Tax Exemption for Biofuels in Germany: Is Bio-Ethanol Really an Option for Climate Policy? Jan Michael Henke, Gernot Klepper, Norbert Schmitz International Energy Workshop June 2003, Laxenburg, Austria

In 2002 the German parliament decided to exempt all biofuels from the gasoline tax The European Commission as well declared its intention to promote biofuels I. Introduction  Alleged positive effects on climate, agricultural and energy policy  We examine bio-ethanol as a substitute for normal fuels

II.Institutional and market conditions for the production of bio-ethanol Tax exemption, agricultural and trade policy issues III.Can bio-ethanol contribute to energy and climate policy goals? Evaluation based on energy balances, alternative land use greenhouse gas balances, CO 2 abatement costs IV.Conclusions Contents

1.Exemption from the gasoline tax Gasoline tax on normal fuels: 65.5 cent/liter Production costs of normal fuels: 20 cent/liter Production costs of bio-ethanol in Germany: 50 cent/liter II. Institutional and market conditions for the production of bio-ethanol in Germany  Price advantage for bio-ethanol: 35,5 cent/liter  Predicted tax loss: ca. 250 Mio. in 2005

Market organization for sugar Set-aside premium In Germany: Market organization for ethanol Reforms of the Common Agricultural Policy 2. Agricultural policy issues

3. Trade policy issues Tariffs: currently up to 19.2 EUR/hectoliter No tariffs for ACP and other developing countries April 2003: regulation for European ethanol market: import licenses, tariff-quotas, emergency measures Possibilities for accession countries

Two premises must be fulfilled: 1.An increased use of bio-ethanol must lead to energy-savings and a reduction in GHG emissions 2.Abatement costs must not be greater than for alternative strategies III. Can an increased use of bio-ethanol contribute to energy and climate policy goals? Analysis of available evidence for Germany

Net Energy Balance (NEB) Compares the fossil energy input during the production of bio-ethanol to the energy content of traditional fossil gasoline that is avoided due to the substitution by bio- ethanol (different calorific values are accounted for) The first premise is tested with energy and GHG balances: Net Greenhouse Gas Balance Compares the GHG emissions during the production of bio-ethanol to the emissions avoided due to the substitution of traditional fossil gasoline by bio-ethanol

Estimate entire energy input and GHG emissions during complete production chain: 1.Input/emissions during agricultural production Crucial assumptions: fertilizer input, energy needed, yields/hectare, by-products 2.Input/emissions during conversion Crucial assumptions: plant-size, technological standard, type of energy input, by-products Ratio of substitution between bio-ethanol and gasoline Computing energy and GHG balances for bio-ethanol

Figure 1: Net energy balance for the substitution of gasoline by bio-ethanol based on wheat meó 2002

Figure 2: Net energy balance for the substitution of gasoline by bio-ethanol based on sugar beets meó 2002

Results from the energy balances  Nevertheless energy savings are rather low  Other land use strategies allow for larger energy gains on a given amount of land Variation between different studies is bigger for sugar beets Bio-ethanol based on sugar beets is more favorable IEA predicts larger savings Simulated positive/negative scenario

Strategies of Agricultural Land Use For the production of:Bio-ethanolElectricityRME

Figure 3: Net GHG balance in the production of bio-ethanol based on wheat meó 2002

Figure 4: Net GHG balance in the production of bio-ethanol based on sugar beets meó 2002

Results from net GHG balances Bio-ethanol based on sugar beets is more favorable IEA predicts larger savings Simulated positive/negative scenario  Nevertheless net GHG savings are rather low

CO 2 -abatement costs of the bio- ethanol and alternative strategies GHG emissions always have the same environmental impact  Efficient climate policy requires reduction of emissions at sources with the lowest abatement costs Given the commitment in the Kyoto-Protocol, abatement costs in the EU vary around 30 €/ton CO 2  Benchmark for the evaluation of the bio-ethanol strategy

Figure 5: Relationship between process costs and CO 2 abatement for producing biofuels wheatsugar beets

Results for abatement costs Simulated best case scenario: at least 200 €/ton of CO 2 Abatement costs for bio-ethanol strategy are much higher than for alternative strategies Possibilities to lower costs: use by-products, optimize production processes, large-scale production

IV. Conclusions However: There are better options of agricultural land use Expensive strategy with little effects  No economically viable option for climate policy  Justification with energy and agricultural policy objectives questionable Analysis of the promotion of bio-ethanol in Germany from a climate policy point of view: Net energy balances have improved Net greenhouse gas balances have improved

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