FT.com | Willem Buiter’s Maverecon | Let’s stop subsidising the production and use of bio-fuels

July 6, 2008

Let’s stop subsidising the production and use of bio-fuels

A recent World Bank report on the causes of the rise in food prices during the past three years confirms the view, widely held outside the Washington DC White House and the French farmers’ lobby, that increased bio-fuel production has made a major contribution to rising food prices. According to Rising Food Prices: Policy Options and World Bank Response, global wheat prices rose by 181 percent over the 3-year period leading up to February 2008 and overall global food prices by 83 percent. Food crop prices are expected to remain high in 2008 and 2009 and then begin to decline. They are likely to remain well above the 2004 levels through 2015 for most food crops. Around 15 percent of the increase in food crop production prices is due directly to higher energy and fertilizer costs.

The list of the usual suspects for the cause of this food price boom is not controversial, but the quantitative magnitudes of the individual contributions is. The main drivers are (1) global economic growth and especially rapid growth of real per capita income in the emerging markets (mainly the BRICs), countries whose consumption expenditure share on food (and energy) is still high because of the low levels of real per capita income: (2) crop failures; (3) diversion of crop production away from food into bio-fuels; (4) food subsidies in emerging markets and developing countries and food export controls/taxes/tariffs leading to hoarding in food importing countries; (5) destabilising speculative behaviour in the commodities futures markets.

Crop failures have been a local rather than a global phenomenon, and appear to have been cancelled out by above-normal crop yields in other parts of the world. Food export controls may have cause sharp peaks in certain cereals, especially rice, but their impact is likely to be transient, especially with most of the recently imposed controls now reversed. Evidence for any lasting impact of futures market speculation on the spot price for physical commodities actually delivered is conspicuous for its absence. That will not stop the usual parliamentary ‘let’s blame the speculators’ enquiries. Enquiries into abusive and destabilising speculative behaviour in the oil futures markets are already under way in the US and have been announced for the UK. They may well be extended to include food crops. As is so often the case, our legislators hope that the electorate will confuse motion with action and action with effective measures to deal with the problems. Fundamentals alone are quite capable of explaining the relentless trend in real food crop prices.

I have not been able to locate the paper A Note on Rising Food Prices by Donald Mitchell, which was around in mimeo format as early as April 2008. This paper is supposed to contain more detailed calculations and estimates of the effect of bio-fuels on global food crop prices. Different accounts claim that Mitchell estimated that either 65 percent or 75 percent of the increase in real food prices over the past three years is due to bio-fuel demand. Economics/econometrics isn’t rocket science, but the difference between even 65 percent and the 3 percent claimed by the Bush White House is large enough to make me want to have a close look at the research supporting both numbers. Personally, I am surprised that the contribution of food demand growth in the rapidly growing BRICs apparently accounts for less than 20 and possibly less than 10 percent of the rise in global food crop prices, but until I get hold of the Mitchell paper, I cannot judge the robustness of his calculations or venture a guess at the confidence intervals that surround his point estimates.

Increased bio-fuel production has contributed to the rise in food prices, according to the report. Concerns over oil prices, energy security and climate change have prompted governments to increase bio-fuel production and use leading to greater demand for raw materials including: wheat, soy, maize, palm oil and sugar cane. Food crop price hikes are also linked to higher input costs, including energy and fertilizer prices. The report also lists a weak dollar as a cause of high oil prices. While a weak dollar may make for high dollar prices for food crops, there is no obvious link between the weakness of the dollar and a high real price of food crops, or a high relative price of food crops compared to other goods and services. Exports bans on food crops, higher export tariffs and import subsidies also raised the world real price of food crops.

High food crop prices and high energy costs are painful for everyone except for the net exporters of food crops and energy; this applies to individual farming households and to countries. It is disastrous, indeed life-threatening, for the poor in the poorest countries. During the early phase of the latest globalisation wave, when industrial production in China the other BRICS and many other emerging markets and developing countries first took off, the reduction of extreme poverty in China and India also was sufficient to improve the World Bank’s figures for the number of people surviving on $1 or $2 a day. With food and energy prices rising, partly in response to the rapid growth in emerging market demand but partly because of wrong-headed policies, that reduction in global extreme poverty may well be reversed. Some of the new or renewed poor may even live in China and India. Many will live elsewhere, including Bangladesh, Pakistan, Egypt and sub-Saharan Africa.

What can be done?

In the advanced industrial countries:

End all subsidies to the production of bio-fuels and all official targets for their use. Currently, the E.U. has an official goal of 5.75 percent of motor fuel use from bio-fuels by 2010. The U.S. has mandated the use of 28.4 billion litres of bio-fuels for transportation by 2012. Some emerging markets will have to change their tunes also. Brazil (the leading producer of sugar-cane-based ethanol) requires that all diesel oil contain 2 percent bio-diesel by 2008 and 5 percent by 2013, and Thailand has required 10 percent ethanol in all gasoline starting in 2007. India mandates a 5 percent ethanol blend in nine states, and China is requiring a 10 percent ethanol blend in five provinces. All this will have to go. It is part of a process called ‘learning’. More governments and official institutions should try it.

