IFPRI Forum

June 2006

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In recent years biofuels-that is, fuels derived from renewable biological resources, like plants-have drawn attention as energy sources that may help cope with rising energy prices, address environmental concerns about greenhouse gases, and offer new income to farmers, including farmers in developing countries. In principle, there is a high degree of congruency between these three driving forces for biofuel production and the poverty reduction targets embodied in the Millennium Development Goals. But private sector and market approaches to biofuel development will do little on their own to achieve these congruencies. If this growing sector is to meet broader social and environmental goals, biofuel development will require careful management and public sector support.

The development of biofuels poses risks and has the potential to result in difficult trade-offs. Although biofuel production would have clear benefits for the agricultural sector, the net impact on poverty and food insecurity in developing countries is less clear. Not all countries have the natural resource base to justify significant production of bioenergy crops, but for those that do, the diversion of land and water away from the production of other agricultural outputs, especially food and feed, needs to be considered. This shift could lead to higher food prices, which would be beneficial to farmers who produce a net surplus of food, but detrimental to poor consumers and food-deficit farmers who would have to balance more expensive food against less costly energy. Since the poor typically spend much larger shares of their consumption budget on food than energy, this trade-off is unlikely to be favorable. In addition, although biofuels may be cost-effective substitutes for oil, they are not necessarily much better for the environment. Biofuels can, for example, use a great deal of energy in their production, leading to little if any net reduction in greenhouse gases.

How can win-win outcomes be assured? How can the economic, environmental, and social benefits of bioenergy be made more complementary?

First, there are ways to reduce the trade-offs between bioenergy crops and food production. One is to develop biomass crops that yield much higher amounts of energy per hectare or unit of water. Another is to focus on food crops that generate by-products that can be used for bioenergy. Yet another way is to develop and grow biomass in less-favored areas rather than in prime agricultural areas-an approach that would benefit some of the poorest people. Finally, greater investment in increasing the productivity of food crops would free up additional land and water for the production of energy crops.

Second, it is important to choose appropriate scales and techniques for producing and processing biomass. So far most attention has been given to large-scale production of bioenergy for the market. This is because biomass crops lend themselves to economies of scale in growth and processing, given their bulk and relatively low per-hectare energy yields. Yet the scale benefits need to be balanced against the costs and energy loss of transporting high-bulk biomass products. This situation opens up opportunities for smaller-scale and rural-based production and processing, which would be much more beneficial for the poor than large-scale and urban-based processing. In developing countries, small-scale processing of biomass to produce, for instance, electricity or biogas could help meet local energy needs in rural areas. The agricultural research systems in developing countries have a key role to play in addressing these issues to make biofuels pro-poor. This is a promising area for public-private partnership in research. The Consultative Group on International Agricultural Research (CGIAR) could also play a key role in strengthening international knowledge and facilitating exchange of information on pro-poor development of biofuels. IFPRI itself is devoting increased research attention to the opportunities and concerns surrounding biofuels, especially as they affect poor people.

Third, different crops and processing technologies lead to different environmental outcomes. For example, ethanol produced from sugar cane not only is competitive with oil at today's prices, but also has favorable energy and carbon balances. In contrast, biodiesel produced from oilseeds and ethanol produced from maize and sugar beets are less competitive on price and have less favorable energy and carbon balances. There is great scope for developing cost-effective technologies that lead to larger carbon savings, and considerable research is being directed at this problem in Europe and the US. The impact on other scarce resources, however, especially water for sugar cane, needs to be factored in as well.

Because most of the environmental and social benefits of bioenergy are not priced in the market, leaving bioenergy development entirely to the private sector will likely lead to bioenergy production and processes that are economically efficient but fail to achieve the best environmental and social outcomes. To ensure better outcomes, the public sector has important roles to play.

First, it can help overcome the high initial costs of producing and using biofuels. For example, a viable biofuel industry requires massive and coordinated investments not only by farmers and processors, but also by car manufacturers, consumers, fuel distributors, and garages. As experience in Brazil, Europe, and the United States shows, the public sector can help achieve critical market size through the use of tax and investment incentives, regulation, and direct public investments. The public sector should also focus on meeting the urgent need for biofuel trade and regulatory systems, which are in their infancy in many countries. This emerging agricultural sector should not be burdened with trade distortions, and World Trade Organization discussions should take this issue into account.

The public sector can also enhance market incentives for achieving greater environmental and social benefits, like greater reduction of greenhouse gas emissions and adoption of appropriate plant scales. Effective tools are taxes and subsidies, regulation, publicly funded research and development, intellectual property protection, and the development and promotion of markets for carbon payments.

Finally, the public sector has a role to play in overcoming vested interests in existing technologies, such as within the car and oil industries.

With oil prices around US$70 a barrel, interest in bioenergy is running high. The energy needs of rapidly growing countries like China and India, together with unstable oil supplies, suggest that the days of cheap oil are over. Bioenergy offers an attractive alternative for many developed and developing countries, but if its full potential is to be captured, then both the public and private sectors, working as partners, must make long-term commitments and investments in innovation.