BIOFUELS, TRADE AND SUSTAINABLE DEVELOPMENT: Issues, Challenges and Strategy Components

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BIOFUELS, TRADE ANDSUSTAINABLE DEVELOPMENT
Issues, Challenges and Strategy Components

• HAMDOU RABY WANE
• Food Security and Sustainable Development
  Division
• UN ECONOMIC COMMISSION FOR AFRICA
• Workshop on Trade and Environment in Africa
• Lusaka, Zambia
• 27-29 May 2009

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OUTLINE

• Bioenergy in the Global Energy Context
• Global Market Overview and Industry Trends
• A Dynamic Policy Landscape
• Some Key Policy Challenges and Trade Issues
  relevant for Africa

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Bioenergy in the Global Energy Context/1

• Bioenergy is one of the most dynamic and rapidly
  growing sectors of the global energy economy.
  Accelerated growth in the production and use of
  bioenergy in the past few years is attracting
  interest from policy makers and investors around
  the globe
• Focus of much of the recent interest in modern
  biotechnologies is on liquid biofuels, in
  particular ethanol and biodiesel
• Dominant players the US and Brazil. But many
  other governments are actively considering the
  appropriate role for biofuels in their future
  energy portfolios

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Bioenergy in the Global Energy Context/2

• What are Liquid Biofuels?
• Biofuels produced from biomass for uses such as
  transport, heating, electricity and cooking
• First Generation
• Bioethanol - alcohol produced from starchy crops
  (sugarcane, maize, sugarbeet, cassava, wheat,
  barley, sweet sorghum...)
• Biodiesel - produced from oily crops and trees
  (rapeseed, oil palm, soy, coconut, jatropha) and
  animal fats, waste oil
• Second Generation not yet comercially available
• E.g cellulosic bioethanol/ biodiesel based on
  biomass gasification produced from forestry
  products, grass, organic waste

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Bioenergy in the Global Energy Context /3

• The gradual move away from oil has begun. Over
  the next 15 to 20 years we may see biofuels
  providing a full 25 percent of the worlds energy
  needs Alexander Muller, Assistant D-G for the
  Sustainable Development Department, FAO
• Between 2003 and 2007, global production of
  biofuels has doubled and was expected to double
  again in the four coming years. New pro-biofuels
  policies enacted in Latin America (Argentina,
  Colombia, Ecuador, Mexico), Canada,
• Asia (China, India, Indonesia, Malaysia, the
  Philip-pines, Thailand), and in Africa (Malawi,
  Mozambique,
• Senegal, South Africa, Zambia)

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Bioenergy in the Global Energy Context /4

• Bioenergy is an opportunity
• To add to the global supply of energy to meet the
  enormous growing demand
• To mitigate some of the price surge effects
  depletion of foreign exchange earnings and
  budgetary imbalances, increased volatility of oil
  prices and complicated economic planning, etc.
• For an environmentally friendly , carbon-neutral
  way for energy supply
• To provide income and employment to the people

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Bioenergy in the Global Energy Context /5

• For supply diversification for countries that are
  highly dependent on the world oil market for
  their modern energy, many of which are in the
  tropics with relatively low-cost biofuel crops,
  such as sugar cane and oil palm, already grown
• To substitute to traditional biomass fuels and
  improve peoples access to electricity
• Locally produced, bioenergy can provide energy
  for local agricultural, industrial and household
  needs at less than the costs of fossil fuels

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Bioenergy in the Global Energy Context /6

• Trade-offs and risks - Economic,
  environmental, and social impacts will depend
  largely on local conditions and on policy
  frameworks implemented to support bioenergy
  development
• At the national level, agricultural policy,
  including the availability of rural
  infrastructure, credit, and land tenure, will
  determine the scale and distribution of economic
  benefits
• At the international level, reducing agricultural
  subsidies in rich countries and allowing free
  trade in agricultural commodities will spur the
  development of first-generation liquid biofuels
  the fastest growing segment of the world
  agricultural market
• Trade reform efforts have powerful effects on/to
  be subject to sizable impacts from biofuels
  expansion

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Bioenergy in the Global Energy Context /7

• Trade-offs and risks ../2
• Rapid growth in 1st-generation liquid biofuels
  production ? raise in agricultural commodities
  prices negative economic and social effects,
  particularly on the poor. Imperative of more
  equitably shared ownership
• Thus, the economic, environmental, and social
  impacts of bioenergy development must be assessed
  carefully before deciding if and how rapidly to
  develop the industry and what technologies,
  policies and investment strategies to pursue
• Decision-makers need to address chronic
  structural problems in agriculture, forestry, and
  the economy so that the economic benefits to the
  poor outweigh the losses.
• Brazil, the EU and the US experiences ?
  governments regulations and tax incentives are
  essential to the development of modern bioenergy.
  It is a Policy-driven Market
• ./.

