Sustainability standards for bioenergy A means to reduce climate change risks?

1. Sustainability standards for bioenergy A means to reduce climate change risks? Prof. Dr. Renate Schubert, Julia Blasch Institute for Environmental Decisions (IED)

2. Agenda • Risks of unregulated bioenergy use • Sustainability standards • Market failure in the bioenergy market • Overcoming information asymmetries • Predictions on consumers’ WTP • Addressing public externalities • Conclusions and recommendations

3. 1. Risks of unregulated bioenergy use • Bioenergy accounts for ~10% of global primary energy supply • More than 85% thereof is traditional bioenergy use in the developing world • Production and use of modern bioenergy,esp. of biofuels, usually depends on government support Exception: Brazilian ethanolBiofuel subsidies in Europe, US and CA: ~ 11 Bio. US-$ in 2006 • Often cited motivations for support policies: (1) climate change mitigation (2) energy autonomy (3) rural development

4. 1. Risks of unregulated bioenergy use • Unregulated supportbears risks for • Climate • Biodiversity • Food security • Soil and water resources • Social development • Two origins of risks: (1) unsustainable behavior of market actors AND (2) unsustainable government support policies  Can regulation reduce these risks?

5. 2. Sustainability standards • Possible regulation: sustainability standards for bioenergy production • Sustainability standards have to refer to: • Required life-cycle-GHG emission reduction • Minimum land use changes (direct and indirect LUC) • No conversion of natural ecosystems • Conservation of water and soil quality • Controlled use of GMO • Compliance with basic labor standards

6. 2. Sustainability standards • Certification schemes need to attest compliance with the standard • Product labels as visible signs to consumers • Open question: What type of scheme should be introduced? • Voluntary certification • Mandatory certification • Binding minimum standard

7. 2. Sustainability standards Examples for legislation and initiatives on sustainable bioenergy • National: Criteria for biofuels support in GB, DE, CH; Criteria for biofuels of Swedish energy company SEKAB • Supranational: Criteria for biofuels support in European RES Directive • International: Criteria of Roundtable on Sustainable Bioenergy (RSB) Sustainability Task Force of Global Bioenergy Partnership (GBEP)

8. 3. Market failure in the bioenergy market Open question: • Why don’t markets provide sustainable bioenergy by themselves? Answer: Potential sources of market failure are • Information asymmetries between producers and consumers • Public externalities of bioenergy production

9. 3. Market failure in the bioenergy market Information asymmetries • Consumers cannot observe production methods • They have incomplete information on the production processes • Production method is a “credence characteristic” of bioenergy • Producers know modes of production, i.e. information asymmetry (Akerlof,1970) • Results: No price premium for sustainable bioenergy Producers supply unsustainable bioenergy

10. 3. Market failure in the bioenergy market Public externalities • Positive externalities from sustainable bioenergy production • Positive effects on biodiversity, climate, soil/water, etc. • But: No remuneration for provision of these public goods • Negative externalities from unsustainable bioenergy production • Deforestation, soil degradation, loss of biodiversity, etc. • But: No private costs for damages caused • Result: too little sustainable, too much unsustainable b.e.

11. 3. Market failure in the bioenergy market • Simultaneous occurrence of information asymmetries and public externalities  consumers will not reveal their true willingness to pay for sustainable bioenergy  producers will not produce sustainable bioenergy Two sources of market failure  Two instruments to correct them

12. 4. Overcoming information asymmetries • General effect of standards/ certification/ labeling • Producers can credibly signal their modes of production • Consumers can distinguish products according to production methods used at low information costs • Result: Socially preferable market outcome • Producers can capture price premium for sustainable bioenergy • Consumers can adapt purchasing behavior to their preferences

13. 4. Overcoming information asymmetry • Open question: Will private actors introduce voluntary standards? • Producers aim at capturing price premium • Price premium will only emerge if consumers show necessary willingness to pay • Problem of insufficient WTP because of public externalities prevails  No, we will not observe voluntary standards; mandatory certification as solution! (= Instrument 1)

14. 5. Predictions on consumers’ WTP • Theoretically, willingness to pay depends on • Consumers’ preferences for “green” product characteristics • Existence of private benefits from “green” product characteristics (i.e. health, taste) • Share of “concerned” consumers in population • Consumers’ ability to pay the price premium • Generally, WTP studies for “green” products predict: • Share of “concerned” consumers: 30-50% of population • WTP for price premium: up to 5-10% of product price

15. 5. Predictions on consumers’ WTP • Market share of certified Sustainable Forest Management • In 2008 around 8.3% of global forest cover (~ 13.4% of managed forests) was certified by either FSC or PEFC • 80-90% of certified forests lie in Europe, North America, Russian Federation • Market share of certified “green electricity” • In 2006 share of certified electricity was +/- 5% in European countries with some exceptions (NL, SE) Limited market share for sustainable bioenergy

16. 6. Addressing public externalities How to design the mandatory certification: Taxation vs. binding minimum standard (BMS) Taxation • Perverse incentive of taxation  Less sustainable bioenergy than before intervention • High tax rate required due to high social costs of unsustainable bioenergy production (i.e. deforestation, use of GMO,child labor)  Unsustainable bioenergy will be noncompetitive  Producers will have to exit the market

17. 6. Addressing public externalities Taxation vs. binding minimum standard (BMS) Binding minimum standard (BMS) • BMS equals an “infinitely” high tax on unsustainable bioenergy production • Like a tax BMS will force producers of unsustainable bioenergy to exit the market • However: No perverse incentive like from taxation • And: BMS may exhibit higher political feasibility  BMS are dominant solution (=Instrument 2)

18. 7. Conclusions and recommendations Mandatory certification and a binding minimum standard… • eliminate the worst environmental and social effects of bioenergy production • pave the way for comprehensive requirements for sustainable land-use in the whole agriculture and forestry sector • must be embedded in a broader package of policy measures

19. 7. Conclusions and recommendations Recommendations for implementation • Step-wise approach: implementation at national, regional and then international level (to ensure compatibility with GATT/WTO law) • Criteria on international level: Recognized body such as Global Bioenergy Partnership (GBEP) or Roundtable on Sustainable Biofuels (RSB) should take the lead • Intermediate solution: bilateral agreements between important producer and consumer countries

20. 7. Conclusions and recommendations Next steps/Outlook • Short-run: Unconditional promotion of bioenergy should be brought to an end  instead: minimum standard + phase out subsidies for bioenergy of outstanding sustainability • Long-run: Integrated taxation strategy for fossil fuels and unsustainably produced renewable energy is needed  aim: change of relative prices in the energy market in favor of sustainable renewable energy products with proven potential to mitigate climate change

21. New Report: „Future Bioenergy and Sustainable Land Use“ Latest report by the German Advisory Council on Global Change (WBGU) For more information: www.wbgu.de