Public funds should instead be allocated to research and development into alternative, renewable and environmentally friendly sources of energy. There is no argument to tax the use of bio-fuels or to ban them. There just is no argument for subsidising their production or use. This was the case even before food prices began to rise steeply as a result of the diversion of potential food crops to the production of bio-fuels.

Encourage research in genetically modified crops, both through the public funding of R&D and by overcoming phobias (common in Europe) against the growing of GM food crops.

End all policies to subsidise or protect agriculture as well as all policies to restrict agricultural production through set-asides (paying farmers not to grow stuff) and other idiocies.

Stop using phony phytosanitary standards as arguments to restrict free trade in agricultural products. Free trade in agricultural products and unimpeded market access on the same terms as local producers should be the rule.

Only send food abroad on below-market terms to address short-term humanitarian disasters.

Use cash aid for the poorest in the rich countries, or, even better, raise the real value of the lower end of the social safety net. The poor spend a larger proportion of their income on food and energy than the rich. When the relative price of food and energy rises, a larger amount of ‘real’ income is required for the poor to maintain their standard of living (if ‘real’ income is defined by deflating money income in terms of the cost of living of the average consumer).

For emerging markets and developing countries where most of the poor are located.

Stop subsidising the production of bio-fuels. According to the World Bank report, “Converting rainforests, peatlands, savannas, or grasslands to produce food-based bio-fuels in Brazil, Southeast Asia, and the United States creates a ‘bio-fuel carbon debt’ by releasing 17 to 420 times more (CO₂) than the annual greenhouse gas (GHG) reductions these bio-fuels provide by displacing fossil fuels. ” This does not necessarily mean that these rainforests, peatlands, savannas and grasslands should not be converted to the growing of crops. What it does mean is that the crops should probably not be used to make bio fuels. Without subsidies or other incentives, they probably would not be used to produce bio fuels.

Lower taxes on foodgrains make obvious sense.

End food export controls and food export taxes. This is a useful part of the solution, but only if countries agreeing to export food when domestic prices are high and rising can be assured of access to open global food markets when their needs are acute.

Running down foodgrain stocks to increase food supply by only makes sense if these stocks are too high from a best-practice precautionary perspective. In food importing countries, fear of food export restrictions in food exporting restrictions leads to individually rational but collectively costly hoarding of foodgrains. Price controls may help consumers but discourage local producers and encourage the diversion of food to other destinations where prices are higher. Selective food subsidies, aimed at the staple foods of the poor (not a caviar, salmon and filet mignon etc.) may make sense.

The economist’s first-best solution - cash transfers to the poor - requires the government to know who the poor are. That information is often not available. Universal cash benefits are ruled out for budgetary reasons. Food-for-work programs that tie access to free food to the performance of (hopefully) socially useful labour may be an efficient way of targeting only those who really need the food. They also satisfy the inner Puritan in us. The problem is that it leaves those who are both poor and unfit or disabled to fend for themselves. Food rations and food stamps tend to be expensive if they are universal. They require the government to be able to identify the poor if they are to be selectively targeted. Food ration/stamp; school feeding programmes may be a cost-effective way of ensuring that the majority of youngsters get at least a minimum level of food intake during school days in their formative years.

Conclusion

The logic of the case against subsidising (through cash subsidies or through protection) the production and use of bio-fuels is the same regardless of whether bio-fuels account for 3 percent or 75 percent of the increase in global food crop prices over the past three years. The degree of urgency with which we tackle the removal of the production subsidies, protectionist measures and other inducements to encourage the production and use of bio-fuels does depend on the numerical magnitude of the distortions created by this ill-conceived policy.

In the absence of firm evidence to the contrary, I am inclined to attach more weight to the figures produced by Donald Mitchell than to those generated by the White House. The reason is simple. The experience of the past 7 plus years has demonstrated beyond a reasonable doubt that the Bush White House is a shameless production line of blatant lies and misrepresentations. In the Clinton White House, the mendaciousness related mainly to the personal (mis)behaviour of the inhabitants of 1600 Pennsylvania Avenue. In the Bush White House, lies deceptions and distortions are the weapon of choice for the promotion and defense of favoured policies. Iraq’s non-existent weapons of mass destruction and the alleged but never proven close links between Al Queda and Saddam Husain’s administration are the most obvious examples of Bush White House mendaciousness. Its record as regards attempts to suppress research findings generated within the Administration that might undermine the White House’s environmental policies betrays the same underlying attitude that telling the truth is a tactical option at best.

So let’s pursue an end to the promotion of bio-fuels, except as part of an impartial research and development programme into renewable and environmentally friendly sources of energy. And let’s start at home.

