October 31, 2007
Biofuels: a tale of special interests and subsidies
By Martin Wolf
Energy security and climate change are two of the most significant challenges confronting humanity. What we see, in response, is the familiar capture of policymaking by well-organised special interests. A superb example is the flood of subsidies for biofuels. These are farm programmes masquerading as answers to energy insecurity and climate change. Not surprisingly, they have the depressing characteristics of such programmes: high protection, open-ended support to producers, and indifference to economic rationality.
Already the support in members of the Organisation for Economic Co-operation and Development costs about $13bn to $15bn a year. But this sum generates much less than 3 per cent of the overall supply of liquid transport fuel. To bring the biofuel share to 30 per cent, as some propose, would cost at least $150bn a year and probably more, as marginal costs rose.
Someone needed to take a close look at the rationality of all these supports. An excellent report from the Global Subsidies Initiative of the International Institute for Sustainable Development does just that. It does not tell a pretty story.
The remainder of this column can be read here. Debate from our guest economists appears below.
Andrew Oswald: In an interesting article, Martin Wolf has drawn our attention to the extent of the subsidies to bio-fuels. There is, however, an important point that is not greatly mentioned in his article; it one that economists (and many others) routinely ignore. This is that bio-fuels are extraordinarily demanding in their spatial requirements. In other words, western society would need to give over huge amounts of land to the production of energy of this form.
Clean energy matters. We have to respond to the problem of global warming.
I have been involved (with engineers J. Oswald and H. Ashraf-Ball) in a calculation of the land requirements for various sorts of renewable-energy sources. The numbers are stark and not known to most economists.
A simple way to make the main point is as follows.
Assume that in the future all motor vehicles in Great Britain will have to be powered by hydrogen cells, and that those cells will need to be fuelled from a green energy source such as biofuel. Then the question is this: how much British land must we give over solely to the production of such green fuels? With reasonable engineering assumptions, and the assumption that sugar beet is used as the crop, the answer for biofuel is that, to keep British transport moving, 400,000 square kilometers of land would have to be given over to sugar-beet production. As Great Britain’s whole land mass is only 240,000 square kilometers, it can be seen that biofuels, if internally produced within our country, are not feasible alone as a solution. Britain would have to have the crops grown elsewhere, with an accompanying loss of energy security. This may be desirable but needs to be considered in the energy debate.
We have done this kind of calculation for other green energy sources, such as wind turbines and wave power. The other types are spatially more efficient but still tremendously demanding in their land requirements. It is likely that a mixture of such green fuels will be needed in the future.
The need for clean energy is going to force economists to think much harder about geography and space. In the last 100 years, economists have barely done so — partly because the harnessing of oil and coal requires little land area (courtesy, in a sense, of millions of years of fossilization of vegetable matter). Oil and coal come to us as highly condensed forms of energy. Green energy is quite different. They need huge land areas. Spatial issues are then central.
In my view, the western nations have not thought through the spatial implications of green energy.
Andrew Oswald
Posted by: Andrew Oswald | November 1st, 2007 at 12:34 pm | Report this commentMartin Wolf: Andrew has made a very important point. We do have to ask how much of this stuff the world could produce (while still feeding the population).
Brazil is both a large country and a highly competitive producer of bioethanol (based on sugarcane). According to Wikipedia, its production in 2000 was based on 45,000 km² of land (a mere 17,000 square miles), however, far less than the area Andrew gives above just for the UK’s consumption. I have no idea how much this could be increased and would welcome informed comments from someone who does.
Andrew’s bigger point is still more important: economists have not just to think about area; they have to think about “land” in its broadest sense - namely, the availability of resources.
Posted by: Martin Wolf | November 1st, 2007 at 3:29 pm | Report this commentClay Ogg (guest): Land use changes caused by biofuel demands admittedly constitutes a neglected topic (see Andrew Oswald, posted 1 Nov 2007). However, economists recently discovered that the high crop prices (mentioned by Martin Wolf) as well as the need for more cropland to meet biofuel demands (mentioned by Andrew Oswald) leads to land conversion for crop production in tropical countries.
In particular, the FAPRI 2007 World Agricultural Outlook Report explains that China historically bought rapeseed oil from Europe. Yet, as Europe, instead, consumes their vegetable oil as an automobile fuel, China now purchases palm oil from Indonesia, adding considerably to the demand for Indonesian palm oil.
A key point missed by both Wolf and Oswald concerns the this link between biofuel demand and the release of greenhouse gases in Indonesia, which is the third largest source of greenhouse gases in the world (behind China and the U.S.) Nearly half of the land being converted from rain forest to produce this palm oil for export to China occurs on peat bogs, which release immense quantities of greenhouse gases as they are drained. Tens of thousands of fires occur, which are very hard to put out.
This link between biofuel demand and the resulting deforestation in tropical countries, admittedly, is a very neglected topic. However, I found economic analyses which provide new arguments, beyond those raised by FT.com, about the costs of biofuel subsidies.
(I have a Ph.D from the Department of Agricultural and Applied Economics at the University of Minnesota. I presented a short review of this economic literature at a recent biofuels conference hosted by the Farm Foundation. My biofuels paper is available as a Staff Report on the National Center for Environmental Economics website.)
Posted by: Clay Ogg | November 5th, 2007 at 4:55 pm | Report this commentI thank Mr Ogg for his interesting comment. Indeed, everything is connected to everything else. High farm prices certainly encourage deforestation and the conversion of peat bogs to cultivation. Another black mark against bio-fuels!
Posted by: Martin Wolf | November 5th, 2007 at 9:02 pm | Report this comment