International Experience with Liquid Biofuels Workshop on Renewable Energy and Energy Efficiency Bangkok, 28 August 200

1. International Experience with Liquid BiofuelsWorkshop on Renewable Energy and Energy EfficiencyBangkok, 28 August 2006 Masami Kojima World Bank

2. Increasing global interest inliquid biofuels • Potential for reducing greenhouse gas emissions in transport (most difficult sector) • Energy security • Reduce reliance on imported oil • Alternative suppliers • Support to domestic farmers

3. Ethanol and biodiesel producers Ethanol • Brazil from sugarcane – sugar industry mostly unprotected • US from maize – maize large recipient of subsidies • China from mostly maize, some cassava and sugar cane • Spain, France, and Sweden from sugar beets, wheat and barley Biodiesel • Germany, France, and Italy from rapeseed oil – rapeseed production subsidized – and in the future also from soybean oil • US from soybean oil – soybeans subsidized • Malaysia and Indonesia from palm oil in the future • India from jatropha on a small scale • Brazil from soybeans and other crops in the future • Argentina from soybeans in the future

4. Liquid biofuel market to date • Used as transportation fuels • Heavily protected, mostly domestic, limited trade (10%) with Brazil accounting for half of trade • Type of support • Fuel tax and other fuel charge/fee reduction (universal) • Mandatory blending or consumption requirements • Price support and government purchasing policy • Producer subsidies • Large subsidies to feedstock growers in EU and USA – link to OECD agricultural policies • Import tariffs • Downstream subsidies (e.g., vehicles)

5. Economics of ethanol production from sugarcane *83% sugar and 17% molasses, and molasses priced at 30% of sugar

6. Fuel excise tax reduction for ethanol Country Tax reduction per liter Germany* €0.6545 (US$0.83) Sweden* SKr4.62 (US$0.63) Spain* €0.42 (US$0.53) France* €0.37 (US$0.47) Australia A$0.38143 (US$0.28) USA $0.135 federal, many states give additional tax incentives *EU countries have principle of not over-compensating

7. Fuel excise tax reduction for biodiesel Country Tax reduction per liter Germany* €0.4704 (US$0.61) Sweden* SKr3.12 (US$0.43) France* €0.33 (US$0.42) Spain* €0.29 (US$0.37) Australia A$0.38143 (US$0.28) USA $0.26 or 0.13 federal *EU countries have principle of not over-compensating

8. Import tariffs Ethanol classified as an agricultural commodity, biodiesel as industrial  much higher tariff rates on ethanol • India: 182% on undenatured ethanol, 30% on denatured ethanol • EU: €0.192 (US$0.24) per liter on undenatured ethanol, €0.102 ($0.13) per liter on denatured ethanol100 developing countries enjoy duty-free access, but Brazil is not among them • USA: 2.5% + $0.1427 per liter

9. Mandates • Brazil: 20–25% ethanol in gasoline, 2% biodiesel by 2008, 5% by 2013 • USA: 7.5 billion gallons (28 billion liters) of renewable fuels in gasoline by 2012 (total gasoline consumption in 2005 – 140 billion gallons)MN 10% ethanol since 1997, 20% by 2013HI 10% ethanol in 85% of gasoline sold • Germany: 2% next year • Argentina: 5% biofuels in gasoline and diesel by 2010 • Colombia: 10% ethanol in cities with >500,000 • India: 5% ethanol in 9 states and 4 UTs in Jan 2003, withdrawn in Oct 2004, re-started in Oct 2006 • Canada: Several provinces require 2.5%-10% ethanol in gasoline

10. Can biofuels provide a solution to high oil prices? • Biofuel production a small fraction of petroleum fuel production for the foreseeable future  biofuels will be price takers • Marginal demand and marginal supply set prices  1–2% global displacement might moderate oil price increases (but consider fuel economy penalties, and energy needed in feedstock production, biofuel manufacture, and additional transport to markets if any)

11. Close link between biofuels and agriculture • Feedstocks have alternative outlets • Sweetner market for sugar and molasses • Food and animal feed for maize, wheat, cassava, soybeans, palm oil • Most cropland can be used to produce different agricultural commodities, so biofuels can affect crops other than biofuel feedstocks • Link between sugar, maize, wheat, and soybean prices and production via sugar/soybeans in Brazil and maize/wheat/soybeans in the US

