1 Drivers for biofuel Energy security – Diversification Self-sufficiency Climate change Agriculture and rural development Support for domestic farmers Increasing demand, higher income for farmers and agribusiness, job creation, more opportunities for trade

2 First-generation liquid biofuels Limitations in economics and production potential widely acknowledged More than half of production cost due to feedstock Domestic production and consumption of biofuels economic under few favorable circumstances (Brazil in 2005 and ), but uneconomic most of the time Hence heavily protected, mostly domestic, limited trade Large price distortions and forward and backward linkages with other price-distorted markets.

3 Impact of higher biofuel demand Correlation with gasoline and diesel prices Threshold diversion level for strong correlation to emerge? Second generation biofuels may present different challenges for developing countries. Food vs. fuel conflict may persist. Potentially adverse impact on climate change where land use changes occur Large subsidies and mandates are driving these consequences

4 Economics of ethanol production from sugar cane *83% sugar and 17% molasses, and molasses priced at 25% of sugar; 20% fuel economy penalty for ethanol

5 Economics of ethanol production from sugar cane *83% sugar and 17% molasses, and molasses priced at 25% of sugar; 20% fuel economy penalty for ethanol

6 Vegetable oil vs. diesel prices *Price data from USDA FAS, World Bank and Energy Intelligence

7 Vegetable oil vs. diesel prices *Price data from USDA FAS, World Bank and Energy Intelligence

8 Price dynamics Feedstock FoodBiofuel Oil price Weather

9 Support policies Mandates Create inelastic demand, introducing potential for large price shocks without an escape clause Are politically difficult to reverse Subsidies Either taxpayers pay, or consumers pay if mandated Concern that some developing countries are following the U.S. and EU subsidy policies

10 Additional thoughts Reasons for supporting biofuels are attractive: rural development, reducing global warming, enhancing energy security. But a biofuel program may not be a good vehicle for addressing them; separate policy solutions may be more cost-effective. Support policies in OECD countries raise many questions, but are being copied in developing countries. Removing border restrictions in OECD for biofuels would enhance competition and bring down prices in currently protected markets but could prolong current market distortions could force governments to ask openly about the objectives and costs of biofuel support policies.