 billion. These numbers remain relatively small compared to the level of subsidies granted by the US for ethanol as estimated by Koplow (2006). Based on the successful experience of the bioethanol plan, Brazil is now also investing in biodiesel. The National Program on Biodiesel Production and Usage (PNPB) was inaugurated in 2005.17 PNPB initially required 2% of petrol based diesel to be replaced by biodiesel from 2008 to 2012 and increase to 5% from 2013 onwards (Colares, 2008). On 1 July 2009, the Brazilian government has already mandated a 4% biodiesel blending share. It is possible that the 5% biodiesel target will occur before 2013, as specified in the current legislation. Biodiesel production is projected at 1.5 billion liters in 2009 (Barros, 2009). In order to meet the required consumption shares a large capacity expansion is underway. There are 65 plants already operating and 12 plants waiting for an official authorization. The total output capacity reaches the 4 billion liters. Brazilian biodiesel production is mostly based on soybean, though other important vegetable oil plants are castor bean, palm tree and jathropa. Contrary to ethanol, biodiesel is not costcompetitive and is subsidized. There are two main support schemes. The first one refers to auctions organized by the government, where the National Petroleum Agency (ANP) buys given quantities of biodiesel to ensure supply targets. The prices paid in the auctions have been higher than production costs, thus stimulating supply. The second form of assistance is granted through tax exemptions with a focus on the regional location of production and on the provenience of the feedstock (‘‘Social Fuel Stamp’’ scheme). A minimum percentage of raw materials have to be purchased from family farmers to qualify for the fiscal 16 Bagasse is a by-product of sugar cane, it is estimated that one tonne of sugar cane generates 280 kg of bagasse, 90% of which is employed as feedstock for heat and power generation. 17 Federal Law 11.097 of 13 January 2005.

benefits.18 Depending on the type of feedstock and its regional provenience, tax incentives vary from 73% to 100% of the existing federal levy (Barros, 2009).

3.3. Colombia In 2001 the government mandated a 10% bioethanol blend in cities with a population above 500,000 inhabitants (Law 963). The law went into effect in late 2005 (Pinzon, 2007). In 2009, 75% of total gasoline consumed in Colombia had 10% ethanol content (Rutz et al., 2009). The government aims to cover the entire national demand with the 10% blend by 2010 and subsequently increase the ethanol content up to 25% by 2020 (ProExport Colombia, 2008). Ethanol is primarily derived from sugar cane and its prices are fixed by the government on the basis of international sugar prices. In addition, fuel ethanol is exempt from the VAT. The promotion of production and consumption of biodiesel started with Law 939 of 2004 and Resolution 1289 of 2005. The latter established an obligatory 5% biodiesel blend by 2008 (Pinzon, 2008). Future plans of the biodiesel promotion program include an increment of the blend up to 10% in 2010 and 20% in 2012 (Rutz et al., 2009). Palm oil is the feedstock of choice for biodiesel production. The latter enjoys sales tax and fuel tax exemptions. Furthermore, income obtained from crops used as biodiesel feedstock is also exempted from taxation. Financial instruments and policies are in place to support the local biofuel industry by giving incentives to new agro-industrial projects. Finally, in 2009 the government has required with Decree 1135 that from 2012 60% of all new vehicles sold in Colombia must support a E85 flexi fuel technology.19 The above mentioned quota shall increase to 100% by 2016 (Rutz et al., 2009).

