Regulatory Impact Analysis Biofuels as an example By Senior Adviser Johan Nitter-Hauge Ministry of Finance, Norway

Finansdepartementet Rationale for intervention Markets don´t always secure efficiency Eg. externalities, information failure, public goods. Objectives defined to reflect outcomes (eg. crime reduction) rather than just outputs or inputs (eg. prosecutions, prison staff). Cost-benefit analysis – some examples: Transportation sector Climate Change Programme Supporting people programmes

Finansdepartementet Climate Change Programme - biofuels According to the Kyoto protocol of 1997, Norway has commitments in relation to its Co2-emissions. The transportation sector is responsible for about one quarter of energy-related greenhouse gas emissions. Replacement of conventional hydrocarbon based fuels with fuels made from renewable bio-sources, e.g. rape seed or palm oil could be one way of reducing the emissions. Appraisal looked at a scenario where 2 % of the fuels consists of biofuels. The main biofuels today are ethanol and biodiesel. In Norway they are imported.

Finansdepartementet Biofuels - benefits Biofuels have a lower carbon footprint than conventional fuels. 100 % carbon savings assumed. 2 % biofuels content results in a reduction in total Co2 emitted in Norway of tons per year. The social cost of Co2 is set at 25 euros per ton. Thus, the value of the annual benefit in Norway is 4 mill. euros.

Finansdepartementet Biofuels - costs Biofuels have a lower energy content than conventional fuels. Resource costs of biofuels passed on to consumers. Other (non-monetary) costs: Crops that otherwise would become food might instead become fuel. Biofuel programmes could raise food prices. Higher crop prices could harm the poorest people.

Finansdepartementet Costs of a 2 % biofuel scenario Bioethanol Price at the pump (eurocents per litre) Additional cost (eurocents per litre) Total additional cost (mill. euros) Total volume sold 2004 Conventional fuel 42, mill. litres Bioethanol 2 % (E02) 42,380,063531,398 E02 energy- corrected 42,690,388,13 Biodiesel Conventional diesel 49, mill. litres Biodiesel 2 % (E02) 49,680,386,86 E02 energy- corrected 49,810,5089,02

Finansdepartementet Benefits and costs in summary Reduced Co2 emitted: 4 mill. euros Total additional cost (8,13+9,02)mill. euros: 17,15 mill. euros Net benefit: - 13,15 mill. euros Cost-efficiency: Reduced Co2-emissions: tons Cost per ton of Co2 abated: 107 euros Social cost of Co2 per ton: 25 euros

Finansdepartementet Sensitivity analysis A cost decrease of 30 % means that the cost per ton of Co2 abated could be 64 euros. According to the Stern report, the social cost of Co2 should be about 60 euros. An oil-price of 80 dollars per barrel makes biofuels competetive with conventional fuels.

Finansdepartementet Conclusion - biofuels The measure does not pass a cost-benefit test with today´s prices of Co2. However, a measure should be included in a climate change programme even though it does not pass a cost - benefit test if it is anticipated that it will help to secure access to less costly carbon savings in the future. Thus, the greatest potential for reducing costs lies in the development of next generation technologies to utilize the cellulosic content of the plants.

Finansdepartementet Biofuels – what did the government decide? There will be a biofuel obligation where the fuel sellers have to ensure that at least 2 % of the fuel they sell for road transport is biofuel by By 2009 at least 5 % of the fuel sold for road transport shall be biofuel. New regulations circulated for comments. In addition: Tax reliefs for biofuels and so-called flexi-fuel cars are already in place.

Finansdepartementet The Preservation of Climate