Sowing the seeds for a biofuels market

There is a trend to increase financial support under the EU’s Common Agricultural Policy (CAP) to promote growing the raw materials from which biofuels are derived.

The 2003 CAP reform introduced a special aid for energy crops which offers €45 per hectare to farmers with a maximum limit for the total planted area of 1.5 million hectares. The scheme was extended last year to the new member states and the total area extended to two million hectares.

Michael Mann, spokes-man for Farm Commissioner Mariann Fischer Boel, says that the thrust of the 2003 CAP reforms was to break the link between what farmers grow and what they receive by way of CAP payments, so that they were more responsive to market demands. "If there’s market demand for biofuels, farmers will grow them," he says.

He highlights a number of other measures where there are incentives for farmers to switch food crop production to energy uses, including the possibility, under reform of the EU’s sugar regime agreed in 2005, of funding to convert sugar refineries to produce ethanol which can be used for fuel.

In addition, sugar beet grown for non-food use is exempt from the quota restrictions which apply to the rest of sugar production. Sugar beet can also be grown on set-aside land, ie, arable land taken out of use to reduce excess production.

This trend of increasing support for energy crops is set to continue. The Commission states clearly in its biofuels strategy that it wants to develop the potential for arable crops to be processed into feedstocks for biofuel. It has already proposed abolishing intervention, ie, public buying of excess stock to maintain prices, for maize and will probably be looking at ending intervention for other crops in the near future. Set-aside will probably also disappear as a result of the mid-term review of the 2003 CAP reforms, scheduled for 2007-09. Processing crops for biofuels would provide an alternative outlet once the safety net of intervention buying disappeared and set-aside was no longer limiting production.

While the effect of these measures will be to divert a greater share of overall existing arable production into use for the biofuel sector, Fischer Boel thinks that the 10% target for biofuels’ share in the EU’s energy consumption will not be met solely from domestic feedstock production so there will be an increased reliance on imports.

Fischer Boel’s spokesman denies that the greater emphasis on feedstock production for biofuels is simply a way of converting the CAP subsidies for growing food crops into payments for producing for the biofuels sector, saying that the 2003 reforms aim to make farmers respond to market demand. While there are increasing financial incentives to supply raw material for the biofuels sector, Mann says that this amounts to "a kick-start for the biofuels sector", while other key factors influencing demand and availability of supply, such as tax breaks, are in the competence of member states.

The EU’s agricultural sector, especially in the new member states that have abundant land, has an obvious potential to divert crop production towards the biofuels sector and incentives to do so given that traditional forms of support for food uses are being dismantled. Germany already produces more biodiesel than it consumes (4.2 million tonnes in 2006 compared to sales of 2.5 million tonnes). But the extent to which European farmers will produce the biofuels necessary to meet a target of 10% of overall vehicle fuels by 2020 will probably depend more on the development of processing technology and transport infrastructure and the price competitiveness of EU-sourced raw materials than on the level of public subsidy.

There is a trend to increase financial support under the EU’s Common Agricultural Policy (CAP) to promote growing the raw materials from which biofuels are derived.