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Global Market Overview /1

• Production
• 2004-2008 biodiesel increased six-fold to 12
  billion liters per year and ethanol doubled to 67
  billion liters per year.
• In 2008, ethanol and biodiesel production both
  grew by 34 percent.
• 2005 2006 2007 2008
•  
• Ethanol 33 39 50
  67
• Biodiesel 3.9 6 9
  12

Countries with policy targets
66 73
States/provinces/ Countries with biofuels
mandates 38
53
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CDDCs mainly limited to traditional sugarcane
producers in the Caribbean and Africa
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Global Market Overview /2

• The U.S. has become the dominant ethanol
  (corn-based) producer (34 billion liters produced
  in 2008), although Brazil had started an
  ambitious program to increase production by 50
  by 2009 (sugar-based).
• Ethanol provided gt 40 percent of all (non-diesel)
  motor vehicle fuel in Brazil in 2005.
• Other countries producing fuel ethanol include
  Australia, Canada, China, Colombia, Costa Rica,
  Cuba, the Dominican Republic, France, Germany,
  India, Spain, Sweden,
• Thailand, Jamaica, Poland, Malawi, South
  Africa,, and Zambia

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Global Market Overview /3

• Biodiesel growth rates have been even more
  dramatic than ethanol, although absolute
  production is still much less than ethanol.
  Biodiesel production increased sixfold from 2
  billion liters in 2004 to at least 12 billion
  liters in 2008.
• The EU is responsible for about two-thirds of
  world biodiesel production. Production has
  increased at 20-100 annual rates in recent
  years, particularly in Germany (1/2 of the
  worlds total in 2008), France, Italy, Spain,
  Poland,
• Outside of Europe, top biodiesel producers
  include the United States, Argentina, Brazil, and
  Thailand.

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Biofuel Trade Trends

• Exports 10 of global production mainly
  bioethanol
• Bioethanol
• Exports Brazil - 50 of exports, but also from
  Guatemala and other Caribbean countries, Peru,
  Pakistan, Zimbabwe, Swaziland
• Imports US - 31 imports from Brazil, China
  and the Caribbean. EU mainly intra-EU plus
  imports from Brazil, Guatemala, Ukraine. Other
  importers - India, China, Japan, Korea
• Biodiesel most trade is in feedstocks
• Palm oil (Malaysia/Indonesia) ? EU, China and
  other Asian countries.
• Soya (Brazil, Argentina , US) ? EU
• Coconut oil Philippines ? Japan

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Global Market Investment Flows /4

• Investment in new biofuels production capacity
  worldwide has been growing rapidly, and was
  expected to exceed 4 billion in 2007.
• The value of biofuels production plants under
  construction and announced construction plans
  through 2009 exceeded 4 billion in the United
  States, 4 billion in Brazil, and 2 billion in
  France
• Venture capital investment in the US 800
  million reported for biofuels alone spec. for
  developing and commercializing technologies for
  converting cellulose to ethanol

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Global Market Industry Trends /5

• Ethanol 2006-2008
• USA 130 operating ethanol plants production
  capacity of 26 billion liters/year by 2007, a 60
  percent increase over 2005. During 2008, 31 new
  ethanol refineries came online in the United
  States, bringing total production capacity to 40
  billion liters per year, with additional capacity
  of 8 billion liters per year under construction.
• There were also about 1,900 E85 ethanol refueling
  stations in the United States, mostly in the
  Midwest.
• Brazil continued its ethanol expansion plans,
  begun in 2005, to more than doubling production
  by adding 22 billion liters/year of new sugar
  plantations and ethanol production capacity by
  2012. Total investment required in Brazil during
  20062012 gt 15 billion.

