2011 Global Food Policy Report

David Laborde and Siwa Msangi, IFPRI

Policy discussions over biofuels in 2011 reflected the increasing complexity of the issue over the past decade. Originally promoted as a way of decreasing dependence on fossil fuels and avoiding the carbon emissions generated by them, biofuel production has now been widely recognized to have strong links to agricultural markets and even land-use patterns. The first-generation biofuels currently in commercial use—biodiesel made from vegetable oil and ethanol made from sugarcane or maize—have the strongest links to agricultural markets and land use, although there are important by-products that can be used as feed in order to offset these effects. Given the areas of scientific uncertainty that still remain over the impact of biofuels on food security and the environment, decisionmaking has become complex and, in some cases, contentious.

Nearly a dozen international institutions came together in 2011 to issue a joint report that addressed the issue of biofuels and food prices and called for eliminating distortive biofuel policies, especially where the environmental benefits are not as high as expected.¹ The Group of 20 (G20) also raised the issue of biofuels in 2011 as part of its overall concern with food security. The G20 countries recognized the need to examine the role of biofuels in food price volatility and to adjust biofuel mandates when market situations warrant interventions. They did not, however, make more definitive statements about biofuels and their links to food prices because of disagreements between large producers (like Brazil) and net food importers (like China) on the importance of these links.² The role of policy support to domestic biofuels sectors—in the form of tax credits, subsidies, and tariffs against imported ethanol (for the United States and the European Union)—remains a concern for key stakeholders.

Indeed, key countries display different social preferences in handling the delicate issue of food–fuel links depending on the local dynamics of agricultural demand and supply. In Brazil, the flexibility of sugar-ethanol mills allows producers to shift easily between ethanol and sugar production based on prevailing market conditions for food (sugar) and fuel (ethanol/gasoline) and provides them with constant, year-round outputs in their supply chain. Since 2008 Brazil has reduced its exports of ethanol to the world market, in part because of rising US production and exports, increased demand for sugar from large consumers like India, and high and uncompetitive prices in its domestic ethanol market.³ As a result, in 2010 and 2011 Brazil found itself importing ethanol from the United States, boosting US biofuel revenues, and making the US tariff against Brazilian ethanol imports inconsequential.

China has backed off of aggressive expansion of biofuel production in the past five years because of concerns about domestic grain markets and prices. China’s biofuel production started rapidly with the building of four state-owned ethanol plants in 2001. By 2007, it had produced a total of 1.35 million tons of ethanol, placing it third in the world. At that point, this rapid rise was halted and the use of cereals in biofuel production was capped.⁴

Despite some attention to the impacts of biofuels on food security, much of the policy discussion over biofuels in 2011 focused on environmental concerns.⁵ International biofuel markets are dominated by the European Union and the United States, the largest consumers and producers of biodiesel and ethanol, respectively. While neither adopted major policy changes in 2011, the year was still one of intense debate, paving the way for potentially important decisions in 2012. Although the policy debate focused on the environment, any decisions made regarding biofuel production will have implications for global food markets, given the volume of crop-based feedstocks that are converted annually.

European Union

In the European Union the consumption of biofuels is a key component of a decision to reduce greenhouse gas emissions from the transport sector by replacing fossil fuels with renewable energy. In 2003 a European Union directive set a target of 5.75 percent for renewable-energy use in the transport sector by 2010. In 2009 the European Union adopted the Renewable Energy Directive, which has a target of 10 percent by 2020. Although renewable energy can include electricity, hydrogen, or second-generation biofuels (that is, ethanol and biodiesel made from nonfood feedstocks such as agricultural residues and switchgrass), the main mechanism for meeting this target is and will remain first-generation biofuels.

The directive also established environmental sustainability criteria for biofuels, including a minimum rate of direct greenhouse gas emission savings (35 percent in 2009, rising to 50 percent in 2017) and restrictions on the types of land that may be converted to production of biofuel feedstock crops. This restriction covers direct land-use changes only. The revised Fuel Quality Directive, adopted at the same time as the Renewable Energy Directive, is more technical, includes identical sustainability criteria, and targets a 6 percent reduction in greenhouse gas emissions from transport fuels by 2020.