4. Europe 4.1. The European Union In April 2009 the parliament of the European Union endorsed a minimum binding target of 10% for biofuels in transport by 2020 as part of the EU Directive 2009/28/EC on renewable energy. The directive also specified a minimum 35% reduction in GHG emissions to be achieved by biofuels during their life cycle, a target that is meant to increase to at least 50% starting from 2017.20 Sustainability criteria for indirect land-use changes are also provided. No bio-feedstock shall originate from primary forests, highly bio-diverse grassland, protected territories and carbon-rich areas. In 2003 Directive 2003/30/EC set a 5.75% target of biofuels market penetration by 2010, although the quota was not binding and individual countries were allowed to present their own national action plans. Each country was asked to aim at an indicative 2% share by 2005. However, in 2005 biofuels accounted for only 1% of transport fuels. Similarly the 2010 goal is likely to be missed, with an expected share of 4.2%.21 18 The percentage of feedstock purchased from family farmers varies across regions: 30% for the Northwest, Southeast and Southern regions; 10% for the Center-West and North regions (for crops harvested in 2009/2010); 15% for the Center-West and North regions (for crops harvested in 2010/2011). See Barros (2009). 19 For vehicles above 2000 cm3 the requirement applies from 2013. 20 Minimum GHG reductions vary depending on the type of feedstock and processing technique employed. 21 Data disclosed in the ’’Proposal for a Directive of the European Parliament and of the Council on the promotion of the use of energy from renewable sources’’ [COM(2008) 30_nal], 23.1.2008.

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Table 3 EU 27 fuel ethanol production by country (2008–2007) in million liters. Source: European Bioethanol Fuel Association, Production Data, available at http:// www.ebio.org/statistics.php?id=4 (European Bioethanol Fuel Association, 2009). Country France Germany Spain Poland Hungary Slovakia Austria Sweden Czech Rep. Other EU 27

2008

2007

950 581 346 200 150 94 89 78 76 291

539 394 348 155 30 30 15 120 33 139

2855

1803

The above policies are part of a greater plan to foster the adoption of alternative sources of energy in the EU. In 2001 Directive 2001/77/EC set a 12% target for gross national energy consumption and a 22.1% share of electricity to be derived from renewables by 2010. In 2008 the European Commission expected that a share of 19% – rather than the 22% proposed – will be reached by 2010. More recently, the EU Directive on Renewable Energy of 2009 endorsed a binding target of 20% share of renewables in energy consumption by 2020. In several countries tax reductions or exemptions have been implemented in order to support production or consumption. Directive 2003/96/EC on Energy Taxation specified the incentives allowed for the promotion of biofuels and for the achievement of the targets set by the common agenda. Tax exemptions can be carried out by single countries after approval of the EU Commission. The exemptions are expected to be proportional to the blending levels and should account for raw material prices in order to avoid overcompensation. In addition, they are limited in duration to six years but may be renewed. We discuss in more detail the individual tax and incentive policies of the two leading producers (France and Germany, see Tables 3 and 4) in Sections 4.2 and 4.3. Import tariffs for Most Favored Nations (MFN) amount to a 6.5% ad valorem duty for biodiesel.22 There are however little imports of biodiesel, of which the EU is the world’s leading producer (UNCTAD, United Nations Conference on Trade and Development, 2006). Vegetable oil for biodiesel production can enter for industrial use as ‘‘crude soy oil,’’ ‘‘crude sunflower oil’’ or ‘‘crude rape oil’’ and face a tariff of 3.2%. Alternatively, ‘‘crude palm oil for industrial use’’ has no inbound duties (Kutas et al., 2007). Imports of ethanol are substantially larger and amounted to 250 million liters in the 2002–2004 period. About 30% of imported bioethanol came from MFN countries under the classification of ‘‘denatured alcohol’’ at a levy of h0.102 per liter or as ‘‘undenatured alcohol’’ at h0.192 per liter.23 Reduced or no duties are granted to less developed countries belonging to the Generalized System of Preference (GSP), Cotonneou Agreement (ACP) and Everything But Arms (EBA). It is also important to mention the role played by the Common Agricultural Policy (CAP) in the evolution of the biofuel industry.24

22

Biodiesel enters the EU borders under the item ‘‘other chemicals’’. Brazil was the largest MFN exporter, with a 25% quota of the total EU imports. 24 The CAP is a long standing aid program aimed at helping farmers, fostering the quality of food and protecting rural areas. The program currently costs around 55 billion euros annually and it receives more than 40% of the EU’s budget. See the EU’s web page on agriculture at http://europa.eu/pol/agr/index en.htm.

