BIOFUELS, TRADE AND SUSTAINABLE DEVELOPMENT--Issues, Challenges and Strategy Components

BIOFUELS, TRADE AND SUSTAINABLE DEVELOPMENT: Issues, Challenges and Strategy Components HAMDOU RABY WANE Food Security and Sustainable Development Division UN ECONOMIC COMMISSION FOR AFRICA Workshop on Trade and Environment in Africa Lusaka, Zambia 27-29 May 2009 OUTLINE Bioenergy in the Global Energy Context Global Market Overview and Industry Trends A Dynamic Policy Landscape Some Key Policy Challenges and Trade Issues relevant for Africa Bioenergy in the Global Energy Context/1 • Bioenergy is one of the most dynamic and rapidly growing sectors of the global energy economy. Accelerated growth in the production and use of bioenergy in the past few years is attracting interest from policy makers and investors around the globe • Focus of much of the recent interest in modern biotechnologies is on liquid biofuels, in particular ethanol and biodiesel • Dominant players = the US and Brazil. But many other governments are actively considering the appropriate role for biofuels in their future energy portfolios Bioenergy in the Global Energy Context/2 • What are Liquid Biofuels? Biofuels produced from biomass for uses such as transport, heating, electricity and cooking – First Generation: • Bioethanol - alcohol produced from starchy crops (sugarcane, maize, sugarbeet, cassava, wheat, barley, sweet sorghum...) • Biodiesel - produced from oily crops and trees (rapeseed, oil palm, soy, coconut, jatropha) and animal fats, waste oil – Second Generation: not yet comercially available • E.g cellulosic bioethanol/ biodiesel based on biomass gasification – produced from forestry products, grass, organic waste Bioenergy in the Global Energy Context /3 “The gradual move away from oil has begun. Over the next 15 to 20 years we may see biofuels providing a full 25 percent of the world’s energy needs” – Alexander Muller, Assistant D-G for the Sustainable Development Department, FAO • Between 2003 and 2007, global production of biofuels has doubled and was expected to double again in the four coming years. New pro-biofuels policies enacted in Latin America (Argentina, Colombia, Ecuador, Mexico), Canada, Asia (China, India, Indonesia, Malaysia, the Philippines, Thailand), and in Africa (Malawi, Mozambique, Senegal, South Africa, Zambia) Bioenergy in the Global Energy Context /4 Bioenergy is an opportunity : – To add to the global supply of energy to meet the enormous growing demand – To mitigate some of the price surge effects: depletion of foreign exchange earnings and budgetary imbalances, increased volatility of oil prices and complicated economic planning, etc. • For an environmentally friendly , carbon-neutral way for energy supply • To provide income and employment to the people Bioenergy in the Global Energy Context /5 • For supply diversification for countries that are highly dependent on the world oil market for their modern energy, many of which are in the tropics with relatively low-cost biofuel crops, such as sugar cane and oil palm, already grown • To substitute to traditional biomass fuels and improve people‟s access to electricity • Locally produced, bioenergy can provide energy for local agricultural, industrial and household needs at less than the costs of fossil fuels Bioenergy in the Global Energy Context /6 Trade-offs and risks - Economic, environmental, and social impacts will depend largely on local conditions and on policy frameworks implemented to support bioenergy development • At the national level, agricultural policy, including the availability of rural infrastructure, credit, and land tenure, will determine the scale and distribution of economic benefits • At the international level, reducing agricultural subsidies in rich countries and allowing free trade in agricultural commodities will spur the development of first-generation liquid biofuels – the fastest growing segment of the world agricultural market • Trade reform efforts: have powerful effects on/to be subject to sizable impacts from biofuels expansion Bioenergy in the Global Energy Context /7 Trade-offs and risks ../2 • Rapid growth in 1st-generation liquid biofuels production  raise in agricultural commodities prices & negative economic and social effects, particularly on the poor. Imperative of more equitably shared ownership Thus, the economic, environmental, and social impacts of bioenergy development