Because reducing emissions is officially the only goal of Europe’s biofuel policy, policymakers set a high priority on getting a correct assessment of the greenhouse gas balance sheet of biofuels. Such an assessment would account for the diversion of land use in biofuel production, which can reverse the conclusion about biofuel’s capacity to reduce carbon emissions.⁶ Land-use changes occur when farmers, domestically and abroad, replace production historically dedicated to food and feed with production of biofuel crops or when they convert natural land to cropland. These land-use changes are considered direct if farmers convert natural land cover directly to cropland for growing the feedstock crop used in biofuels within the biofuel-producing country. On the other hand, land-use changes are considered indirect if changes in market prices cause another crop to expand into natural land cover or if a reduction in exports from the biofuel-producing country (such as maize from the United States) causes farmers in other countries to convert natural land to cropland to expand production of those (or other) crops. Given the complex nature of domestic and international market linkages, indirect land use changes are much harder to verify and observe than direct land-use conversions. Therefore, in 2009 the European Council (representing the governments of member states) and Parliament asked the European Commission to examine the question of indirect land-use change, including possible measures to avoid it, and report back on the issue by the end of 2010.

The Commission then launched four studies to examine indirect land-use change issues. One study, conducted by the International Food Policy Research Institute (IFPRI), analyzed the impact of the European biofuels mandate and possible changes in Europe’s biofuel trade policies on global agricultural production and the environmental performance of the European biofuel policy, as spelled out in the Renewable Energy Directive.⁷ The report suggested that indirect land-use change was a valid concern but that there was a high degree of uncertainty regarding its magnitude. Following these investigations and public consultation, in December 2010 the Commission published a report acknowledging that indirect land-use change can reduce the greenhouse gas emissions savings associated with biofuels. Because of the many uncertainties, however, the Commission did not deliver a clear recommendation about whether and how measurement of indirect land-use change should be included in the legislative framework. The Commission announced that new research would be conducted and that an impact assessment report would propose several policy options.

During 2011 the discussions became more intense. On the one hand, biofuel producers disagreed with the concept of indirect land-use change and claimed that even the debate and uncertainty about future legislation deters investments and is costly to Europe’s economy and climate change strategy. On the other hand, many members of the European scientific community and observers from the United States asked the Commission to reconsider its position regarding biofuels and urged it not to make emissions accounting mistakes regarding biofuels. Nongovernmental and environmental groups actively highlighted the social risks linked to biofuels (such as “land grabbing” and competition between food and fuel uses) as well as the environmental risks (such as increased emissions). Although the European Commission had not yet released its impact evaluation report by the end of 2011, it did release a new modeling exercise conducted by IFPRI on the land-use issue in October.⁸ Reflecting the fact that the merits of first-generation biofuels are highly disputed, the Commission also stated that it would no longer support biofuel projects in its overseas development policies.

United States

In the United States, discussions of biofuel policy take place at two levels. At the federal level, the US Environmental Protection Agency regulates biofuel blending through the Renewable Fuel Standard. At the state level, some ambitious states have set up their own biofuel policies (such as California’s Low Carbon Fuel Standard), seeking to improve upon the Renewable Fuel Standard in terms of environmental performance.

In 2011 there were a number of policy discussions at the federal level about whether the biofuel tax credit—called the Volumetric Ethanol Excise Tax Credit—should be repealed. In an atmosphere of increasing fiscal austerity within the United States, an unusual alliance of fiscal and social conservatives and environmentally minded opponents of biofuels emerged around the issue of repealing the tax credit. Researchers have pointed out the welfare and efficiency losses that result when such a tax credit is combined with a blending mandate, which is part of the federal Renewable Fuel Standard policy.⁹ Food security concerns have been raised over the effects of tax credits and subsidies on biofuel production and, in turn, on the level and stability of agricultural and food prices.¹⁰ Some have pointed out, however, that energy prices were a stronger driver of past growth in biofuel production than tax credits alone.¹¹

What if the current Renewable Fuel Standard were replaced with (or complemented by) a policy focused on lowering the carbon intensity of fuel, such as California’s Low Carbon Fuel Standard? The essential difference between the two policies involves the incentives for biofuel producers and blenders. Because the Renewable Fuel Standard awards credits based on the production and blending of ethanol and biodiesel, it rewards biofuel production regardless of whether and how much that production reduces carbon emissions. In contrast, the Low Carbon Fuel Standard allocates credits to blenders who achieve a specified reduction in carbon intensity of the blended fuel. It is thus a direct incentive to reduce carbon intensity in transport and other fuels. California’s policy favors, for example, sugar-based ethanol and second-generation biofuels from cellulosic sources, such as switchgrass and miscanthus, over the maize-based ethanol currently favored under existing national policy.¹²

If a policy similar to the Low Carbon Fuel Standard—aimed at reducing carbon intensity by 15 percent—were adopted nationally and used to complement the existing Renewable Fuel Standard, simulations show that the amount of maize-based ethanol produced and consumed in the United States would fall by 11.8 billion liters by 2035, while ethanol from cellulosic feedstocks would increase by 12.5 billion liters by the same year.¹³ Such a shift could have important implications for international markets and land-use change outside the United States.¹⁴

At present, a number of initiatives and studies are being conducted in the United States to see if it is feasible to scale up a California-like policy on a wider regional basis. A national low-carbon fuel policy would need to take into account the different fuel demands of the various subregions of the country in order to come up with a standard that could both lead to reduced use of high-carbon fuels and meet the concerns about energy security and affordability that are major components in the US debate about energy policy.