July 6th, 2008 in Economics, Environment, Ethics, Politics | Permalink

34 Responses to “Let’s stop subsidising the production and use of bio-fuels”

Comments

This was a wonderfully well written article. Similar to one I posted yesterday-http://blog.metro-real-estate.com/?p=667.

Why, however, did you find it necessary to engage in an attack on the Bush administration. I am not defending them but it seemed completely irelevant to your article and detracted form a fine piece of work.
Posted by: Tom Lindmark | July 6th, 2008 at 1:27 am | Report this comment
My rant at the end of the blog was intended as a general attack on mendaciousness in public life. I juxtaposed Bill (”I did not have sexual relations with that woman”) Clinton’s blatant lies about his personal misbehaviour with the Iraq war Axis of Lies in the Bush Whitehouse (Bush, Cheney, Rumsfeld, Wolfowitz and Feith, with Powell as an unwitting victim. The Bush administration, as the incumbents these past seven plus years, got more lines of stick than the Clintons, but the point is definitely non-partisan.

The White House’s 3 percent estimate of the contribution of corn-based bio fuels to the increase in global food crop prices almost surely belongs in the Pinocchio category. On May 14, 2008, Ed Lazear, Chair of the Council of Economic Advisers said the following in evidence to the Senate Foreign Relations Committee (http://www.whitehouse.gov/cea/lazear20080514.html) (part of the Hearing on “Responding to the Global Food Crisis”): “We estimate that the increase in U.S. corn-based ethanol production accounts for approximately 7.5 percentage points of the 37% increase in corn prices over the past twelve months. The increase in corn-based ethanol production in the rest of the world this past year accounts for as much as an additional 5.5 percentage points. Combining the increases in ethanol production in the U.S. and the rest of the world, we estimate that the total global increase in corn-based ethanol production accounts for about 13 percentage points of the 37% increase in corn prices, or about one-third of the increase in corn prices over the past year.”

This contrasts with the statement (also made in May 2008) “On the international level . . . only 3 percent of the more than 40 percent increase we have seen in world food prices this year is due to the increased demand on corn for ethanol,” by Agriculture Secretary Ed Schafer.

Both these figures only related to corn-based ethanol. As I understand it, the World Bank study considers the demand for all biofuels.

Our political leaders resort to lies and deception as a matter of course - often as a first resort. Their readiness to put the entire gamut of offices and powers of the state in the service of their lies and deception discredits not only our political leaders but also the institutions that sustain our society. It pervades every area of policy, even bio-fuels. It makes me mad. And when I’m mad, I blog.
Posted by: Willem Buiter | July 6th, 2008 at 11:53 am | Report this comment
Tom, the Bush White House should in no way be given the benefit of the doubt.

They chose to lie as a policy tool; therefore, nothing coming out of their collective mouths deserves to be respected, considered, or otherwise referenced.

“it seemed completely irrelevant to your article”

I found it completely topical. The difference between the Bush party line - “It doesn’t benefit us, so it doesn’t exist” - and the facts of the matter are sharp, and worth noting.

At this point, I’m inclined to believe the Bush administration is lying even before acquiring proof to the contrary.
Posted by: Unsympathetic | July 6th, 2008 at 2:51 pm | Report this comment
I am more than a little surprised at Professor Buiter’s backtracking in his above post from the important and perfectly justified “rant” at the end of his article about the use of lies as an essential instrument of policy by the Bush administration. Nothing that happened in the Clinton years could possibly compare with this perversion and subversion of democracy.

The Bush administration’s use of the big lie technique (combined with unprecedented secrecy) is not just limited to issues such as the Iraq war and the environment, but permeates every aspect of its approach to government. Take, for example, the repeated lies and evasions that former Attorney General that Alberto Gonzales used in trying to conceal the politicization of the Justice Department, and which eventually forced him to resign.

Look at the pattern of White House lies and concealment in the scandal over the disclosure that Valerie Plame, the wife of a prominent Iraq war critic, was a secret CIA agent, which destroyed her career and led to the perjury and obstruction of justice conviction of top White House aide Lewis Libby.

Even more importantly, the Bush administration’s lies over the use of torture, “rendition”, secret prisons, mistreatment of prisoners at Guantanamo, and the fact, as reported in the New Yorker, the New York Times and elsewhere, that top administration officials authorized the abuses at Abu Ghraib are undermining what is left of our freedom.

Ditto for the administration’s lies about its illegal spying program, which it is now trying to legitimize after the fact by using the biggest and most pervasive lie of all, namely that anyone who opposes the Bush/Cheney grab for unlimited executive power is allegedly providing aid and comfort to the terrorists.

As if these were not lies enough, would Professor Buiter be willing to believe the administration’s (and Senator McCain’s) line that the US economy is fundamentally sound, and that all we need in order to solve whatever problems we have are more laissez faire, increased corporate welfare and bigger tax cuts for the rich?