must be assessed carefully before deciding if and how rapidly to develop the industry and what technologies, policies and investment strategies to pursue Decision-makers need to address chronic structural problems in agriculture, forestry, and the economy so that the economic benefits to the poor outweigh the losses. Brazil, the EU and the US experiences  governments regulations and tax incentives are essential to the development of modern bioenergy. It is a Policy-driven Market Global Market Overview /1 Production 2004-2008: biodiesel increased six-fold to 12 billion liters per year and ethanol doubled to 67 billion liters per year. In 2008, ethanol and biodiesel production both grew by 34 percent. 2005 Ethanol Biodiesel 33 3.9 2006 39 6 2007 50 9 2008 67 12 Countries with policy targets States/provinces/ Countries with biofuels mandates 66 73 38 53 Top Bioethanol Producers 2006 Canada 1% Russia 1% India 4% EU 7% China 8% SA 1% Thailand 1% Colombia 1% Others 5% U.S.A. 38% Brazil 33% CDDCs: mainly limited to traditional sugarcane producers in the Caribbean and Africa Global Market Overview /2 • The U.S. has become the dominant ethanol (corn-based) producer (34 billion liters produced in 2008), although Brazil had started an ambitious program to increase production by 50% by 2009 (sugar-based). • Ethanol provided > 40 percent of all (non-diesel) motor vehicle fuel in Brazil in 2005. • Other countries producing fuel ethanol include Australia, Canada, China, Colombia, Costa Rica, Cuba, the Dominican Republic, France, Germany, India, Spain, Sweden, Thailand, Jamaica, Poland, Malawi, South Africa,, and Zambia Global Market Overview /3 • Biodiesel growth rates have been even more dramatic than ethanol, although absolute production is still much less than ethanol. Biodiesel production increased sixfold from 2 billion liters in 2004 to at least 12 billion liters in 2008. • The EU is responsible for about two-thirds of world biodiesel production. Production has increased at 20-100% annual rates in recent years, particularly in Germany (~1/2 of the world‟s total in 2008), France, Italy, Spain, Poland, • Outside of Europe, top biodiesel producers include the United States, Argentina, Brazil, and Thailand. Biofuel Trade Trends • Exports: ~10% of global production – mainly bioethanol • Bioethanol: – Exports: Brazil - 50% of exports, but also from Guatemala and other Caribbean countries, Peru, Pakistan, Zimbabwe, Swaziland – Imports: US - 31% imports – from Brazil, China and the Caribbean. EU: mainly intra-EU plus imports from Brazil, Guatemala, Ukraine. Other importers India, China, Japan, Korea • Biodiesel: most trade is in feedstocks – Palm oil (Malaysia/Indonesia)  EU, China and other Asian countries. – Soya (Brazil, Argentina , US)  EU – Coconut oil: Philippines  Japan Global Market … Investment Flows /4 • Investment in new biofuels production capacity worldwide has been growing rapidly, and was expected to exceed $4 billion in 2007. • The value of biofuels production plants under construction and announced construction plans through 2009 exceeded $4 billion in the United States, $4 billion in Brazil, and $2 billion in France • Venture capital investment in the US: $800 million reported for biofuels alone – spec. for developing and commercializing technologies for converting cellulose to ethanol Global Market … Industry Trends /5 Ethanol 2006-2008 • USA: 130 operating ethanol plants; production capacity of 26 billion liters/year by 2007, a 60 percent increase over 2005. During 2008, 31 new ethanol refineries came online in the United States, bringing total production capacity to 40 billion liters per year, with additional capacity of 8 billion liters per year under construction. • There were also about 1,900 E85 ethanol refueling stations in the United States, mostly in the Midwest. • Brazil continued its ethanol expansion plans, begun in 2005, to more than doubling production by adding 22 billion liters/year of new sugar plantations and ethanol production capacity by 2012. Total investment required in Brazil during 2006–2012 > $15 billion. Global Market … Industry Trends /6 Ethanol 2006-2008 (cont’d) • In Brazil, over 400 ethanol mills and 60 biodiesel mills were operating by the end of 2008. About 15 percent of Brazil‟s ethanol pro-duction was exported in 2008. Most of the sugarcane plantation and ethanol plant expansion being carried out with national public