Roundtable for Sustainable Biofuels

Within the wider international community, there have been efforts to promote the sustainable production of biofuels and to provide producers with guidelines and incentives for ensuring that biofuels are low in carbon content relative to fossil-based alternatives, as well as compatible with international standards of decent work and fair compensation. Following the example of other initiatives for sustainable production, the Roundtable for Sustainable Biofuels was launched in 2011 as a mechanism for certifying biofuel producers who adhere to standards of low environmental impact and fair labor practices. This certification allows them to receive a price premium, similar to the price premium earned by fair-trade coffee producers. The Roundtable was designed in a way that makes the standards needed to reach official “sustainable” status compatible with those applied to certify the biofuels imported into Europe under the Renewable Energy Directive. Over time, the Roundtable for Sustainable Biofuels standards might be ratcheted up to encourage biofuel producers to further reduce the carbon intensity of biofuels; they could also include the indirect environmental effects of biofuels, especially those related to changes in land use and land cover.

Looking Ahead

Food and energy markets will continue to interact in the future, creating fast-changing market opportunities for producers of feedstock crops like sugar and maize, regardless of whether they are supplying food, feed, or fuel sectors. But domestic trade policies and restrictions can lead to market disruptions and sharp price spikes, as seen in 2008 and 2010. One of the main lessons of the food price crises of the past several years is that open trade is essential to allow goods to freely flow to where their use is most highly valued and to allow for adjustments that will minimize market disruptions.¹⁵

In the European Union and the United States, the use of maize and rapeseed oil in biofuel production grew quickly until 2008/09, and this growth will likely stabilize as the US mandates for maize-based ethanol are met in 2015 and as policies in the industrialized countries encourage the use of alternative fuels with lower environmental impacts (see Figure 1). The significant rise in the use of maize in the United States—which nearly tripled over the period 2000 to 2009—implies that the maize market will be tight in the face of future changes, unless supply expands and grain inventory levels are rebuilt. Even though the rate of growth in rapeseed oil use is much smaller in comparison, its effect in tightening market conditions for vegetable oils will be similar.

Figure 1: US and EU use of maize and rapeseed oil in biofuel production and other industrial uses, 2000/01–2024/25

The US Volumetric Ethanol Excise Tax Credit was scheduled to expire at the beginning of 2012, leaving the production and blending of ethanol to be driven by market forces. Given rising oil prices, it is likely that demand will continue pushing ethanol production above existing mandate levels. It remains to be seen whether the expiration of the tax credit will have an appreciable impact on US domestic feed prices for maize or on exports of US maize to the world market (which have, in turn, their own effect on world prices). As long as oil prices remain stable or rise slightly, there is little expectation that the profitability (and volume) of US ethanol production will be affected much. If demand for ethanol from Brazil or other countries rises, that would introduce an additional driver for ethanol production that is independent of the effects of any US policy instrument and would help remove the topic of ethanol subsidies from US political debate during this pivotal election year.

If the food price increases seen in 2011 persist into 2012, they will continue to provide increasing revenue to US grain producers while raising the cost of feed for livestock producers and of biofuel feedstock for US ethanol producers. Any US policies in 2012 to create incentives for the use of second-generation biofuel feedstocks (such as switchgrass, miscanthus, or other dedicated energy biomass) will promote innovation and encourage the US biofuels sector to diversify its sources of feedstock beyond grains to include agricultural residues (such as the maize stover left behind after harvesting). This may serve to relieve pressures on market demand for grain and on the land required to produce it. Careful assessment, however, is still necessary to measure the agronomic consequences of removing these residues from the field.

It is expected that the European Commission will make a formal biofuel policy recommendation in 2012 followed by a legislative process involving the European Parliament. Any decision by the European Commission will have global consequences because, besides changing the level and nature of biofuel production in Europe, it will serve as a model for lobbies and policymakers in many other countries.

Given the trajectory of the biofuels debate during 2011, policy discussions over the production and blending of biofuels seem likely to continue and will be fed by new research findings on the implications of biofuel policies for food security and the environment.