Professor Buiter was right the first time.
Posted by: algasema | July 7th, 2008 at 3:30 am | Report this comment
Sorry, I meant: “that former Attorney General Alberto Gonzales”.
Posted by: algasema | July 7th, 2008 at 3:34 am | Report this comment
Thank you all for validating my observation. An otherwise marvelous article on biofuels has taken a back seat to a political rant.
Posted by: Tom Lindmark | July 7th, 2008 at 5:56 am | Report this comment
‘Biofuels’ is too broad a definition to be discussed without further differentiation. ‘Biofuel’ covers everything from ethanol produced from maize and natural gas (horribly inefficient no matter how you look at it) to biocrude from algae and CO2 (very efficient). The point is not to stop subsidies for biofuels - that is much too simplistic and misses the point. The point is that we should consider economic incentives to bring alternative, BETTER (less CO2 per unit of usable energy, positive energy balance, etc), fuels to the point where they are cost-competitive. Incentives are required to overcome the ‘learning curve deficit’; something that markets will not achieve since policies are never stable for a sufficiently long time to allow private investment to generate returns.

Please stop addressing complex issues via simplistic soundbites…it benefits nobody.
Posted by: Jan-Peter Onstwedder | July 7th, 2008 at 9:59 am | Report this comment
William,

I see your point about the Bush administration - but that problem is going to go away in a few months anyway.

However, I can’t help feel that two separate articles, one about the economics of bio-fuels, and another about the need for better transparency in government, would have been more appropriate.

As Tom has said, the net effect of the anti-Bush rant has been to distract from the bio-fuel question.
Posted by: Mark Harrison | July 7th, 2008 at 10:00 am | Report this comment
Like Jan-Peter Onstwedder, I am unenthusiastic about over-generalisation when addressing issues like “bio-fuels”. The more one gets into detailed research about the various forms of Bio-fuel sources, the less clear become the “solutions” to the food vs fuel debate.

Equally the debate about GM food crops is over-generalised. eg there seems to be Monsanto GM (one solution for all - ours appears to be their motto) and others’ GM. It is too easy to be seduced by the Monsanto message.
Posted by: Derek Tunnicliffe | July 7th, 2008 at 11:19 am | Report this comment
Jan-Peter Onstwedder is writing rubbish. There is no efficiency case for subsidising the production or consumption of any biofuel, or indeed any fuel, bio or dead. Learning curve effects are not externalities. They are up-front investment costs of the kind found in any investment where inputs precede outputs - that is, in all investment activity. Businesses face this problem all the time. There are many with the scale, scope and financial resources that can bridge the gap between outlays and returns. If certain biofuels are efficient and others not, the market will uncover it.

Externalities (or rather public good properties) are attached to basic research and to some development activities. R&D into biofuels is no exception. Knowledge and know-how that is costly to generate but can be disseminated at zero marginal cost, will not be produced effectively by profit-seeking private agents. Subsidies are in order there.

I will be happy to refer Mr. Jan-Peter Onstwedder to a simple introductory text in microeconomics and cost-benefit analysis. Studying its contents would help him look less ignorant next time he puts pen to paper.
Posted by: Willem Buiter | July 7th, 2008 at 1:06 pm | Report this comment
We are in fighting mood this afternoon, aren’t we professor?

I have to admit that, after a quick scan of John McCain’s campaign web site, he seems to make sense on biofuels (no subsidies, no tariffs). Let’s hope that special interests don’t sway him on this as on other issues.

I still think that Professor Buiter should explain how John McCain’s fiscal policy proposals make any sense.
Posted by: Carlomagno | July 7th, 2008 at 1:39 pm | Report this comment
In a free market, corn will be turned into a gasoline substitute when the relative prices of the two commodities sit within a particular range.

A bushel of corn produces about 2.7 US gallons of ethanol. Today’s spot market price for corn is about $7.50 a bushel. (I do not have access to a precise figure). This means that a US gallon of ethanol costs about $2.80, just for the raw material. The energy value of ethanol is about two thirds that of gasoline. The raw material cost of a US gallon equivalent of ethanol is therefore about $4.20. The latest weekly figure for average US gasoline prices is $4.095. There are some useful co-products from ethanol distillation, but the value doesn’t cover the cost of processing the corn.

In other words at current relative prices, there is little financial reason for any business to turn corn into ethanol. The price of corn is too high. Even with current subsidies, the margins available to ethanol producers are low. Further increases in corn prices as a result of poor weather in the US will make even subsidised ethanol uncompetitive. If the oil price falls, then ethanol conversion similarly becomes unviable.

But the US insists that about 9bn gallons of ethanol must be blended into gasoline this year. The EPA can adjust this number (I believe at the request of individual states), and policy makers should focus on removing this requirement.

About one in twenty of the world’s food grains will go into American cars this year, but global oil demand will only be reduced by one per cent by this process.
Posted by: Chris Goodall | July 7th, 2008 at 1:59 pm | Report this comment
To critics of Professor Buiter’s “rant” and of my comment arguing that it did not go far enough:

Is there a statute or rule of journalistic practice that prohibits writing about bio-fuels and Bush administration mendacity in the same article, even if there may be no direct connection? Are not democracy and energy equally important? How can anyone make an intelligent choice about the second if the first is in danger?