financing and a growing share from foreign investors. • In Europe, additional ethanol production capacity of over 3 billion liters per year was under construction in 2008. • Spain: 16 biofuels production facilities operating by the end of 2006, although most production was exported Global Market … Industry Trends /7 Biodiesel 2006-2008 • Many new bio-diesel capacity throughout Europe putting total European biodiesel production capacity increased to almost 7 billion liters/year at the end of 2006, from 4.5 billion liters/year in 2005 • Argentina: 8 firms with 0.7 billion liters production capacity in 2007 shipping almost 400 million liters abroad. Added 10 new commercial plants in 2008, all producing for export. Another 16 plants were expected during 2009 to bring capacity to 1.8 billion liters per year. • In Europe, more than 200 biodiesel production facilities were operating in 2008 Global Market … Industry Trends /8 Biodiesel 2006-2008 (cont‟d) • Brazil: surge of investment in 2007 to cope with a B2 (2%) blending requirement starting in 2008. • South Africa: 1st first commercial biodiesel plant began operation in 2007, using sunflower oil as feedstock. • Many plans for new biodiesel plants and/or increased palm oil and jatropha plantations announced in several countries, including Brazil, Bulgaria, India, Indonesia, Malaysia, the Philippines, and Singapore, Global Market … Industry Trends /9 2nd Generation Biofuels 2006-2008 Kick-off of commercial investment beyond pilot-scale plants. Government support tied to private investment was an important factor. Large insti-tutional investors got into the picture too, as illustrated by Goldman Sachs’ $30 million investment in Iogen Corpora-tion of Canada. • Canada created a CAD $500 million (US$500 million) fund to invest in private companies developing large-scale facilities for producing both ethanol and biodiesel from cellulose. • Japan allocated 15 billion yen ($130 million) in 2006 for R&D, pilot projects, and market support Global Market … Industry Trends /10 2nd Generation Biofuels 2006-2008 (cont‟d) • Globally, additional capacity of at least 1.5 billion liters per year was planned. Industry pioneers include Royal Nedalco (the Netherlands), Econcern (the Netherlands), Iogen (Canada), Diversa/Celunol (USA), Abengoa (Spain), and the Broin & DuPont consortium (USA). • USA: announcement in early 2007 of an investment of up to $390 million in six cellulosic ethanol production plants over the coming four years, with total capacity of 500 million liters/year. Plants totaling 12 million liters per year were operational in 2008, and additional capacity of 80 million liters per year was under construction. Global Market … Industry Trends /11 2nd Generation Biofuels 2006-2008 (cont‟d) • In Canada, capacity of 6 million liters per year was operational. • In Europe, a handful of plants were operational in Germany, Spain, and Sweden, and capacity of 10 million liters per year was under con-struction. • The largest 2nd-generation biofuels plant in the world ($200 million) will come online in Delfzijl, the Netherlands, in 2009, to produce 200 million liters per year of bio-methanol from wheat chaff and other wastes. Global Market … Industry Trends /12 2nd Generation Biofuels 2006-2008 (cont‟d) • The world‟s first commercial wood-to-ethanol plant began operation in Japan in 2007, with a capacity of 1.4 million liters/year. • The first wood-to-ethanol plant in the United States was planned to be completed by 2008 with an initial output of 75 million liters/year. A $200 million plant in Iowa, designed to digest corn fiber and stover (stalks and leaves), was set to begin construction in 2007 and be completed in 2009. A Dynamic Policy Landscape The development policies combine: mandates for blending biofuels in vehicle fuels; targets and plans for future levels of biofuels use; fuel tax exemptions, tax benefits and production subsidies; sustainability criteria • Mandates for blending biofuels into vehicle fuels: enacted, in 2007, in at least 36 states/provinces and 17 countries at the national level. Most mandates require blending 10–15 percent ethanol with gasoline or blending 2–5 percent biodiesel with diesel fuel. Most mandates are fairly recent, enacted over 20042005. • Mandates can be found in at least 13 Indian states/territories, 9 Chinese provinces, 9 U.S. states, 3 Canadian provinces, 2 Australian states, and at