I have some truly exciting strands of thinking that are starting to come together on many things trade & environment. I will hopefully be able to have time to write and post them here soon. In the meantime, today I thought I’d quickly go through the current surge in biofuels trade that we are seeing globally and discuss some of the drivers and controversies.
Biofuels, by which I here mean primarily bioethanol and biodiesel, are a truly intriguing type of renewable energy. First of all, unlike most renewable energy types, biofuels can be traded on a large scale between nations. This is no small advantage when one considers the heavy criticism levied against solar and wind with regards to the rather static character of their energy supply. Second, biofuels are relatively “plug-and-play” with much of the existing transportation fleet, especially with regards to biodiesel.
In the last 10 years, and especially in the last 5, we have seen a remarkable increase in the international biofuels trade between nations. Today, it is a booming industry where many players compete fiercely for market share and international competitiveness. It is staggering to see that world biofuels production has experienced actual exponential growth. World biofuel production grew from below 30 PJ in 2000 to 572 PJ in 2009 for biodiesel and from 340 PJ in 2000 to over 1540 PJ in 2009 for bioethanol.
Why so quickly and why now? Well, other than general environmental awareness, arguably one of the most important factors has been the establishment of relatively predictable markets. For example, the EU Renewable Energy Directive (EU-RED) from 2009 has stipulated that 10% of EU transport fuel is to come from renewable energy sources by the year 2020. Together with a few other instruments, this has meant that demand for biofuels has soared in the European market as the transition to meet the target is underway.
Though the EU is arguably the most important market in the world right now for biofuels, the story is similar in many other countries as of late. In the US, the Energy Independence and Security Act from 2007 mandates an aggregate of 36 billion gallons of renewable transport fuel to be in use by 2022. In Brazil, which by the way has the oldest and most fleshed out program of any nation, has an entire national program (commonly referred to as “Proalcool”) that dates all the way back to the 1970’s. That story is a fascinating one in its own right but I’ll here just quickly mention that Brazilian bioethanol (from sugarcane) is generally considered the most price-competitive in the world. In China there has been some hesitancy towards biofuels, but in August 2007 the National and Development Reform Commission announced a Medium and Long Term Development Plan for Renewable Energy which said that renewable energy as a share of total primary energy consumption should rise to 15% by 2020, and biofuels are expected to play an important part in this target. In India, an ambitious plan has been set out to have a 20% share of biodiesel and bioethanol blended in with gasoline and mineral diesel by 2017.
With these commercial interests quickly ramping up, this has also probably been one of the most contentious areas of all in the whole trade & environment field, and that is saying something. The EU has already slapped the US in 2009 with anti-dumping duties which dramatically limited their market share on the European market. Meanwhile, draconian tariffs and highly questionable biofuel standards in terms of fairness continue to be rife in this area. Especially Brazil has been a vocal critic of the rather blatant protectionism that has been raised against its highly efficient and cheap bioethanol production. Critics argue that the EU renewable energy directive is essentially geared towards biofuels (and especially biodiesel) produced from rapeseed which, incidentally, happens to be what fits European producers especially well. Meanwhile, in the US, comparatively inefficient biofuel products made from maize have enjoyed massive subsidies while creating questionable overall environmental benefit, while also being protected by sky-high tariffs on competing imports. It really is a testament to the extreme competitiveness of Brazilian ethanol that despite these tariffs they are still a viable player on the US market.
I could go on and on about the unlevel playing field and thoroughly skewed nature of the international biofuels market, but suffice it to say for our purposes here that it is not exactly free and open in its makeup.
With that said however, there is still considerable trade going on and in 2009, net biofuel trade reached 130 PJ of energy. Trade flows are directed at the most lucrative markets, which at the time of writing is still the EU and the US. It is important to understand that this is a heavily government-dominated area, where trade policy, tax exemptions and the plethora of implementational instruments all play a significant role in affecting the markets that exist.
On a political level, this is an interesting field because it straddles goals of energy security, environment and climate, as well as development. It is very hard to separate these when looking at the production and trade of biofuels and its accompanying policies. Several developing countries are today vibrant players in the global biofuels market and it looks likely that this trend will only continue due to the natural comparative advantages that often arise for developing countries from land availability and feedstock options.
Unfortunately, trade restrictions are not the end of the controversies surrounding biofuels. The popular Food vs. Fuel debate runs like a river through all things biofuels and in all honesty one can probably not say that the debate has been decided yet. The fear is that land, which is already becoming very scarce in the world, is more productively put to use growing food for people instead of fuel. Especially, the more inflammatory arguments often went, fuel that go into cars in rich countries. This Food vs. Fuel debate is an area all of its own and if you are interested in more info, I really recommend a book, aptly titled Food vs. Fuel which is co-written by Francis X. Johnson, whom I’m currently working with at SEI.
Many people raise concern over the wisdom of proceeding with biofuels at all, whereas many people advocate that biofuels are a great and environmentally friendly option when the policies are done right. International trade complicates the matter. Since verification mechanisms are typically a lot harder when feedstock growth occurs halfway across the world from the end-market, there is much worry that huge and bustling markets will incentivize environmentally unsustainable practices in developing countries that desire market access in the lucrative biofuels trade. Mozambique, for instance, has been observed by some as being a place where national policies are outlined specifically to conform with EU criteria so as to gain market access. Some arguments have been raised that this in practice means that the governments that control the “best” markets essentially has the role of a soft imperialist that readily affects national policies in third countries. This of course raises certain troublesome political issues with regards to sovereignty. These are exceedingly tough questions and one of those ethically “sticky” areas that are a hallmark of many intersections in trade and environment policy.
I’m currently writing on the WTO law implications of biofuel trade, so I will surely return to this very interesting and fast-moving area.