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Table 4 EU 27 biodiesel production by country (2008–2007) in million liters. Source: European Biodiesel Board (2009), Statistics, Production by Country. Original data in tonnes, conversion rate: 1 liter ¼0.88 kg. Note that data for 2007 is no longer on website. Data available at http://www.ebb-eu.org/stats.php. Country

2008

2007

Germany France Italy Belgium Poland Portugal Denm./Sweden Austria Spain Other

3203 2063 676 315 313 305 263 242 235 1199

3284 991 413 189 91 199 168 303 191 664

EU 27

8813

6492

In 1992 the Mac-Sharry CAP reform25 was introduced in order to reduce surpluses in the production of cereals and oil seeds. Most importantly, mandatory fixed shares of non-food set-aside land were established. In 2005 more than 95% of the non-food setaside areas were allocated to energy crops.26 A further CAP reform in 2003 maintained obligatory shares of non-food set-aside land, included direct aid for energy crops and introduced Single Payment Schemes (SPS) that decoupled producer support from production decisions.27 For a maximum guaranteed area of 1.5 million hectares, an incentive of h45 per hectare was granted to growers of energy crops. In January 2009 the Council Regulation (EC) No 73/2009 promulgated a new reform of the CAP. Mandatory set-aside was suspended. In the light of potential food shortages and rising prices, the policy’s original objective to eliminate cereals surpluses was obsolete. Next we discuss the legislative framework of biofuels production in France and Germany, the two leading biodiesel and ethanol producers in the European Union (see Tables 3 and 4).

4.2. France French biofuel policies include mandatory blending of bioethanol and biodiesel as well as fiscal incentives. The aggregate share of biofuels in the transport sector was set at 1.2% in 2005 and it is expected to increase to 7% in 2010. The aggregate biofuel percentages were calculated with respect to net calorific values. The corresponding volume of biodiesel consumption is expected to amount to 2.7 million tonnes (equivalent to 7.6% of total diesel volume) in 2010, while bioethanol demand should reach 0.81 million tonnes (comparable to 10.7% of total gasoline volume) (Hennard, 2008). Initial plans from the previous government to reach a 10% target for biofuels integration have been halted and currently there are not specific biofuel goals after 2010. Specific quotas of biofuel production benefit from tax rebates. Production quotas are allocated through public tenders (Kutas et al., 2007). All manufacturers within the EU can participate in the tender and so far a few foreign companies situated nearby France’s borders have also qualified. The production quotas are allocated for a period of six years. A failure to reach the targeted incorporation rate incurs in a penalty. Each company is granted a favourable tax treatment on a limited quantity of biofuels. The tax

23

25

Council Regulation (EEC) No 1765/92—the Mac-Sharry reform. See ‘‘Report from the Commission to the Council on the Review of the Energy Crops Scheme’’, COM (2006) 500 Final, 22.09.2006, p. 6. 27 Council Regulation (EC) No. 1782/2003. 26

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rebates are reviewed annually and have been reduced over the years. In 2005 biodiesel and bioethanol enjoyed 0.33 and 0.38 h/l reductions, respectively. In 2009 biodiesel manufacturers were entitled to a 0.15 h/l rebate while ethanol producers were granted a 0.21 h/l saving over given quantities of output (Flach, 2009). The fiscal rebates are expected to phase-out by the end of 2011. Biofuels production has increased substantially despite the recent decline in fiscal incentives. Bioethanol is obtained from wheat, corn and sugar-beet. Biodiesel is based on vegetable oils (especially rapeseed). In 2010 French biodiesel consumption is projected to surpass its German counterpart for the first time with 2.7 million tonnes. In output terms, Germany still leads the European biodiesel market with a projected 2.66 million tonnes output, while French companies are expected to produce 2.3 million tonnes in 2010. On the other hand, France remains the leading ethanol producer of the Euro region with a forecasted 700,000 tonnes of ethanol in 2010 (Flach, 2009). Germany and France should display similar consumption and production patterns of both ethanol and biodiesel in the medium term and will remain the leading European biofuel markets.