least 9 developing countries at the national level. Policy Landscape /2 Biofuels targets and plans defining future levels of biofuels use • A new U.S. renewable fuels standard requires fuel distributors to increase the annual volume of biofuels blended to 36 billion gallons (136 billion liters) by 2022, extending a previous standard of 7.5 billion gallons (28 billion liters) by 2012. The new standard implies that 20 percent of gasoline for road transport would be bio-fuels by 2022. Policy Landscape/4 • The European Commission established a new EU-wide target of 10 percent of transport energy by 2020, extending the previous EU-wide target of 5.75 percent by 2010 adopted in early 2007. Special provisions for biofuels sustainability were also adopted, including double crediting of second- generation (i.e., cellulosic) biofuels and excluding from credit any biofuels that do not save at least 35 percent of green-house gas emissions compared to the equivalent fossil fuel use. • All EU countries now have a biofuels target, most for 5.75 percent of transport fuels by 2010. Some of the targets are in the range of 1–3 percent, and a few are just indicative. Portugal and France both adopted a target of 10 percent of transport energy, by 2010 and 2015 respectively. Belgium and Croatia adopted a target 5.75 per-cent by 2010. Policy Landscape /3 Biofuels targets and plans defining future levels of biofuels use • The United Kingdom has a similar renewable fuels obligation, targeting 5 percent by 2010. • Japan‟s new strategy for long-term ethanol production targets 6 billion liters/year by 2030, representing 5 percent of transport energy. • In 2007, China finalized targets for the equivalent of 13 billion liters of ethanol and 2.3 billion liters of biodiesel per year by 2020. • South Africa‟s new biofuels strategy targets 4.5 percent biofuels. Policy Landscape/5 • Many jurisdictions are also starting to mandate biofuels use in government vehicles, including several U.S. states. • Compared to the frenzy of the years 2006/2007, the year 2008 was relatively quiet for biofuels policy (with the exception of the sustainability and other provisions adopted in the EU as part of its transportation energy target). In most of the cases, adjustments were made to the tools. • For example, Germany lowered the mandatory biofuels blend rate for all transport fuels from 6.25 percent to 5.25 percent for 2009. The rate will again increase to 6.25 percent for 2010–14. • Several blending mandates were enacted or modified in 2008, including in Brazil, India, Jamaica, Korea, and Thailand. Policy Landscape /6 • India: new target of 20 percent biofuels blending in both gasoline and diesel over 10 years, along with tax incentives for growers of biofuels crops. The initial mandate was for E5 blending in 2008 but ethanol supply issues may have delayed that mandate. • Countries with new biofuels targets identified in 2008 include Australia (350 million liters by 2010), Indonesia (3 percent by 2015 and 5 percent by 2015), Japan (500 million liters by 2012), Madagascar (5 percent by 2020), and Vietnam (300 million liters by 2020). Policy Landscape /7 Brazil has been the world leader in mandated blending of biofuels for 30 years under its “ProAlcool” program: – The blending shares are adjusted occasionally, but have remained in the range of 20–25 percent. – All gas stations are required to sell both gasohol (E25) and pure ethanol (E100). – The blending mandate has also been accompanied by a host of supporting policies, including retail distribution requirements, production subsidies, and tax preferences for vehicles (both “flex-fuel” vehicles and those that run on pure ethanol). Policy Landscape /8 Fuel tax exemptions, tax benefits and production subsidies • The largest production subsidies exist in the United States – totalled US$5 billion in 2006, about ½ of this in the form of fuel tax credits and reductions –the federal government provides a 51 cents/gallon (14 cents/liter) tax credit for ethanol blending through 2010, and a 43 cents/gallon (12 cents/liter) tax credit for biodiesel through 2008 – the subsidy amounted to more than 40 percent of the market price • A number of U.S. states also offer production incentives and sales tax reductions or exemptions. Policy Landscape /9 Fuel tax exemptions, tax benefits and production subsidies • Brazil also provides large tax reductions. In June 2005, the tax