And, as Professor Buiter implies, how can we expect to learn the truth about bio-fuel policy from a government that is incapable of telling the truth about anything else?
Posted by: algasema | July 7th, 2008 at 2:57 pm | Report this comment
The statements Willem Buiter shows in his comment are not lies, but rather a - admittedly deceptive - misuse of statistics. Ed Lazear’s May 14 numbers compare the effect of increased demand for corn for ethanol production on the price of corn, whereas Ed shafer compares the effect of increased demand for corn for ethanol production on the price of “world food prices”. Quite a difference…
In any case, the 3% figure seems low, but if one excludes other biofuels and any effects the substitution of other food crops in favour of corn destined to ethanol production has on food prices, it may not be all that far from the truth.
Posted by: cfm | July 7th, 2008 at 3:18 pm | Report this comment
Skyrocketing global demand and diminishing supply of oil has spawned an energy crisis that threatens economic growth and political stability. In order to secure access to critical energy resources, governments and corporations have sacrificed human rights, negotiated with terrorists, and bribed public officials (e.g. UN Oil for Food Program, Iraq’s invasion of Kuwait, etc.). The true cost of most sources of energy cannot be measured solely in dollar terms, but must also incorporate the environmental impact resulting from pollution, habitat destruction, and geological alteration. A growing movement towards “alternative energy” has emerged as wealthy nations consider the negative externalities of energy consumption as opposed to simply its financial cost. The allure of clean domestically produced energy warms the hearts of environmentalists, but it seems unlikely to pragmatists that a few windmills and solar panels can displace carbon based fuels.

http://www.beyondthemargin.net/2008/06/alternative-energy-panacea-or-placebo.html
Posted by: Jimbo, HB, CA | July 7th, 2008 at 3:34 pm | Report this comment
At the same time, without Biofuels we need other energy sources… We need to drill for oil in sites that are currently offlimits…

Not since the years of Jimmy Carter has the United States faced a greater energy crisis. While there are no shortages at the pump or plans to ration supplies, our nation’s neglect of energy infrastructure combined with a collective “not in my backyard” mentality has sentenced us to dependence on unstable and hostile regimes around the world. With supply and demand in such fragile balance, any political instability, terrorist attack, or shift in diplomatic relations could quickly send oil prices soaring further crippling our economy. We need more domestic drilling and we need it now.

http://www.beyondthemargin.net/2008/06/demand-for-drilling.html
Posted by: Jimbo, HB, CA | July 7th, 2008 at 3:36 pm | Report this comment
The consequence of subsidy for anything is to increase demand. Much of the irrationality of the official response to the alleged man-made Global Warming is based on political correctness, the desire to be being seen to be doing something which would, at least in the short term, pass through a standard pc filter. However, the main driver of demand for all the items in short supply is people and their subsidy. Is it entirely rational to subsidise the procreation of poor people in rich countries and poor people in poor countries? Is it rational to allow people from the third world to emigrate to the first world to continue their profligate breeding activities, create overpopulation strains on the indigenous peoples, and drive higher overall consumption?
Either governments and international bodies should take the necessary steps to stop and reduce overpopulation or they should go away and find some other ‘issue’ to monkey with.
Posted by: forthurst | July 7th, 2008 at 4:57 pm | Report this comment
As a way to tackle poverty, cash transfer programmes, like Brazil’s Bolsa Familial, have shown promising results, according to research by the International Poverty Centre, amongst others.
http://www.undp-povertycentre.org/CCT.do

However, they may not suffice to address an emergency like the current food crisis. It takes time to put them in place. And, as noted, some of the poor may be missed. Also, the immediate effect may be to further increase food prices, thus worsening the plight of those left out.

So, as Professor Buiter suggests, food subsidies aimed at the staple foods of the poor will often be required too.

Food importing countries need to be assured that they can have access to financial support to address balance of payments problems.

The poor must be able to protest. Famines are less likely in open political systems, with a free press, and freedoms of assembly and association. Special attention must be paid to people in remote, rural areas who may get less attention from the press and may face more difficulties in organising themselves. This, rather than the conduct of the Clintons and the Bushes, is the important political aspect of the problem.

I am glad that Professor Buiter refers to the need to overcome phobias (common in Europe) against the growing of GM food crops, rather than simply dismissing opponents as Luddites. One needs to examine the different fears and address legitimate concerns.
Posted by: Edward S | July 7th, 2008 at 5:42 pm | Report this comment
I liked the professors article and as usual with economics the basic stuff is the best , namely that goverments should stop messing with the markets and allow them to do their work wherever possible.

I do have the following comments on the conclusions :-

- I think GM crops are a red herring as I believe one of the economic drivers for GM is licensing ( called economic-rent seeking ?) and this makes aligning business interests with public interest difficult - todays feckless governments will tend to be pawns in this game, not players. Also homogenising ecosystems is a sure way to destroy them with the laws of unintended consequences in the long term, and this kind of thinking tends to go hand in hand with fans of GM development.