4.3. Germany In July 2009 the German government approved a revision of its mandatory biofuel targets.28 The overall mandatory biofuels share in the transport sector was adjusted to 5.25% for 2009 and it will be held at 6.25% from 2010 until 2014 (all percentages are measured in net calorific values). In addition, the minimum biodiesel content in transport diesel was retroactively set at 4.4% for 2009 and it will be kept constant until 2014. Similarly the share of ethanol in gasoline was fixed at 2.8% over the 2009–2014 interval.29 From 2015 onwards, the biofuel quotas will be determined on the basis of GHG emission reductions. The German government is currently discussing how to implement and monitor the forecasted reductions in CO2 emissions. Germany is the first country in the EU to propose biofuel quotas based on GHG emission savings. In September 2009 the German government has promulgated the sustainability decree for biofuels,30 which encompasses the regulations proposed in the EU Directive 2009/28/EC. Besides the GHG savings, biofuels will have to certify that the provenience of their feedstock does not include primary forests, highly biodiverse grassland, protected territories and carbon-rich areas. In addition, Hydrotreated Vegetable Oils (HVO) have been proposed as an alternative to the standard biofuels (i.e. biodiesel and ethanol), pending approval from the European Union. Starting from 1 January 2007, Germany eliminated fuel excise tax exemptions and replaced them with quota obligations and tax rebates.31 Previously the total revenue loss due to biofuel tax exemptions reached 1.98 billion per year (Kutas et al., 2007). Budget constraints eventually led the German government to 28 See ‘‘Draft Law on the Amendment of the Promotion of Biofuels’’ (originally ¨ ¨ as Anderung der Forderung von Biokraftstoffen), 18 July 2009. 29 Fuel producers are required to supply a mandatory biofuel share equivalent to 5.25% of their aggregate production in 2009. In their attempt to meet the above mentioned quota, there are minimum binding requirement for the production of diesel and gasoline. The share of biodiesel in diesel production must not be lower than 4.4%, whereas the bioethanol content of gasoline must correspond to at least 2.8%. 30 Biokraftstoff-Nachhaltigkeitsverordnung—BiokraftNachV, 30 September 2009. 31 See State aid No N 57906 - Germany and the European Commission Document C(2006)7141, published on the 20.12.2006 in reference to State aid No N 579/ 06—Germany; Tax rebates for biofuels (amendments to an existing scheme) ¨ and Gesetz zur Einfhrung einerBiokraftstoffquote durch Anderung des Bundes¨ Immissionsschutzgesetzes und zur Anderung energie- und stromsteuerrechtlicher Vorschriften (Biokraftstoffquotengesetz—BioKraftQuG).

abolish the excise duty exemptions as a form of subsidies. Tax exemptions were initially replaced by tax rebates only for pure biodiesel on the amounts exceeding the imposed quotas. Currently pure biodiesel and vegetable oil are taxed differently than regular diesel (0.186 h/l for pure biodiesel B100 versus 0.47 h/l for diesel), though the discrepancy is expected to the level out over time. Ethanol production is based on sugar-beet and grains. Ethanol production capacity amounts to 880,000 tonnes per year,32 while actual output is forecasted to reach 500,000 tonnes in 2010. Biodiesel is mainly derived from rapeseed and its production capacity is estimated at 4.8 million tonnes per year,33 though production is estimated at 2.7 million tonnes in 2010 (Flach, 2009).

