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Background

On 23 April 2009, the European Union adopted the Renewable Energy Directive (RED) which included a 10 percent target for the use of renewable energy in road transport fuels by 2020. It also established the environmental sustainability criteria that biofuels consumed in the EU have to comply with. This includes a minimum rate of direct GHG emission savings (35 percent in 2009 and rising to 50 percent in 2017) and restrictions on the types of land that may be converted to production of biofuels feedstock crops. The latter criterion covers direct land use changes only. The revised Fuel Quality Directive (FQD), adopted at the same time as the RED, includes identical sustainability criteria and targets a reduction in lifecycle greenhouse gas emissions from transport fuels consumed in the EU by 6 percent by 2020. Moreover, the Parliament and Council asked the Commission to examine the question of indirect land use change (ILUC), including possible measures to avoid this, and report back on this issue by the end of 2010.

The Commission launched four studies in 2009 to examine ILUC issues, including a first general equilibrium modeling study that aimed to analyse the impact of the EU biofuels mandate, and possible changes in EU biofuels trade policies, on global agricultural production and the environmental performance of the EU biofuel policy as concretised in the RED. That report was published in March 20101 (Al-Riffai, Dimaranan and Laborde, “Global Trade and Environmental Impact Study of the EU Biofuels Mandate”. It showed that indirect land use changes were a valid concern, but that the degree of uncertainty regarding their magnitude was large. Since then, this study has been widely cited and commented on in discussions with stakeholders and civil society on EU biofuels policy. Numerous suggestions for improvements in the study were received. Research on biofuels modeling also continued and made progress since then. In order to feed this new information and insights into the Commission's impact assessment on the land use change effects of biofuels, and into the report to the Parliament and Council, the European Commission requested IFPRI to carry out the present updated study.

The new study

This new study contains several important changes compared to the previous report. It uses an updated version of the global computable general equilibrium model (CGE), MIRAGE-Biof, as well as a revised scenario describing the EU mandate based on the National Renewable Energy Action Plans of the 27 member states. In addition, a stronger focus has been placed on specific feedstock Land Use Change (LUC) computation and the uncertainties surrounding these values. Systematic sensitivity analysis is used to measure the potential range of LUC coefficients. In the absence of empirical evidence on the impact of the direct land use change criteria in the RED this report revolves around total LUC, comprising both direct and indirect changes, instead of the narrower concept of indirect LUC only. There is a lack of data on the impact of the direct greenhouse gas savings thresholds on biofuel markets and LUC. However, the direct savings thresholds will ensure that all biofuels used in the EU in 2020 have at least 50 percent direct greenhouse gas emissions savings. We evaluate the impact of the EU mandate in accordance with the implementation scenarios in the National Renewable Energy Action Plans (NREAPs) of the 27 Member States. In the mandate scenario, we introduce a biofuels policy shock that assumes that the EU will consume 27.2 Mtoe of first generation land-using ethanol and biodiesel by 2020, involving an additional consumption – called additional mandate in this report – of 15.5 Mtoe. Total biofuel consumption reaches 8.6 percent of the mandated target of 10 percent renewable energy in road transport fuels. The remaining is expected to come from other types of renewable energy including waste products. The action plans forecast that 72 percent of this will be biodiesel and 28 percent ethanol (expressed in energy content). We analyze the effects of the implementation of the EU biofuels additional mandate under two different trade policy scenarios: i) A status quo trade policy scenario that leaves all currently existing import tariffs on biofuels unchanged in 2020 and ii) a free trade scenario that eliminates all tariffs on all biofuel imports, except for the contingent anti-dumping levy on biodiesel imports from the US.

The most important change compared to the previous study (Al Riffai and al, 2010) is the definition of the scenario considered (size of the mandate, ratio biodiesel/ethanol). Several other modifications have been done involving the treatment of co-products (higher substitution), the peatland emissions (higher factor), the land reallocation among crops (better calibration) and the dynamics of food demand (less elastic).

Overall findings

Overall, EU biofuel production will increase from 10.1 Mtoe in the baseline to 20.9 Mtoe without trade liberalization and 17.8 Mtoe with trade liberalization. First, since the way in which Member States intend to implement the EU mandate is expected to result in an increase in the relative consumption of ethanol to biodiesel (from 17/83 in 2008 to 28/72 in 2020), the scenario under the trade policy status quo reinforces local production of ethanol. Under trade liberalization, EU ethanol production declines, with sugar beet- and wheat-based ethanol most affected. As a result, local production capacity and feedstock production are dominated by biodiesel production. With trade liberalization, biodiesel represents 92.5 percent of total EU biofuel production.