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Global Market Industry Trends /6

• Ethanol 2006-2008 (contd)
• In Brazil, over 400 ethanol mills and 60
  biodiesel mills were operating by the end of
  2008. About 15 percent of Brazils ethanol
  production was exported in 2008. Most of the
  sugarcane plantation and ethanol plant expansion
  being carried out with national public financing
  and a growing share from foreign investors.
• In Europe, additional ethanol production capacity
  of over 3 billion liters per year was under
  construction in 2008.
• Spain 16 biofuels production facilities
  operating by the end of 2006, although most
  production was exported

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Global Market Industry Trends /7

• Biodiesel 2006-2008
• Many new biodiesel capacity throughout Europe
  putting total European biodiesel production
  capacity increased to almost 7 billion
  liters/year at the end of 2006, from 4.5 billion
  liters/year in 2005
• Argentina 8 firms with 0.7 billion liters
  production capacity in 2007 shipping almost 400
  million liters abroad. Added 10 new commercial
  plants in 2008, all producing for export. Another
  16 plants were expected during 2009 to bring
  capacity to 1.8 billion liters per year.
• In Europe, more than 200 biodiesel production
  facilities were operating in 2008

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Global Market Industry Trends /8

• Biodiesel 2006-2008 (contd)
• Brazil surge of investment in 2007 to cope with
  a B2 (2) blending requirement starting in 2008.
• South Africa 1st first commercial biodiesel
  plant began operation in 2007, using sunflower
  oil as feedstock.
• Many plans for new biodiesel plants and/or
  increased palm oil and jatropha plantations
  announced in several countries, including Brazil,
  Bulgaria, India, Indonesia, Malaysia, the
  Philippines, and Singapore,

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Global Market Industry Trends /9

• 2nd Generation Biofuels 2006-2008
• Kick-off of commercial investment beyond
  pilot-scale plants. Government support tied to
  private investment was an important factor. Large
  institutional investors got into the picture
  too, as illustrated by Goldman Sachs 30 million
  investment in Iogen Corporation of Canada.
• Canada created a CAD 500 million (US500
  million) fund to invest in private companies
  developing large-scale facilities for producing
  both ethanol and biodiesel from cellulose.
• Japan allocated 15 billion yen (130 million) in
  2006 for RD, pilot projects, and market support

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Global Market Industry Trends /10

• 2nd Generation Biofuels 2006-2008 (contd)
• Globally, additional capacity of at least 1.5
  billion liters per year was planned. Industry
  pioneers include Royal Nedalco (the Netherlands),
  Econcern (the Netherlands), Iogen (Canada),
  Diversa/Celunol (USA), Abengoa (Spain), and the
  Broin DuPont consortium (USA).
• USA announcement in early 2007 of an investment
  of up to 390 million in six cellulosic ethanol
  production plants over the coming four years,
  with total capacity of 500 million liters/year.
  Plants totaling 12 million liters per year were
  operational in 2008, and additional capacity of
  80 million liters per year was under
  construction.

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Global Market Industry Trends /11

• 2nd Generation Biofuels 2006-2008 (contd)
• In Canada, capacity of 6 million liters per year
  was operational.
• In Europe, a handful of plants were operational
  in Germany, Spain, and Sweden, and capacity of 10
  million liters per year was under construction.
• The largest 2nd-generation biofuels plant in the
  world (200 million) will come online in
  Delfzijl, the Netherlands, in 2009, to produce
  200 million liters per year of bio-methanol from
  wheat chaff and other wastes.

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Global Market Industry Trends /12

• 2nd Generation Biofuels 2006-2008 (contd)
• The worlds first commercial wood-to-ethanol
  plant began operation in Japan in 2007, with a
  capacity of 1.4 million liters/year.
• The first wood-to-ethanol plant in the United
  States was planned to be completed by 2008 with
  an initial output of 75 million liters/year. A
  200 million plant in Iowa, designed to digest
  corn fiber and stover (stalks and leaves), was
  set to begin construction in 2007 and be
  completed in 2009.

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A Dynamic Policy Landscape

• The development policies combine mandates for
  blending biofuels in vehicle fuels targets and
  plans for future levels of biofuels use fuel tax
  exemptions, tax benefits and production
  subsidies sustainability criteria
• Mandates for blending biofuels into vehicle
  fuels enacted, in 2007, in at least 36
  states/provinces and 17 countries at the national
  level. Most mandates require blending 1015
  percent ethanol with gasoline or blending 25
  percent biodiesel with diesel fuel. Most mandates
  are fairly recent, enacted over 2004-2005.
• Mandates can be found in at least 13 Indian
  states/territories, 9 Chinese provinces, 9 U.S.
  states, 3 Canadian provinces, 2 Australian
  states, and at least 9 developing countries at
  the national level.