5. Asia 5.1. China China’s biofuel policies focus on ethanol production. Biodiesel has been only marginally promoted by the government (despite the fact that diesel is the predominant transport fuel), as China is a net importer of vegetable oils. Over time the position of the Chinese government has shifted from its initial unconstrained support to a more careful consideration of the potential impact of biofuel production on the food markets. In 2001 the government issued standards for denatured fuel ethanol and for bioethanol gasoline for automobiles. The Ethanol Promotion Program was launched in 2002 in order to make use of excessive maize stock-piles. The State Scheme of Pilot Projects on Bioethanol Gasoline for Automobiles followed shortly. In 2004 the National Development and Reform Commission (NDRC) extended the scope of the pilot project to the national level and initiated the State Scheme of Extensive Pilot Projects on Bioethanol Gasoline for Automobiles (SSEPP). Ethanol production and distribution was rigidly controlled by the government that also imposed CNCP or Sinopec as the distributors of choice. At the beginning of 2006, extensive pilots projects carried in five provinces and 27 cities had achieved the 10% blending target34 (Dong, 2007). In December 2006 the NDRC proposed the ambitious goal of 6.6 billion liters of biofuel output by 2010 as part of the 11th Five Year Plan.35 However, the proposal was not approved by the State Council due to the rising food prices (Latner et al., 2007). In August 2007 the National and Development Reform Commission (NDRC) announced a Medium and Long Term Development Plan for Renewable Energy. Renewable energy as a share of total primary energy consumption should rise to 10% by 2010 and to 15% by 2020. Biofuels are expected play an important role in the achievements of these targets. Ethanol production is projected to reach 2 million tonnes by 2010 and 10 million tonnes by 2020. Biodiesel consumption should correspond to 200,000 tonnes by 2010 and 2 million tonnes by 2020 (GSI, Global Subsidies Initiative, 2008). However, the government is unlikely to grant production permission to new factories employing corn or maize feedstock nor to authorize capacity expansion (GSI, Global Subsidies Initiative, 2008). The attention has been switched to non-grain 32 German Confederation of Ethanol Producers, Bundesverband der Deutschen Bioethanolwirtschaft e.V., available at www.bdbe.de/. 33 Federation of the German Biofuels Industry, Verband der Deutschen Biokraftstoffindustrie e.V., available at www.biokraftstoffverband.de/. 34 The vehicles in the pilot cities and provinces were required to use E10. 35 Data reported in GSI (2008) as 5.2 million tonnes of ethanol. Conversion rate used: 1 l of ethanol¼0.7894 kilograms (kg).

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crops such as cassava, sweet sorghum and sweet potatoes. The limited non-grains feedstock supplies constrain the growth of the biofuel sector, where the ethanol production was forecasted to reach the 1.7 million tonnes in 2009 (Beckman and Junyang, 2009). The price of fuel ethanol is controlled by the government at a level that would make ethanol production unsustainable without external financial assistance.36 In 2007 a subsidy of US$200 per tonne of ethanol was granted to producers (equivalent to US$0.158 per liter). From 2008 the fixed subsidy has been replaced by payments based upon the yearly evaluation of individual plants’ performance (GSI, Global Subsidies Initiative, 2008). The licensed ethanol producers are exempted from the 5% consumption tax and the 17% VAT. Financial assistance is also granted to intermediate inputs such as grains and fertilizers. In addition, the Ministry of Finance provides direct support of second-generation cultivations with allowances amounting to US$438 per hectare for jathropa plantations and US$394 per hectare for cassava cultivations. No direct subsidies are currently granted for biodiesel. There are no national biodiesel standards, thus preventing the latter from being blended and distributed across the nation.

5.2. India The Indian government has set ambitious biofuel targets. The National Policy on Biofuels was approved in September 2008. By 2017, a 20% share of biodiesel and bioethanol shall be blended with mineral diesel and gasoline,37 respectively. A key feature of the policy requires biodiesel production to employ non-edible oil seeds to be cultivated on waste and marginal land. In order to support growers, a continuously revised Minimum Support Price (MSP) for biodiesel oil seeds is be guaranteed by the government. A Minimum Purchase Price (MPP) for bioethanol and biodiesel is also being implemented (Altenburg et al., 2009). Previous biofuel policies included the Ethanol Blended Petrol (EBP) program and the National Mission on Biodiesel (NMB). The EBP was initiated in 2003. Mandatory blending of 5% ethanol was required in four union territories (out of seven) and in nine states (out of 28). The 5% target was later extended to 20 states from November 2006. However, governmental plans to raise the ethanol share requirements to 10% in 2008 have so far been delayed due fluctuations in the availability of sugar molasses associated to sugar cane production, the main ethanol feedstock. In addition, the use of imported ethanol to meet the requirements of the EBP program is not allowed by the government in an attempt to foster the domestic biofuel industry (Singh, 2007; 2009). The year 2003 also marked the beginning of the National Mission on Biodiesel. The government initially intended to plant jathropa on 11.2 million hectares of wasteland by 2012 and achieve a 10% blending target. However, biodiesel production costs surpassed its purchasing price (which is predetermined by national regulators on a six months basis), thus effectively hindering the ambitious targets proposed by the government (Singh, 2009). Fiscal incentives for biodiesel production include the exemption from the central excise tax (4%), though most state administrations have maintained the state excise duty. On the other hand, there are no direct financial tax incentives for ethanol 36 GSI (2008) reports this price to be 0.911 times the ex-factory price of RON (research octane number) 90 gasoline (p. 23). 37 As reported in an article by Rajkumar Ray and Mayank Bhardwaj, ‘‘India sets new biofuel target, risks food price row,’’ published by Reuters on the 11.09.2008.

