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Biofuels and the food price crisis: A survey of the issues
August 2008
Kimberly Elliott
Centre for Global Development (CGD)

Acknowledgements: FANRPAN acknowledges the Centre for Global Development (CGD) website as the source of this report: www.cgdev.org


Abstract

While the precise contribution of biofuels to surging food prices is difficult to know, policies promoting production of the current generation of biofuels are not achieving their stated objectives of increased energy independence or reduced greenhouse gas emissions. Reaching the congressionally mandated goal of blending 15 billion gallons of renewable fuels in gasoline by 2015 would consume roughly 40 percent of the corn crop (based on recent production levels) while replacing just 7 percent of current gasoline consumption. Moreover, while it has long been known that the net energy and greenhouse gas emission benefits of corn-based ethanol are relatively small because its production is energy-intensive, recent scientific studies suggest that the current generation of biofuels, including biodiesel made from palm oil, soybeans, and rapeseed, as well as corn-based ethanol, actually add to greenhouse gas emissions relative to petroleum-based fuels when land use changes are taken into account. That is, greenhouse gases are released when forests are cut down or grasslands cleared to plant biofuels, or food is planted on new acreage to replace crops diverted to fuel elsewhere. In sum, the food crisis adds urgency to the need to change these policies but does not change the basic fact that there is little justification for the current set of policies.

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"The RFS [renewable fuel standard] remains an important tool in our ongoing efforts to reduce America’s greenhouse gas emissions and lessen our dependence on foreign oil, in aggressive yet practical ways."

Environmental Protection Agency Administrator Stephen L. Johnson announcing his decision to deny a waiver of the mandated minimum level of ethanol in gasoline, August 7, 20081

Just months before riots spurred by high food prices broke out in developing countries around the world, the US Congress passed, and President George W. Bush signed, legislation aimed at promoting energy independence, including via a sharply increased minimum level of “renewable fuels” that refiners must blend with gasoline. With current technologies, “renewable” means mainly corn- (in the United States) or sugar-based (Brazil) ethanol or oilseed- or palm oil-based biodiesel (in the European Union). At the same that the energy bill was being finalized, Congress was also debating farm legislation that included an extension of the $0.54 per gallon tariff on imported ethanol and modestly reduced the tax credit for refiners using ethanol, from $0.51 to $0.46 per gallon.

Eight months later, with season-average corn prices projected to be more than 50 percent higher than a year earlier, EPA Administrator Johnson made the announcement affirming the Bush administration’s support for biofuel subsidies. The European Union also has similar tax and regulatory policies promoting the use of biofuels. With food prices surging, however, these policies are under increasing scrutiny. Biofuel advocates usually cite one or more of the same rationales as Johnson—improving energy security by reducing dependence on foreign sources of oil, reducing greenhouse gas emissions, or boosting rural livelihoods.

Skepticism regarding the security and environmental benefits of the current generation of foodbased biofuels is not new. But the critiques have become sharper and louder since the acceleration of food price increases that threatens to push 100 million people back into hunger, malnutrition, and poverty. Moreover, while past research raised serious questions about the significance of potential climate change benefits from corn-based ethanol, new research that takes into account deforestation and other land use changes concludes that the current generation of food-based biofuels is more likely to contribute to than mitigate global warming. Climate change, in turn, is expected to threaten agricultural sustainability in tropical areas, especially sub-Saharan Africa, making food insecurity an even more serious problem in the future (Cline 2007).

This paper briefly surveys the array of factors behind recent food price spikes, but the focus is on the role that biofuels, especially corn-based ethanol, and policies promoting them, might be playing. 2 To summarize the conclusions:
  • Demand for ethanol is the major factor in the rise in corn prices (and an important one in increasing oilseed and palm oil prices).
  • The magnitude of any spillovers to other grains and food products is harder to pin down, but biofuels have had some role by diverting production from and consumption to alternative crops.
  • Regardless of its contribution to rising food prices, corn ethanol is not making a significant contribution to the energy security and environmental goals set for it and the policies promoting it are costly to taxpayers and the environment.
Even as some proponents concede the limitations, they nevertheless argue that government support for corn ethanol is necessary as a “bridge” to the next generation of potentially more efficient and environmentally effective biofuels, including those made from agricultural waste, grasses or jatropha (a tropical shrub) grown on marginal land not suitable for food crops, or algae. But development of viable alternatives is slowed rather than accelerated by diverting resources to corn ethanol and creating production and distribution infrastructure that may not be transferable or in the right place if the next generation is eventually developed. Moreover, sugar ethanol from Brazil, which has greater net energy and environmental benefits as long as it does not contribute to further deforestation in the Amazon region, is available now, but is discouraged by an import tax.

Finally, while the food price crisis is not the only, or perhaps even primary, reason to review biofuel policies, critics should also not overestimate the degree to which eliminating subsidies would alleviate the food crisis, at least as long as oil prices stay high. High gasoline prices boost the demand for alternatives and make ethanol a more economically competitive alternative. The tax credit and tariff on imported ethanol do support the US ethanol price and particularly now are helping to offset high corn prices that are squeezing producers’ profits margins. Thus, changing those policies might provide some relief in the short run. Unfortunately, the tax credit and tariff were extended in the recent farm bill and changes would require additional action by Congress. The Environmental Protection Agency has authority to waive all or part of the mandate for up to a year at any time, but declined to do so in response to a request from Texas Governor Rick Perry, who is concerned about the health of his state’s livestock industry. But a waiver would provide little more than symbolic relief in the short run, because it is not binding (production is likely to be above the mandated level this year, unless corn prices remain close to $7 per bushel or oil prices drop well below $120 per barrel).3 In the longer run, however, the mandate level props up production and could encourage the building of additional capacity.


Footnotes:

  1. http://yosemite.epa.gov/opa/admpress.nsf/6424ac1caa800aab85257359003f5337/871e4716874340fe8525749e005b 43be!OpenDocument
  2. Nora Lustig, a member of the Center’s Board of Directors, is writing a paper that explores in detail the broader causes and consequences of rapidly rising food prices, especially for the poor.
  3. Tyner and Taheripour (2008), cited in UN FAO (2008).

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