1. EU Biofuel Policy and Development Christopher Stevens Presentation to International Consulting Economists’ Association, 12 February 2008

2. EU Biofuel Policy Development: ICEA, 12 February 2008 2 Clearing the decks (1)  How are biofuels different from other:  exports;  import substitution goods?  If demand increases sharply:  resources will move out of other areas: either directly – maize to jatropha; or indirectly – ‘Dutch disease’.  Possible key issues:  demand is policy driven, so volatile;  goods not necessarily sourced from lowest-’cost’ supplier;  effect of resource competition very visible.

3. EU Biofuel Policy Development: ICEA, 12 February 2008 3 Clearing the decks (2)  Which countries do/will produce more:  for import substitution: depends on relative oil/biofuel costs;  for export: depends on biofuel/alternative export price; market access.  Some examples:  Brazil: yes for import substitution / ? for export;  Mauritius: ? for import substitution / no for export;  Mozambique: no for exports.

4. EU Biofuel Policy Development: ICEA, 12 February 2008 4 EU biofuel policy objectives 1.Reduce greenhouse gas emissions. 2.Boost the decarbonisation of transport fuels. 3.Diversify fuel supply sources and develop long-term replacement fuels. 4.Offer new opportunities to diversify income and employment in rural areas. In reality, (3) and (4) take precedence.

5. EU Biofuel Policy Development: ICEA, 12 February 2008 5 EU supports for biofuels  EU subsidy to biofuels occurs via:  direct subsidy for energy crops;  some direct subsidies ‘at the petrol pump’;  indirect support through protection from imports.  Nos (1) and (3) are directed just to EU suppliers.

6. EU Biofuel Policy Development: ICEA, 12 February 2008 6 EU trade policy  No CN codes for ‘biofuels’.  But we can see:  countries with low/zero tariffs unlikely to supply (because they have free access for sugar);  countries able to supply (e.g. Brazil, Pakistan) face high tariffs;  and national standards vary.

7. EU Biofuel Policy Development: ICEA, 12 February 2008 7 EU tariffs on major biofuels and foodstocks CodeDescriptionTariff payable under selected import regimes MFNGSPGSP+Cotonou Ethanol 22071000Undenatured ethyl alcohol of actual alcoholic strength of >= 80% 19.2€/hln/a00 22072000Denatured ethyl alcohol and other spirits of any strength 10.2€/hln/a00 Bioethanol constituents 10030090Barley (excluding seed) See note (a)n/a Within the limit of the quota [15,000 tons] reduction 50%. 10059000Maize (excluding seed)Reduction 1.81€/ton 12129920Sugar cane4.6€/100 kg netn/a 3.8€/100 kg net 17031000Cane molasses resulting from the extraction or refining of sugar See note (b)n/a Within the limit of the quota [600,000 tons] reduction 100%. Biodiesel constituents 1507Soya-bean oil 3.2-9.60-6.100 1508Groundnut oil 0-9.60-6.100 1511Palm oil 0-12.80-4.400 1513Coconut copra, palm kernel or babassu oil 2.5-12.80-8.900 1514Rape, colza or mustard oil 3.2-9.60-6.100

8. EU Biofuel Policy Development: ICEA, 12 February 2008 8 The oil-food price link: two stylised scenarios  Scenario 1:  oil price rises leading to diversion of resources from food to biofuel production;  food prices rise;  all oil/food importing countries face adverse t-t shift;  biofuel producing countries have partly offsetting gain.  Scenario 2:  oil price rises leading to new production of biofuels;  food prices not affected;  all oil importing countries face adverse t-t shift;  biofuel producing countries have partly offsetting gain.

9. EU Biofuel Policy Development: ICEA, 12 February 2008 9 The link with EU policy  EU policy:  makes scenario 1 more likely;  makes offsetting biofuel export gains less likely.  EU producer subsidies increase likelihood of biofuel- food resource diversion:  because conversion efficiency is low;  because likelihood of new production is low.  EU trade policy limits scope to export biofuels.

10. EU Biofuel Policy Development: ICEA, 12 February 2008 10 A modest proposal  Whether or not new EU targets will cause development problems is an empirical question but:  more feasible with liberal trade than without;  more feasible if biofuel production encouraged in areas where most likely to be additonal.  Use GSP to give Brazil, Pakistan … duty-free access for denatured ethanol.  Merits:  by limiting to ethanol ACP/LDC sugar exports continue;  by using GSP environmental conditionality a possibility.

11. EU Biofuel Policy and Development Christopher Stevens Presentation to International Consulting Economists’ Association, 12 February 2008