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(originally published by Booz & Company)


A Clear Look at Biofuels

Replacing the appetite for petroleum with a taste for biofuels would no doubt result in the consumption of substantial agricultural resources. However, there is significant additional rain-fed land in the world available for agricultural production, according to the FAO and other global authorities.

In short, food prices in a world with biofuels will be higher than in a world without biofuels, but they will not necessarily be higher than they are today.

Perception: Biofuel development robs water-stressed countries of their most precious natural resource.
Reality: Although biofuel development does place additional strain on water resources, there are major agricultural zones in the world that suffer water scarcity regardless.

The vast majority of the globe’s agricultural regions can rely on the natural rain cycle for water. Two rather urgent exceptions are India and northern China. In these countries, not only is water quantity a problem, but so is water quality. China and India’s brisk economic growth will only exacerbate this crisis, as their growth is fed by ever-increasing amounts of food and fuel. Petroleum supply cannot keep up with demand even now; both countries are already dependent on imported oil. Meanwhile, water availability limits their domestic production of food. Imports will increasingly be a requirement, forcing a choice between food and fuel security.

Agriculture consumes more water, by far, than any other sector. Biofuel production requires water, but growing feedstock consumes much more. In other words, it is agricultural activity — not biofuel development per se — that diminishes the quantity and quality of available water in India and northern China. The solution to the water crisis in these regions will be found in sound policy and the development of a reliable and diversified portfolio of import sources for both food and fuel.

Perception: Government mandates and subsidies provide the necessary foundation for the development of the biofuel industry.
Reality: Government intervention can trigger unintended consequences, negating the intended benefits of biofuels.

Governments around the world have offered favorable tax treatment, low-cost loans and research funds for the development of biofuels, and a biofuels infrastructure chiefly to promote energy security, reduce GHG emissions, and protect domestic agriculture. Over time, however, greater government emphasis on biofuels puts upward pressure on food commodity prices, and tariffs and quotas have shut out economically viable options in favor of local alternatives. For example, protectionist policies in the U.S. have effectively eliminated imports of Brazilian cane ethanol.

In certain instances, regulatory support of biofuels has had obvious deleterious effects. European mandates supporting biofuel production prompted certain Southeast Asian countries to burn forests and peat lands to produce palm oil for ethanol. The resulting GHG emissions were dangerously high.

Policies can furnish the necessary impetus to develop valuable new technologies and establish new infrastructure; the Brazilian government’s promotion of cane ethanol is the perfect example. However, policymakers must walk a fine line in promoting long-term beneficial behaviors to avoid short-term detrimental consequences. They need to pave the way to an orderly transition by introducing incentives that are broad enough to encompass long-term optimal technologies and specific enough to focus on those with the most potential.

After separating truth from fiction, our conclusion is that with sound policies in place and healthy innovation, we can expect biofuels to become a viable alternative to fossil fuels in the long term. And as we look toward the world’s biofueled future, government leaders and economists should be mindful of the consequences and implications of various policy solutions:

  • Current agricultural rules in Organisation for Economic Co-operation and Development (OECD) countries, including farmer subsidies and restrictions on imports, lower world food prices and reduce the incentive for developing countries to develop their own agricultural supply.
  • Biofuel subsidies, tax exemptions, and blending mandates exacerbate biofuels’ upward pressure on food prices.
  • Infant-industry support may provide the required incentive to establish the infrastructure necessary for biofuels, such as flex-fuel power trains, fueling stations, and transportation infrastructure.
  • Political stability, land rights, and infrastructure are necessary prerequisites to developing functioning agricultural markets in developing countries.
  • Availability of capital and know-how is essential for developing countries to establish a biofuels industry.
  • Reliable and diversified import sources can address food and fuel security issues in water-stressed countries.
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  1. Fengxia Dong, “Food Security and Biofuels Development: The Case of China" (PDF), Iowa State University Center for Agricultural and Rural Development, Briefing Paper No. 07-BP 52, October 2007: The background, history, and current state of biofuels development in China, and implications for other developing countries.
  2. Richard Doornbosch and Ronald Steenblik, "Biofuels: Is the Cure Worse than the Disease?" (PDF) Organisation for Economic Co-operation and Development Roundtable on Sustainable Development, September 2007: A report on the facts and myths surrounding biofuels.
  3. "Biofuels for Transport: An International Perspective" (PDF),  International Energy Agency, April 2004: The costs and benefits of biofuels as a replacement for petroleum around the world.
  4. "Potential Contribution of Bioenergy to the World’s Future Energy Demand" (PDF), International Energy Agency Bioenergy, 2007: A summary of biomass resources and associated issues of market development, international bioenergy trade, and how these resources stack up against other energy options.
  5. World Resources Institute’s EarthTrends Web site: A collection of facts, articles, and documents relating to environmental trends and concomitant social and economic issues.
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