July 31, 2008
Economic Snapshot - August 1, 2008
Biofuels: Seldom is so much spent to achieve so little
Late in 2007, we here at the Economic Snapshot revisited the topic of biofuels and reviewed a brief analysis by the Organisation for Economic Cooperation and Development (OECD), which questioned whether the cost of producing biofuels outweighed the benefits.
In July 2008, the OECD published a more in-depth analysis of biofuel. It concluded that, in OECD countries, biofuel policies are not only costly but also ineffective in reducing greenhouse gases and improving energy security. The OECD report also found that the increased production of biofuels had a significant impact on world crop prices.
Without exception, the production of biofuels in the United States, Canada and the European Union is highly dependent on public funding.
According to the OECD report, spending on biofuel production by the major developed economies is projected to continue to increase. It totalled $11 billion USD in 2006 and is expected to rise to $25 billion per year by 2015. This support translates into a cost per ton of greenhouse gas “not produced” of between $960 and $1700 USD.
In addition to the explicit spending by governments on biofuel production, consumers are being forced to pay for more costly blended fuels mandated by governments. Also, with more agricultural resources being devoted to producing biofuels, there are fewer resources available to feed people and that leads to escalating food prices.
According to the OECD report, the main reason for producing biofuels is to cut greenhouse gases. Indeed, in Brazil, the production of ethanol from sugar cane reduces greenhouse gas emissions by at least 80%.
However, in Europe and North America, the use of wheat, sugar beets and corn as biofuel feed stocks results in much smaller emission savings. Assuming that current biofuel support policies remain in place, the OECD calculated that greenhouse gas emissions from transportation fuel would be reduced by less than 1% by 2015.
In view of this almost-insignificant benefit, it is not clear why the governments of the major developed countries are directly spending so much — and imposing an increased financial burden in the form of higher food and transportation costs on so many — to achieve so little.
Biofuels as Percentage of Total Road Fuel Consumption
Data source: Organisation for Economic Cooperation and Development (OECD).
Chart: Reed Construction Data - CanaData.