difference between pure ethanol and the gasoline/ethanol blend in the state of Sao Paolo amounted to US$0.30 per litre of ethanol • Biofuels tax exemptions exist in at least 10 EU countries. Other coun-tries with tax incentives for production include Canada, Argentina, Bolivia, Colombia, Paraguay & South Africa • These subsidies are much larger than the benefits of potentially Lower GHG emissions that arise from switching to liquid biofuels: a CO2-equivlent price range of US$ 8 to US$20 per tonne will generally provide ~$0.01-0.04 per litre of biofuel (upper end of the range for biodiesel). Policy Challenges The diversity of potential liquid biofuel feedstock is both an advantage and a disadvantage • It enhances the security of supply and I certifincreases the resilience and ecological benefits of biomass production systems compared with monocultures • On the other hand, a range of potential feedstock with differing physical and chemical characteristics creates challenges for handling and processing. It can result in differing characteristics of the final biofuel prooduct  Need for internationally agreedupon fuel specifications/labelling systems • Work to be done to determine which crops and crop species are more suitable for different liquid biofuel applications, soil types, farming systems, and cultivation contexts. Policy Challenges • Key factors to be considered when selecting feedstock include: economic viability, suitability for different biofuel applications, yield per hectare, input requirements, yield increase potential,crop versatility, drought and pest resistance potential, competing uses, price volatility, and opportunity costs • Some feedstock is better suited for large-scale production while others are more appropriate for small scale applications – –For instance, the inedible oilseed Jatropha must be harvested by hand. Thus, it is a labour- intensive crop, suitable for areas with underemployment problems Trade Issues • Subsidies: very high e.g in the US and EU – concerns about impacts on developing countries‟ competitiveness • Standards: – Technical and Sustainability Standards: different initiatives under development: UK, Holland, EC, Biofuels Round Table (RSB) - proliferation – Important for effective market development but imply extra burden (economic and institutional capacities) • At the WTO: no unique forum to address trade liberalisation – Bioethanol and feedstocks – agricultural goods – Biodiesel - industrial goods – or are biofuels environmental goods? • Trade opportunties not only North-South. Need to explore South-South/ regional trade, capitalising on proximity to large Southern/regional markets Trade Issues/2 • Trade in biofuels is built on much more than good climate, cheap Country land and labour. Trade strongly US affected by: – Tariffs: • Higher on bioethanol – Trade agreements: • EU: Cotonou; EPA (101 developing countries) • US: Caribbean Basin Initiative/CAFTA; NAFTA, Andean Countries Bound Tariffs Undenaturated alcohol ~46% EU ~63% Brazil 20% Argentina 20% Thailand 30% India 186% Biodiesel US 6.5% EU 4.6% Trade Issues/3 • The US and Europe have coupled subsidies with import tariffs so that these subsidies will benefit domestic farmers rather rather than those in other countries. This has led to the irony of virtually unimpeded trade in oil, while trade in biofuels is greatly restricted. • Opening international markets to biofuels would accelerate investment and ensure that production occurs in locations where the production costs are lowest. • If trade barriers are removed, some agricultural commodity prices would rise. But this effect would be moderated as producers responded to new incentives. Poor countries in Africa are among those likely to benefit. However, the resulting accelerated investment and production should be assessed closely at the national and international levels to avoid potentially irreversible sustainability impacts Promoting Biofuels Trade require long-term policy support • Policy coherence with existing national/ international policies and goals, and coordination across ministries (e.g Agriculture, Environment, Energy,Trade) • Enabling environment for biofuels development: to provide the „fundamentals‟ • Developing Regionally Integrated Value Chains • Realise synergies from different policy goals • Keep tracking developments in international oil, agricultural markets and 2nd generation of biofuels