- Using cash for aid may be the best way of helping on paper, but horribly prone to corruption in practice. Some relief efforts (most lately Burma) suffered from corrupt officials intercepting aid to sell, and a sending cash will just make it easier for them to “trouser” the aid.

- While I tend to agree with his “rant” about the Bush administration, they did get one thing right - t, namely that democracy should not be the domain of “white methodists”, which is Bush’s way of saying that democracy itself is part of the solution to many of the worlds current problems (not just terrorism, I would add). The professors conclusions will not be complete until this issue is included.
Posted by: Steve T | July 7th, 2008 at 7:01 pm | Report this comment
Willem, Clearly you propose the right policy agenda. I fear, though, that the genie is now out of the bottle (meaning the biofuel production up-front costs including learning have already been funded in many parts of the world), and, given the level of inequality in the world today, it’s inevitable that, even if biofuel subsidies are abandoned, some people will (at a high enough price of oil) continue to fill their SUVs with biofuel while others starve. Both your point about raising “the real value of the lower end of the social safety net” and discussion of possible measures in poorer countries (i.e. those without an existing safety net) are therefore necessary steps even if the proverbial pigs take off and biofuel subsidies and quotas are abandoned by the end of the week.

I would, though, like to query the logic implied by the passage you quote from the World Bank report that it is only the loss of existing “rainforests, peatlands, savannas or grasslands” that matters in environmental - even just carbon - terms. I suggest that we also need to consider the opportunity cost, in terms of the potential to store carbon, of any land used for biofuels, even already cleared land - and similarly put a value on other ecosystem services (biodiversity, flood prevention, water storage etc.).

In fact, if we’re to avoid environmental catastrophe, we need to put a value on land used for food production as well. You rightly pan set-aside policies for “paying farmers not to grow stuff”, but may I suggest that set-aside schemes are a good policy for another reason. Farmers and custodians of land in general should be rewarded for maintaining land in its natural state or allowing it to revert to an ecologically valuable state. The lost income stream would be an opportunity cost incurred by the decision to use land for food or biofuel production, or any other use. Inefficient food production as well as the demands of land for biofuel crops is rapidly reducing the land available worldwide for forest, peatland etc. Rewarding land owners for the provision of ecosystem services, including carbon storage, is surely the logical way to ensure land is used more efficiently.

I’ve produced some short notes on the importance and method of calculation of a “payback period” for biofuels (along the lines of the “biofuel carbon debt” the World Bank mention, but in a little more detail as well as taking the carbon storage opportunity cost into account), which you might be interested to look at, at:
http://unchartedterritory.wordpress.com/2008/06/16/the-biofuel-papers/
Posted by: Tim Joslin | July 7th, 2008 at 8:36 pm | Report this comment
Chris Goodall,

Modern corn production also depends heavily upon the use of fossil fuels for many of the following:

-capital expenses associated with production (the manufacture, shipment, and installation of equipment such as irrigation systems, tractors and so forth)

-the manufacture, packaging, and shipment of seed, petroleum-based fertilizers, fungicides, herbicides, insecticides etc. to the farm

-operating expenses associated with production (labor, fuel, and maintenance costs for the above equipment)

-shipment of the corn to an ethanol processing plant

-flying Monsanto and ADM lobbyists back and forth from Capitol Hill
Posted by: DavidS | July 7th, 2008 at 11:27 pm | Report this comment
Sorry, but your rant against Bush is trivial. You forget that all of the subsidies are backed by the Congress, which is even more steeped in lies. The current nominee from the Democratic party, Obama, is from Illinois a large corn producing state. His administration will do the same. Get off the bandwagon of Bush and look at the real problem. The Do Nothing Congress.
Posted by: mberan | July 8th, 2008 at 1:28 am | Report this comment
mberan is correct, candidates are forced to pander to special interests in the election process. Its starts in Iowa, where high corn prices are always a good thing, and so therefore support the farm bill, and proceed to Kentucky, where the “clean coal” myth is expounded.

Questions of the competence/veracity of the Bush admin already resoundingly concluded, semi-relevant rants don’t help the piece.

My 2c : The U.S.’s benign neglect of global warming issues is criminal neglect. We have been racing to make easy profit from cheap oil and unchecked development. This is our since we rejected the attitude proposed by Jimmy Carter, the last prez to wear a sweater in the white house. Ronald Reagan tore the WH solar system down, years later we have the famous quote, “conservation is not an energy policy” by Dick Cheney.

