1 December 2006


Biofuels, a hot topic connecting the trade and climate communities, drew significant attention at the UN Climate Change Conference held from 6-17 November in Nairobi -- particularly at side events and in the corridors. The potential of these clean-burning natural fuels in developing countries was further explored at an expert meeting convened by the UN Conference on Trade and Development (UNCTAD) from 29 November to 1 December in Geneva.

Both meetings addressed similar concerns with regard to a transition towards a sustainable bioenergy strategy. While biofuels hold promise with regard to curbing carbon dioxide emissions, reducing dependence on imported fuels and generating employment in the agricultural sector, they also pose challenges with regard to their potential impact on food security, environmental sustainability and social justice.

Discussions on biofuels in Nairobi and Geneva centred around the general trends in global trade, as well as subsidies, food security, energy and environmental benefits, and certification and labelling. Participants also considered the steps toward second generation biofuels and talked about the fact that rule-making has yet to catch up with market forces in the area of biofuels.Global trade in biofuels likely to expand

While only one tenth of global biofuel production currently is internationally traded, this trade is expected to grow considerably. This is mainly due to the divide between countries with comparatively lower production costs and those with the greatest demand for biofuels. The recent discussions highlighted the fact that to maximise trade opportunities, a better understanding of international trade rules that influence the production and trade of biofuels is needed. The key rules revolve around market access -- including issues of tariff and non-tariff barriers, subsidies, and the question of whether standards and certification mechanisms are needed in order to ensure environmental and social sustainability of production and trade.

Among the issues raised was the fact that while international trade in ethanol is growing fast, most of it is trade in end products, not feedstock. Accordingly, the growth in ethanol trade during the period from 2000 to 2004 did not affect trade in commodities. International trade in biodiesel remains very limited, and consists mainly of trade in feedstock. While developing countries are generally seen as having a strong comparative advantage in the emerging biofuels market, successful developing countries face escalating tariffs and non-tariff barriers. In addition, exporters do not benefit from general preference schemes (GPS, schemes put in place by developed countries granting tariff preferences to developing countries) or duty- or quota-free market access benefits.

Subsidies to biofuels a tricky issue Subsidies received much attention in the discussions, not least because domestic agricultural support accounts for a large share of both production and trade-distorting subsidies, and many heavily-subsidised crops can also be used in the production of biofuels. Support to biofuels takes many forms, including tariffs, subsidies and tax cuts. They also occur various levels, including the national, sub-national and local government levels, and at various stages of the production/consumption chain.

Certain forms of support are both economically and environmentally unsound: the Global Subsidies Initiative indicates that it costs some US$500 in federal and state subsidies to reduce one metric ton of CO2-equivalent through the production and use of corn-based ethanol. That could purchase more than 30 metric tons of CO2-equivalent offsets on the European Climate Exchange, or nearly 140 metric tons on the Chicago Climate Exchange.

While many participants recognised the need for some form of initial support to make biofuels economically viable, they also widely shared the view that subsidy disciplines might be needed to prevent a distorted global market.

Impact on food security

The impact of the production of biofuels from food crops such as corn, wheat, soybeans and sugar was raised as a major concern. Since cereal grains make up 80 to 90 percent of food for people worldwide and more than 800 million people are still affected by malnutrition, potential impacts on food security and global food prices -- which may be positive for some and negative for others -- require further study.

The UN Food and Agriculture Organisation (FAO) presented research findings, which indicate that energy prices above US$30-35/bbl directly affect agricultural prices. The price links between agriculture and energy markets rises with rising energy prices, as most feedstock become competitive energy sources. In addition, bioenergy can affect all four dimensions of food security -- availability, access, stability and utilisation. Food availability is likely to decline as more food is used as biofuel feedstock, while access to food might increase as producers earn more cash that allows them to buy food.

On the optimistic side, the Copernicus Institute presented some modeling results indicating that with new technological development in production efficiency, one fifth of land currently used for agriculture and pasture could suffice to feed the world by half-way this century.

Understanding the real energy and environmental benefits

Large scale expansion of biofuel production could present serious risks of further encroachment into the world's forests, damage to local and global biodiversity, as well as provide an incentive to extend monoculture in agriculture. In addition, a better understanding of the effective energy and greenhouse gas balance of biofuels is needed, including of whether biofuels produce more energy than is used in their production, and whether they offset more greenhouse gases than they generate during their life-cycle. The discussions saw a general agreement on the fact that certain agricultural crops had much better energy and environmental benefits than others, and that care was needed in the choice of crops. Participants highlighted the suitability of plants like jatropha and sorghum to the natural conditions of regions such as Africa. China highlighted a national target having a 10 percent ethanol blend in 50 percent of gasoline sold by 2010, with sorghum and jatropha showing most promise.

Certification and labelling

In the discussions, many participants supported the certification of biofuels to ensure an environmentally and socially sustainable mode of production. However, certification in this area may be complex. It may affect trade and could result in unnecessary barriers to trade, a concern many participants from developing countries raised. They stressed that the process of developing sustainability criteria for biofuels should be fair, participative and inclusive, and that mutual recognition of certification schemes should be pursued as well.

Speeding up the transition to second generation biofuels

Most participants shared the view that first generation biofuels using sugar or starch crops as feedstock share many limitations. They create competition with food use, the plants are optimised for food, not energy, and only part of the plant is converted to biofuels, meaning GHG and energy benefits are relatively modest. However, they can be blended with existing petroleum-derived motor fuels, minimising necessary infrastructural changes. So-called second generation biofuels are generating much hope. These biofuels are derived from lignocellulose (crop residues, grasses, woody crops) to create thermochemical fuels (Fischer-Tropsh liquids, dimethyl ether, mixed alcohol). In addition, "cellulosic ethanol" can be used with some existing technologies in the fossil fuel industry.

In relation to technological development, participants raised questions pertaining to the potential implications of the intellectual property regime and patens on the transfer of technology and technological cooperation. Others raised issues related to genetically modified organisms that could be used as feedstocks, as well as plant variety, which may also have implications for the bioenergy industry.

Catching up with market forces

Many participants felt that market forces already are steering development of international bio-energy markets, while regulatory frameworks are still at an initial stage of development. UNCTAD reported that at the moment, around 50 developed and developing countries have set up regulatory frameworks on bioenergy in the form of blending targets, subsidies, government procurement preferences etc. However, much remains to be done in order to have in place adequate policy and regulatory frameworks to guide the energy global market towards sustainability.

Part of this process could involve country assessments that would help create a better understanding better of the potential of various regions and countries to produce and trade biofuels in a sustainable manner. Indeed, biofuels may not be a panacea for all countries given difference in natural, social and economic conditions.

Participants in both meetings recognised that biofuels were a promising source of energy with major implications for global competitiveness, energy security, climate change and socio-economic development. However, they may also lead to uncertain social and environmental consequences. As many of biofuels' opportunities and challenges are likely to be influenced by current and future trade rules and disciplines, participants stressed the need to involve all relevant stakeholders in crafting these rules to maximise the contribution of biofuel trade towards a sustainable global bioenergy strategy.

By Gueye Kamal, Senior Programme Manager - Environment Cluster, ICTSD.

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