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production. Nevertheless, subsidized loans are offered by the government for sugar mills constructing an ethanol production unit. 5.3. Indonesia In October 2008 mandatory levels of biofuel consumption were introduced in Indonesia. By 2010 the biodiesel share should amount to 2.5% and reach the 20% mark by 2025. The ethanol component of gasoline is required to be 3% in 2010 and increase up to 15% by 2025 (Dillon et al., 2008). The latest requirements reformulated previous governmental plans that predicted a 10% biofuels share by 2010 (Bromokusumo, 2007). Fluctuations in feedstock prices have hampered biofuel blending. In 2006 Pertamina, the state owned oil and fuel distribution company as well as the only supplier of biofuels, started selling a blend with 5% biodiesel (B5). Over time the cost of palm oil increased and in the first half of 2009 the blending share of biodiesel dropped to around 1% (Bromokusumo, 2009). However, output capacity for both ethanol and biodiesel has been expanding. By 2010 biodiesel capacity is forecasted to exceed 4 million tonnes per year. Ethanol capacity is lower and it was estimated at 11,400 tonnes in 2008. New facilities are under construction in order to reach an output volume of 3 million tonnes by 2010 (Dillon et al., 2008). The government subsidizes fuel prices. Dillon et al. (2008) estimated that fuel subsidies totalled more than US$14.5 billion by October 2008. Ethanol and biodiesel blends are sold to endconsumers at the same price as standard petroleum based gasoline and diesel. As Pertamina is a government owned company, the losses it incurs in order to match the mandatory biofuel shares can be considered as subsidies to the biofuel industry. Between 2006 and June 2008 the losses endured by Petromina due to biofuel blending amounted to US$40 million. In addition, indirect financial aid is also given by the support policies of importing countries such as the US and the EU. 5.4. Malaysia The Malaysian government hoped to take advantage of the increasing interest in biodiesel and the country’s leading position in the production of palm oil. In 2005 the National Biofuel Policy (BNP) was launched. A 5% biodiesel (B5) mandate was envisaged. Legislation to regulate and assist the biofuel industry was formulated by the Biofuels Industries Act of April 2007. However, the 5% biodiesel mandate has yet to be officially implemented. Two types of biodiesel are being produced. Envodiesel is obtained from the direct blending of petroleum diesel with raw palm oil. The latter is used for domestic consumption, though car manufacturers discourage its use. Alternatively, palm methyl esters (PME) biodiesel is manufactured via transesterification of palm oil. PME is destined for the international markets and constitutes the largest share of biofuel production. In 2007 Malaysia exported 95,000 tonnes of PME, equivalent to around 75% of total biodiesel production (Lopez and Laan, 2008). Biodiesel producers may be eligible for financial incentives by claiming either the Pioneer Status (PS) in the biofuels sector or by applying for an Incentive Tax Allowance (ITA). Both support schemes are based on the Promotion of Investment Acts of 1986 (Hoh, 2009). The PS scheme allows at least 70% tax reductions on the statutory income obtained from biodiesel production for 5 years. The ITA plan targets companies with high investment costs in equipment and machinery. Given allowances spent on fixed assets can be detracted from the taxable statutory income for a 5 years period. In addition, there are no export duties on processed