12. Linking agricultural crop and oil prices • “2005 was probably a turning point, as the world sugar market became linked inextricably to the world oil market.” – F.O. Licht • “Molasses and sugar have the highest correlations [with oil]. A comparison of the shares of the proportions of commodity production destined for biofuels suggests that there may be a threshold above which product prices become correlated with energy prices. At biofuel percentages above 10%, sugar, molasses and (since 2002) rapeseed oil seem to have their prices correlated with that of crude petroleum.” – LMC International  Impact on palm oil prices of Indonesia and Malaysia’s July 2006 announcement to commit 40% of palm oil production to biodiesel

13. History of Brazilian ethanol • E5 authorized in 1931, mandated in 1938 • Proálcool launched in 1975: price guarantees, price subsidies, public loans, and state-guaranteed private bank loans to processors and growers • Ethanol and gasoline prices liberalized in 1997-1999 • Sale of hydrous ethanol declined from 1989 to 2004 • Flex-fuel vehicles and high oil prices have boosted ethanol consumption • High sugar prices in 2006 led to ethanol being more expensive than gasoline • Continuing improvement in production efficiency, resulting in large cost reduction through the decades • By far the largest biofuel program and greatest potential for expansion in the world

14. Center-South of Brazil • Undisputed leader in sugarcane production • Entirely rain-fed ( Australia, India) • Plenty of land left( many other countries) • Mill/distillery complex (40/60 to 60/40) yields more favorable economics generally • Extensive R&D, more than 500 varieties of cane that are resistant to 40-odd diseases; typical distillery uses 15 varieties to match each micro-climate

15. Brazil ethanol in 2006 • World sugar prices surge to 25-year high in February 2006 • Potential shortage of ethanol as millers turn to more profitable sugar • Government suspends 20% import tariff on ethanol in February • Cane harvest brought forward to March to address ethanol shortage • Government lowers blend mandate from 25% to 20% in March • Hydrous ethanol price > E20 on equivalent basis • Attractiveness of sugar prices over ethanol continues on and off through July, creating tight supply

16. Experience with cassava in Brazil • No equivalent of bagasse for power generation • Large-scale farming of cassava failed because of pests and diseases • Manual harvesting labor-intensive and time-consuming • No commercial production of ethanol from cassava today

17. What would it take to blend 5% biofuels in gasoline and diesel worldwide by 2015? • Study by LMC International in 2006 • 4 scenarios for ethanol, 3 for biodiesel • Food demand, crop yields, and crop quality assumed to grow at the same rate as since 1991 • Biofuel content in gasoline and diesel same in 2015 as in 2005, or 5% in 2015

18. Additional land required for ethanol (million ha) Base 5%  Only cane in Brazil CS 7.6 17.5 10 Cane worldwide 22 38 16 50% cane/50% maize 178 207 29 All carbohydrates 448 498 50 (maize, wheat, cassava, barley,sugarcane, sugar beets) From “A Strategic Assessment of the Impact of Biofuel Demand for Agricultural Commodities,” LMC International (2006).

19. Additional land required for biodiesel (million ha) Base 5%  Only palm in Indonesia 9.4 19.9 10.5 Palm oil worldwide 20 32 11.3 Oilseeds worldwide 208 258 50 (rapeseed, soybean, palm, sunflower oil) From “A Strategic Assessment of the Impact of Biofuel Demand for Agricultural Commodities,” LMC International (2006).

20. Concluding remarks • A larger world biofuel market could moderate oil price increases, but significant substitution of oil is unlikely for the foreseeable future. • Assessing commercial viability of biofuels needs to take several factors into account: • Rapid expansion of biofuel market could adversely affect biofuel economics by • linking feedstock prices to oil prices • decreasing byproduct prices (e.g., glycerine). • Biofuel production is already beginning to affect price relationships among some products (rapeseed vs. sunflower, palm vs. soy bean oil). • No country has been able to establish a large biofuel market without substantial subsidies. Subsidies to biofuels should be weighed against other priority needs. • Amount of land needed for significant displacement of petroleum fuel with biofuel poses a challenge (environmental where there is land available, physical limitation where land and labor have better use).