OH .. I see I’m starting to rant against the administration already resoundingly discredited. Easy trap to fall into.
Posted by: Greg Jung | July 8th, 2008 at 3:37 am | Report this comment
Working as an agricultural journalist in the US during the 1980s, I was shocked to see the rise in alcohol production from corn. It did not make economic sense then, and it surely does not now. Corn (maize) is an energy intensive crop to grow. That means more energy is used to raise then process the corn than is extracted in the alcohol. Moreoever, in monoculture or in rotation with soybeans, as is common in the US Midwest, it is damaging to soil. The lobby behind gasahol, however, is very strong and it reaches into the Democratic and Republic parties equally. Barack Obama could not have won the Iowa primary, for example, without giving at least strong lip service to alcohol from corn. And no one will win Iowa in November without doing the same.
Posted by: Gale A. Kirking | July 8th, 2008 at 5:55 am | Report this comment
Tommorrow a company called ITM Power, will give its first public demonstration of a bi-fuel car that can will be run on hydrogen for the first 25 miles(typically witrhin commuting range) before automatically switching to petrol for longer journeys. Crucially the car is refilled with hydrogen generated from electricity from a renewable (or conventional) source.

Up to now the energy industry has poured scorn on hydrogen fuel cells because of the high cost of generating hydrogen. The fundamental breakthrough by ITM is that this hydrogen (converted from water and electricity using an ITM electrolyser) is produced at 1% of the cost of conventional electrolysers. This cost reduction makes hydrogen fuel competitive with hydrocarbons (such as petrol, diesel and natural gas) without the harmful greenhouse gas emissions!!

What this bi fuel car and ITM’s hydrogen pump demonstrates is a massive future potential to store intermittent electricity generated from renewable sources (such a solar and wind) in the form of hydrogen. Peak generation from renewables does not usually coincide with peak demand, and electricity is consequently wasted. If the hydrogen is stored it can be used for fuel for transport, cooking, central heating and power generating through fuel cells (ITM have also made giant strides in efficiency and cost effectivness of these too).

At this time of escalating and sustained high fuel prices, concern over greenhouse gasses and energy security (yes, this unit can be applied from domestic to industrial and remote locations in all manner of shapes and sizes),
ITM has produced the “enabling technology” for a “hydrogen economy”, as opposed to our burdensome “hydrocarbon economy” that enables electricity from renewable sources to be stored and influence the energy supply for all applications in society.
Posted by: Charles Purkess | July 8th, 2008 at 7:21 am | Report this comment
Charles Purkess | July 8th, 2008 at 7:21 am
“The fundamental breakthrough by ITM is that this hydrogen (converted from water and electricity using an ITM electrolyser) is produced at 1% of the cost of conventional electrolysers.”

Yes but the conversion process can still only be 50% efficient. Why waste 50% of the electricity, and spend billions building a new distribution system when we have a perfectly good and very efficient electricity distribution system with losses of only around 3%?

What is really needed is higher capacity batteries, I suspect this will happen faster than the construction of millions of hydrogen refuelling stations around the world.
Posted by: Richard | July 8th, 2008 at 9:35 am | Report this comment
Besides the ending of subsidies and mandates on biofuels, I doubt any of your recommendations are politically capable of being carried out.

I think what is more likely to happen is that surging commodity prices, especially oil will downstream into food and other markets and fundamentally alter the economics of farming. The recent New York Times article on bananas, which simply don’t make sense as a US staple food given distance from growing areas in Latin America, refrigeration requirements, short shelf life etc is a prime example. Given higher transportation and refrigeration costs, bananas will disappear from the diet of the average US consumer purely due to pricing.

But how high do they have to get, that is the key question.

US gas prices are still too low to promote the kind of massive lifestyle and cultural changes that will be required. A gallon averages US$4.10, compared to US$4.5 in Thailand, US$5.00 in the Phillippines and US$10.00 in Holland.

Significant demand destruction is yet to appear on the global oil market. In a world with US$145 oil prices, the Chinese and Indians are still buying cars because their governments are still subsidizing oil.

Oil will have to increase significantly, perhaps to US$200+ per barrel, and remain high for a long enough period such that a significant proportion of the world’s wealth is transferred to oil producers and oil consuming nations get rid off all subsidies and taxes on oil consumption. It’s gotta hurt before politicians take action.
Posted by: PN | July 8th, 2008 at 11:11 am | Report this comment
Brilliant article! Well laid out, researched (except for the Mitchell report?). I can only guess that the readers’ comments on political “machinations” come from very partisan individuals who fail to see the solid arguments of substance regarding the issue in question. Are they more interested in cheap politics than the real issue of biofuels? Lamentable, but they obviously live in a cave. The real issue is that substituting crops for fuel is a dead end, especially today, for it is only a band aid solution to more serious and profound problems facing the globe. Technology has evolved enough to continue research into long lasting solutions to energy problems, as well as other alternative sources. Seeking short term solutions to long term problems only exacerbates the issue of world food prices and poverty; we should double up efforts into practical application of known technology, it won’t be long before the cost factor of production of alternative fuels comes into line with mass consumption. The equation is simple.
Posted by: Ian Cairncross | July 8th, 2008 at 6:12 pm | Report this comment
Dear Stupid