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Policy Landscape /2

• Biofuels targets and plans defining future
  levels of biofuels use
• A new U.S. renewable fuels standard requires fuel
  distributors to increase the annual volume of
  biofuels blended to 36 billion gallons (136
  billion liters) by 2022, extending a previous
  standard of 7.5 billion gallons (28 billion
  liters) by 2012. The new standard implies that 20
  percent of gasoline for road transport would be
  biofuels by 2022.

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Policy Landscape/4

• The European Commission established a new EU-wide
  target of 10 percent of transport energy by 2020,
  extending the previous EU-wide target of 5.75
  percent by 2010 adopted in early 2007. Special
  provisions for biofuels sustainability were also
  adopted, including double crediting of second-
  generation (i.e., cellulosic) biofuels and
  excluding from credit any biofuels that do not
  save at least 35 percent of greenhouse gas
  emissions compared to the equivalent fossil fuel
  use.
• All EU countries now have a biofuels target, most
  for 5.75 percent of transport fuels by 2010. Some
  of the targets are in the range of 13 percent,
  and a few are just indicative. Portugal and
  France both adopted a target of 10 percent of
  transport energy, by 2010 and 2015 respectively.
  Belgium and Croatia adopted a target 5.75
  percent by 2010.

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Policy Landscape /3

• Biofuels targets and plans defining future
  levels of biofuels use
• The United Kingdom has a similar renewable fuels
  obligation, targeting 5 percent by 2010.
• Japans new strategy for long-term ethanol
  production targets 6 billion liters/year by 2030,
  representing 5 percent of transport energy.
• In 2007, China finalized targets for the
  equivalent of 13 billion liters of ethanol and
  2.3 billion liters of biodiesel per year by 2020.
  
• South Africas new biofuels strategy targets 4.5
  percent biofuels.

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Policy Landscape/5

• Many jurisdictions are also starting to mandate
  biofuels use in government vehicles, including
  several U.S. states.
• Compared to the frenzy of the years 2006/2007,
  the year 2008 was relatively quiet for biofuels
  policy (with the exception of the sustainability
  and other provisions adopted in the EU as part of
  its transportation energy target). In most of the
  cases, adjustments were made to the tools.
• For example, Germany lowered the mandatory
  biofuels blend rate for all transport fuels from
  6.25 percent to 5.25 percent for 2009. The rate
  will again increase to 6.25 percent for 201014.
• Several blending mandates were enacted or
  modified in 2008, including in Brazil, India,
  Jamaica, Korea, and Thailand.

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Policy Landscape /6

• India new target of 20 percent biofuels blending
  in both gasoline and diesel over 10 years, along
  with tax incentives for growers of biofuels
  crops. The initial mandate was for E5 blending in
  2008 but ethanol supply issues may have delayed
  that mandate.
• Countries with new biofuels targets identified in
  2008 include Australia (350 million liters by
  2010), Indonesia (3 percent by 2015 and 5 percent
  by 2015), Japan (500 million liters by 2012),
  Madagascar (5 percent by 2020), and Vietnam (300
  million liters by 2020).

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Policy Landscape /7

• Brazil has been the world leader in mandated
  blending of biofuels for 30 years under its
  ProAlcool program
• The blending shares are adjusted occasionally,
  but have remained in the range of 2025 percent.
• All gas stations are required to sell both
  gasohol (E25) and pure ethanol (E100).
• The blending mandate has also been accompanied by
  a host of supporting policies, including retail
  distribution requirements, production subsidies,
  and tax preferences for vehicles (both
  flex-fuel vehicles and those that run on pure
  ethanol).

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Policy Landscape /8

• Fuel tax exemptions, tax benefits and production
  subsidies
• The largest production subsidies exist in the
  United States
• totalled US5 billion in 2006, about ½ of this
  in the form of
• fuel tax credits and reductions
• the federal government provides a 51 cents/gallon
  
• (14 cents/liter) tax credit for ethanol
  blending through 2010,
• and a 43 cents/gallon (12 cents/liter) tax
  credit for biodiesel
• through 2008
• the subsidy amounted to more than 40 percent of
  the market
• price
• A number of U.S. states also offer production
  incentives and
• sales tax reductions or exemptions.