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palm or biodiesel, while there are export charges on crude palm oil. Petroleum is also highly subsidized. End-user prices are set by the government at lower rates compared to international prices. The total amount of fuel subsidies varied over the years: in 2006 it totalled US$4.3 billion and in 2007 it reached US$4.7 billion. The integration of biofuel shares was meant to lower the budget spent on petroleum subsidies. However, the rising costs of palm oil (also caused by increased demand for biofuels) contributed to biodiesel’s higher production costs in comparison to petroleum based diesel. Due to this reason it is likely that the government has hesitated to turn the 5% biodiesel mandate into law. Lopez and Laan (2008) estimated the potential loss incurred by the government if the B5 integration target was mandatory at US$675 million per year. The biofuel industry is nonetheless able to enjoy an indirect form of financial assistance. Through the large share of their output destined for exports, Malaysian companies take advantage of the subsidies in place in the EU and in the US. 5.5. Thailand Thailand has successfully promoted the implementation of biofuels, with a forecasted consumption level of 970 million liters in 2009 (Preechajarn and Prasertsri, 2009). The government’s policy is two-folded. Biodiesel blending has been mandatory since 2008. Ethanol consumption, on the other hand, is incentivised through tax exemptions that allow ethanol blends to be significantly cheaper than regular gasoline.38 Ethanol production is primarily derived from sugar cane and molasses, though a significant expansion in tapioca-based production capacity is under construction. In 2009 the expected total ethanol production capacity (inclusive of under-construction sites) amounted to 12.3 million liters per day39 (Prasertsri and Kunasirirat, 2009). Ethanol blended with gasoline is marketed as ‘‘gasohol’’. The gasohol E10 blend has contributed to a significant displacement of standard gasoline. Between 2007 and 2008 gasohol E10 consumption increased from 4.8 to 9.3 million liters per day and its aggregate demand reached nearly 50% of the gasoline market share (Preechajarn and Prasertsri, 2009). Gasohol is exempted from the excise tax. This allows the price of the E10 blend to remain 10–15% below gasoline prices. In an attempt to further boost demand, the government is also promoting E20 and E85 blends and fuel-compatible vehicles. The price of E20 and E85 blends is expected to be, respectively, 20% and 50% lower than gasoline prices thanks to exemptions from the excise duty as well as an additional price subsidy from the State Oil Fund (Preechajarn and Prasertsri, 2009) Biodiesel with 2% methyl ester content (B2) has replaced standard diesel across the country in 2008. The B5 blend should be enforced by 2011. Demand for pure biodiesel (B100) has increased substantially, as the government requires B100 to be blended with standard diesel in order to reach the required biofuel share. In 2011 consumption of B100 should amount to 935 million liters to meet the blending target (Preechajarn, 2010). In order to incentive consumption of B5 before 2011, price subsidies from the State Oil Fund allow B5 prices to be lower than those of B2 blends. In addition, the Committee on Biofuel Development and Promotion (CBDP) has been set up in order to increase domestic production of palm oil, the main biodiesel feedstock (Peerchajarn 38 Gasohol was meant to replace premium gasoline by the beginning of 2007, but concerns over insufficient ethanol supplies and the share of cars that required standard gasoline reversed the decision (Peerchajarn et al., 2007). 39 However, note that in 2008 production capacity exceeded internal demand, plants were running at less than full potential and 31 million liters of surplus ethanol were exported (Prasertsri and Kunasirirat, 2009).

et al., 2008). Nonetheless, Thailand is expected to import around 200,000 tonnes of palm oil between 2011 and 2015 in order to meet the envisaged biodiesel share (Preechajarn, 2010).

