Putting a price on biofuel benefits

Biofuels are not a cheap option. Creating and sustaining a European economy which uses significantly more biofuels than at present will cost many billions of euros.

What policymakers must decide is whether the extra costs are worth paying in order to achieve certain benefits: a more diversified and secure energy supply, reduced greenhouse gas emissions and more jobs in some industrial sectors.

Making intelligent estimates of the net costs is not easy, because there are many uncertainties and many variables. The most important is probably the price of fossil fuels. The higher the price of oil and gas, the more justifiable become the greater costs of paying for biofuel production. Another important variable is the price to be put on carbon dioxide (CO2) emissions, since lower CO2 emissions are one of the main benefits that biofuels are supposed to bring. In the short to medium term, another variable is the speed with which biofuel technologies develop, bringing on to the market more efficient, cheaper fuels with greater CO2 savings.

In its paper on biofuels published last month the European Commission admitted that, "even using the most modern technologies, the cost of EU-produced biofuels will make it difficult for them to compete with fossil fuels, at least in the short to medium term".

The Commission’s strategy for biofuels, published in 2006, had estimated that EU-produced biodiesel breaks even when oil prices are around €60 per barrel, while bioethanol becomes competitive with oil prices of about €90 per barrel. Using work by the European Commission’s Joint Research Centre (JRC) the Commission last month put the break-even points for biodiesel at €69-€76 and for bioethanol at €63-€85. Oil prices currently stand at $54, or €41 a barrel.

Another study by the JRC last year concluded that the total cost of the proposed biofuels policy would be €60-100 billion, for the period 2007-20. The benefits - largely from C02 reductions and greater security of energy supply - were estimated at €20-€40bn, not enough to outweigh costs. The total net benefits were put at minus €15-€55bn.

The JRC’s analysis contained some findings that would make uncomfortable reading for biofuel enthusiasts. One was that hastening to meet the 2010 target of 5.75% of transport fuels coming from biofuels would lead to higher direct and net costs. Another was that increasing domestic production of biofuels (rather than relying on imports) would increase the direct costs. Overall, the JRC study concluded that "the same objectives might be achieved more efficiently, at lesser cost, through alternative means".

It seems likely that the potential costs of the biofuels strategy are about to receive more attention - not least from disgruntled rival industries. On Tuesday (30 January) the Confederation of European Paper Industries (CEPI) issued a study arguing that the economic and environmental benefits would be much greater if wood was first used for making paper rather than burned for energy. CEPI’s underlying concern is that the paper and pulp industry will be competing for resources with the biofuel industry.

CEPI said that it wondered how more ambitious targets on wood for bio energy could be met without risking the overall sustainability of Europe’s forest and agricultural resources as well as the competitiveness of the sector.

When biofuels were just a technological curiosity, their proponents encountered less opposition. But now that corn and soy grown by farmers in the American mid-west is being diverted into the biofuels market and raising the prices for the food industry and for livestock farmers, a backlash is to be expected. They are now warning of higher costs elsewhere in the economy, which have to be taken into account.

The Commission has been arguing the case for biofuels as part of an integrated energy strategy. The greater costs are, it is argued, worth paying for the benefits in CO2 reduction, security of supply and supporting farmers. When it proposes later this year to set a binding target for biofuels to take up 10% of the road fuels market, the accompanying estimates of economic benefits will come under close scrutiny.

Biofuels are not a cheap option. Creating and sustaining a European economy which uses significantly more biofuels than at present will cost many billions of euros.