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Policy Landscape /9

• Fuel tax exemptions, tax benefits and production
  subsidies
• Brazil also provides large tax reductions. In
  June 2005, the tax difference between pure
  ethanol and the gasoline/ethanol blend in the
  state of Sao Paolo amounted to US0.30 per litre
  of ethanol
• Biofuels tax exemptions exist in at least 10 EU
  countries. Other countries with tax incentives
  for production include Canada, Argentina,
  Bolivia, Colombia, Paraguay South Africa
• These subsidies are much larger than the
  benefits of potentially
• Lower GHG emissions that arise from switching to
  liquid biofuels a CO2-equivlent price range of
  US 8 to US20 per tonne will generally provide
  0.01-0.04 per litre of biofuel (upper end of
  the range for biodiesel).

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Policy Challenges

• The diversity of potential liquid biofuel
  feedstock is both an advantage and a disadvantage
  
• It enhances the security of supply and I
  certifincreases the resilience and ecological
  benefits of biomass production systems compared
  with monocultures
• On the other hand, a range of potential
  feedstock with differing physical and chemical
  characteristics creates challenges for handling
  and processing. It can result in differing
  characteristics of the final biofuel prooduct ?
  Need for internationally agreed-upon fuel
  specifications/labelling systems
• Work to be done to determine which crops and
  crop species are more suitable for different
  liquid biofuel applications, soil types, farming
  systems, and cultivation contexts.

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Policy Challenges

• Key factors to be considered when selecting
  feedstock include economic viability,
  suitability for different biofuel applications,
  yield per hectare, input requirements, yield
  increase potential,crop versatility, drought and
  pest resistance potential, competing uses, price
  volatility, and opportunity costs
• Some feedstock is better suited for large-scale
  production while others are more appropriate for
  small scale applications
• For instance, the inedible oilseed Jatropha must
  be harvested by hand. Thus, it is a labour-
  intensive crop, suitable for areas with
  underemployment problems

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Trade Issues

• Subsidies very high e.g in the US and EU
  concerns about impacts on developing countries
  competitiveness
• Standards
• Technical and Sustainability Standards different
  initiatives under development UK, Holland, EC,
  Biofuels Round Table (RSB) - proliferation
• Important for effective market development but
  imply extra burden (economic and institutional
  capacities)
• At the WTO no unique forum to address trade
  liberalisation
• Bioethanol and feedstocks agricultural goods
• Biodiesel - industrial goods
• or are biofuels environmental goods?
• Trade opportunties not only North-South. Need to
  explore South-South/ regional trade, capitalising
  on proximity to large Southern/regional markets

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Trade Issues/2

• Trade in biofuels is built on much more than good
  climate, cheap land and labour. Trade strongly
  affected by
• Tariffs
• Higher on bioethanol
• Trade agreements
• EU Cotonou EPA (101 developing countries)
• US Caribbean Basin Initiative/CAFTA NAFTA,
  Andean Countries

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Trade Issues/3

• The US and Europe have coupled subsidies with
  import tariffs so that these subsidies will
  benefit domestic farmers rather rather than those
  in other countries. This has led to the irony of
  virtually unimpeded trade in oil, while trade in
  biofuels is greatly restricted.
• Opening international markets to biofuels would
  accelerate investment and ensure that production
  occurs in locations where the production costs
  are lowest.
• If trade barriers are removed, some agricultural
  commodity prices would rise. But this effect
  would be moderated as producers responded to new
  incentives. Poor countries in Africa are among
  those likely to benefit. However, the resulting
  accelerated investment and production should be
  assessed closely at the national and
  international levels to avoid potentially
  irreversible sustainability impacts

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• Promoting Biofuels Trade require
• long-term policy support

• Policy coherence with existing national/
  international policies and goals, and
  coordination across ministries (e.g Agriculture,
  Environment, Energy,Trade)
• Enabling environment for biofuels development to
  provide the fundamentals
• Developing Regionally Integrated Value Chains
• Realise synergies from different policy goals
• Keep tracking developments in international oil,
  agricultural markets and 2nd generation of
  biofuels