If you left the planet to a compeletly free marketplace US and Europeam power companies would cut down every tree in the rainforest, and most of the UK and European farmers would go out of business, why , because in a completely free market companies go to the lowest cost base available. A massive amount of Biofuel crops and food crops can be grown with investment in eastern Europe who have in no way recovered from over 50 years of communist rule. We in Europe have a great opportunity to have our cake, and eat it, and knee jerk reactions to press reports- highly justified about South America and Africa and Asia biofuel feedstock production- without looking at the different position of Europe’s agriculture position, shows how little people know. Take a flight over Ukraine,Poland, Moldova etc and see it with your own eyes. The future for biofuels and Agriculture is very positive in the old Communist states.
Posted by: Adam Smith | July 8th, 2008 at 7:38 pm | Report this comment
Using land that can produce viable food staples in order to fuel an SUV was probably one of the stupidest decisions in the past 100 years; it’s just short of the decision to invade Iraq.
Posted by: Andrew W | July 9th, 2008 at 2:44 am | Report this comment
Posted by: Richard | July 8th, 2008 at 9:35 am

Thanks Richard - good questions.

“Yes but the conversion process can still only be 50% efficient” Why waste 50% of the electricity, and spend billions building a new distribution system when we have a perfectly good and very efficient electricity distribution system with losses of only around 3%?

Don’t have to spend billions on a new distribution system. Infrastructure already in place. All you need is water and electricity + the ITM electrolyser unit!!

The key is security of supply. A business can plan expenditure on known fuel costs if generating hydrogen fuel for delivery van fleet , trucks etc.

ITM have developed the cost effective hydrogen generation & the refuelling infrastructure (that was previously the missing link). This is ground breaking!! No need to have to worry about a coup in Aberbajan or Nigeria for example affecting oil supply and price at the pumps.

“What is really needed is higher capacity batteries, I suspect this will happen faster than the construction of millions of hydrogen refuelling stations around the world.”

Batteries use up metals in manufacture, pollute, and create toxic waste in disposal. Unlike most membranes in electrolysers and fuel cells, ITM’s is uniquely platinum free and costs 1% of any comparable membrane.
Posted by: Charles Purkess (CEnv; CSci) | July 9th, 2008 at 9:35 pm | Report this comment
I still believe that something is not OK with these price increases in food and oil. The same number of people is on the earth as 2 or 3 years ago, and we are talking of some dooms day here. My father is an agricultural producer as are many of my family and all of us increased the production, not decreased, and believe every producer is doing this, and still prices are rocketing. We as producers are against this, even if we benefit, because people and governments start looking at you as scapegoats. I think more transparency will be better so the people will understand the nature of the problems. Some people who thing nuts grow on trees and similar stuff, speak of agriculture and production as they are specialists, that is why we have such misunderstandings and speads in the prices in the last 2 to 3 years. Nothing changed in the world to drive the prices 85% or so in the past 2-3 years. I believe something is going on behind the doors here. This is not the reality. And traders are not to blame since they are betting against each other and not trading tons of food or oil, so they can influence price and availability.
Posted by: Bojan | July 10th, 2008 at 3:26 pm | Report this comment
[…] ago. I should say at this point that I do not agree with my new best blogging buddy (thanks to his views on biofuels) Professor Willem Buiter of the FT, when he writes that: “Outright nationalisation, with the […]
Posted by: Fannie and Freddie Get Naked « Uncharted Territory | July 16th, 2008 at 4:51 pm | Report this comment
Brazil has had an exceptionally satisfactory experience with sugar cane ethanol for the past 28 years. Most of Brazilian new vehicles today are manufactured to use any mixture of either gasoline or ethanol.

Its production has absolutely nothing to do with the rainforest, it is several times more efficient than corn, beet, wheat, etc… ethanol, the production of both food and ethanol has increased regularly in Brazil, which means that there is not a substitution of area which was originally used to plant food and now is being used to produce ethanol.

Last, but not least, there are no subsidies to the sugar cane farmers, just the other way around: a nice fat tax is levied on the ethanol sold in gas pumps.

The beauty about its use is that there is no net production of CO2, therefore being an absolutely ecological process.

However, the use of corn, beet, wheat etc.. for the production of fuel ethanol is only a short distance of being morally, if not legally, criminal.

As far as ranting against the Bush admin, the question that first comes to my mind is: would the oil prices have anything to do with the two war fronts opened by… by… Who was it really the one who initiated the Iraqi war front? Who was the one who mentioned something about WMD? Who was the one who accumulated US$ 4.4 trillion dollars trade deficit in the last 7 years? Would this trade deficit have anything to do with the melting of the dollar? Does this melting of the dollar have anything to do with people trying to get rid of those green pieces of paper and turn their face value into something more solid like soya, ore, wheat, rice, euros,etc…?

Both the biofuels issue (except for the Brazilian part) and the Bush rant are more than appropriated IMHO.
Posted by: JFCarli | July 20th, 2008 at 1:51 am | Report this comment