6. Australia In 2001 the Australian government set a non-binding target of 350 million liters of yearly biofuel production by 2010. Even though the targets established by the federal government are not mandatory, in 2006 the state of New South Wales set a 10% binding share of ethanol in gasoline by 2011 and the state of Queensland required 5% ethanol content in gasoline by 2011. Australia has a relatively limited biofuel production. In 2007 ethanol processing capacity was 140 million liters and biodiesel production capacity reached the 323 million liters, with planned future capacities in excess of 1 billion liters for both biodiesel and ethanol (AGRIRDC (Australian Government Rural Industries Research and Development Corporation), 2007). Its actual production is much lower and amounted to 83 million liters of ethanol and 77 million liters of biodiesel in the 2006–2007 fiscal years (Quirke et al., 2008). Despite the low output, biofuels are highly subsidized compared to other Australian industries if measured in Effective Rates of Assistance (ERA). The most important assistance policy is a tax rebate (the Ethanol Production Grant and the Energy Grants—Cleaner Fuels Scheme) that exactly offsets fuel excise duty of A$0.38143 per liter for both ethanol and biodiesel until 2011. On the 1st of July 2011 the Ethanol Production Grant will be eliminated while the actual excise duty will decrease to A$0.125. However, an alternative set of payments will be made via the Energy Grants—Cleaner Fuels Scheme starting with A$0.1 per liter and decreasing by A$0.025 per year until 2015, when it will disappear. Biodiesel enjoys a similar treatment. From 2011 its excise duty will drop to A$0.191 per liter and the Energy Grant—Cleaner Fuels Scheme will reduce its incentives from the previous A$0.38143 to A$0.153 and continue to decrease until it will be eliminated in 2015.40 Import levies on ethanol (both denatured and undenatured) amount to an ad valorem tariff of 5% (with the exception of imports from the US) and an excise duty of A$0.38143 per liter until 2011 (imported ethanol does not benefit from the governmental subsidies provided by the Ethanol Production Grant). From 2011 onwards the excise duty imposed on imported ethanol matches the effective tax rates paid by national producers. Biodiesel enters custom as a duty-free good. The latter has to face the A$0.38413 per liter levy but it can also enjoy the national incentive schemes and it is therefore taxed in the same proportions as domestically produced biodiesel.

7. Conclusion In the last decade biofuels production has been driven by governmental policies. The key instruments widely adopted to foster production and increase consumption have been mandatory blending targets, tax exemptions and subsidies. In addition, governments have intervened on the production chain by supporting intermediate inputs (feedstock crops), subsidizing value-adding factors (labour, capital, and land) or granting incentives that target end-products. Import tariffs have also played a significant role by protecting national industries from external competition. 40 For exact excise duty values for biodiesel and ethanol as well a year by year value of the government’s tax incentives, see Quirke et al. (2008) on p. 32 and p. 45.

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Concerns over the impact of biofuels on food prices and GHG emissions have entered the political debate and new rules are starting to guide the support granted to bioethanol and biodiesel. The US are focussed on the development of second-generation technologies and have set significant production targets from cellulosic sources. In the EU and in the US legislation is being implemented to require substantial reductions in GHG life-cycle emissions. The impact of bioethanol and biodiesel production on indirect land use has also been taken into account and manufacturers have to certify the origin of their feedstock. Germany recently went as far as to set its future biofuel targets in terms of GHG reductions rather than with respect to output volumes. However, it will be a challenge for policy makers and industry executives alike to preserve the continued expansion of the biofuel sector while abiding to ecologically sustainable production requirements. There are yet no large scale production facilities of second-generation biofuels. Most countries continue to produce biofuels based on grains, sugar or vegetable oils. A further concern for governments will be to decrease the support that has so far sustained the development of the biofuel sector. Despite the financial aid granted (in the U.S. alone, financial backing is projected to reach US$ 16 billion yearly by 2014; Koplow, 2007) current production capacity is limited relative to the aggregate consumption of transport fuels. In addition, the share of vehicles able to run on blends with high biofuel content (e.g. E85) is negligible. While higher oil prices would make biofuel production and consumption relatively cheaper, it remains unclear how much more support will be needed before the biofuel industry will be independent of governmental assistance. It will be a demanding task to couple capacity expansion with environmentally sustainable production while limiting biofuels’ burden on national budgets.

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