The report confirms that the extent to which additional demand for biofuels will be met by an increase in supply depends on the feedstock crop. For example, for sugar the additional supply will nearly match the additional demand; for soybean oil and rapeseed oil, this matching is partial, while for wheat, we expect a decrease in the absolute level of supply due to land competition from oilseeds when we assess the additional mandate. The latter case is explained by a stronger price increase for oilseeds and therefore for the land rents for this product compared to wheat (the substitution effects among crops dominating the direct demand increase for wheat). The analysis also shows an increase in price for the biofuels crops, especially for oilseed, due to the strong biodiesel component in the mandate. EU biofuels policy causes the relative prices to change and therefore relocates production. It provides a premium to fats and oils at the expense of other production for which relative value declines.

In terms of trade effects of the EU additional mandate, EU import of rapeseed increases strongly (+ 6 million of tons). Imports of palm oil, and soybean (both oil and beans) also increase but to a much lower extent (+4.6 million of tons). Without trade liberalization, imports of wheat (+0.47 million of tons) and corn (+1.6 million of tons) increase due to greater domestic demand in the EU for ethanol. This ceases to be the case when trade liberalization is implemented. This scenario instead leads to higher sugar cane ethanol imports (+ 6.7 Mtoe). In addition, liberalization helps to release part of the feedstock used in the baseline for ethanol production. As a result, there is a decrease in maize imports...

Concluding remarks and policy issues

1. Overall, land use emissions for the entire EU biofuels additional mandate eliminate more than two-thirds of the direct emission savings when we apply the direct savings coefficients of improved production technology expected in 2020. This report indicates that emissions related to land use changes driven by biofuel policies are a serious concern. This finding is robust as more than 99 percent of crop LUC coefficients in the Monte Carlo analysis are positive. The LUC effect reduces the environmental gains of the biofuel policy and should not be neglected. Biofuel policies may also be designed to achieve other goals (energy diversification, farm support, etc.) that are not considered in this analysis. However, in terms of environmental benefits, they may not be the best tool to achieve initial targets; therefore, careful assessment is needed.
2. Considering LUC effects for biofuel policies is legitimate since a key objective of such policies is emissions reduction. However, introducing a LUC component into biofuel legislation will lead to the question of why LUC measurements are not introduced for other policies that can have larger land use impacts (e.g. CAP reform, trade negotiations). Overall, mitigation strategy requests need to be consistent across a wide range of policies, and there is no a priori reason to think that biofuel production-related emissions are more adverse than those generated by other agricultural production. Taking a discriminatory approach to agricultural production based on its use will be inefficient and potentially unsustainable in both political and legal (e.g. WTO) ways;
3. A differentiated LUC emission coefficient by crop can be difficult to use since these factors are sensitive to leakages across different markets. Increasing the threshold of direct savings for all crops by the same factor (possibly with a differentiated factor for ethanol and biodiesel) may be easier to implement. By increasing the required energy saving targets, this will force firms to use the most efficient processing technologies and may also lead to a downward revision in the ambition of the mandate if it appears that not enough biofuel pathways qualify;
4. Despite all uncertainties, our findings show the hierarchy between ethanol and biodiesel in terms of LUC emissions. Therefore, promoting a larger share of ethanol than the current projection will be meaningful. Trade liberalization of the ethanol market appears to be an effective tool to achieve this.
5. Alternative trade policy options may be developed to promote good practices in terms of land conservation at a national level by trade partners. Crop specific sustainability criteria could be avoided in favor of a combination of tariffs, tariff quotas, and conditional unilateral preferences that will maintain existing trading interests but will limit adverse consequences of new demand;
6. Using available technologies to increase yield e.g. biotech, and low carbon agricultural practices may be an important solution to mitigate the emissions linked to land use changes by reducing the requirement of additional land;
7. Due to the level of uncertainty, monitoring capacities (land use patterns) and research have to be improved and a regular “health check” of biofuel policies should be implemented. The mandate policy should be flexible enough to allow for a redirection of the policy when new information is made available.