FAO wants urgent review of biofuel policies and subsidies

Please find below a report on the FAO flagship publication, “The State of Food and Agriculture 2008”, which focuses on “Biofuels: Prospects, Risks and Opportunities”.

It was published in the South-North Development Monitor (SUNS) #6563 on Wednesday, 8 October 2008, and is reproduced here with permission.

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United Nations: FAO wants urgent review of biofuel policies and subsidies

Geneva, 7 Oct (Kanaga Raja) -- Biofuel policies and subsidies should be urgently reviewed in order to preserve the goal of world food security, protect poor farmers, promote broad-based rural development and ensure environmental sustainability, the UN Food and Agriculture Organization (FAO) said Tuesday.

This key message was conveyed by the Rome-based UN agency in the latest edition of its annual flagship publication, "The State of Food and Agriculture".

"Biofuels present both opportunities and risks. The outcome would depend on the specific context of the country and the policies adopted," said FAO Director-General Jacques Diouf. "Current policies tend to favour producers in some developed countries over producers in most developing countries. The challenge is to reduce or manage the risks while sharing the opportunities more widely."

According to the FAO, biofuel production based on agricultural commodities increased more than threefold from 2000 to 2007, and now covers nearly two percent of the world's consumption of transport fuels. The growth is expected to continue, but the contribution of liquid biofuels (mostly ethanol and biodiesel) to transport energy, and even more so, to global energy use will remain limited.

Despite the limited importance of liquid biofuels in terms of global energy supply, the demand for agricultural feedstocks (sugar, maize, oilseeds) for liquid biofuels will continue to grow over the next decade and perhaps beyond, putting upward pressure on food prices.

If developing countries can reap the benefits of biofuel production, and if those benefits reach the poor, higher demand for biofuels could contribute to rural development, said the UN agency.

"Opportunities for developing countries to take advantage of biofuel demand would be greatly advanced by the removal of the agricultural and biofuel subsidies and trade barriers that create an artificial market and currently benefit producers in OECD countries at the expense of producers in developing countries," said Diouf.

According to the FAO report, other policy measures driving the rush to liquid biofuels, such as mandated blending of biofuels with fossil fuels, as well as tax incentives, have created an artificially rapid growth in biofuel production. These measures have high economic, social and environmental costs and should also be reviewed.

Growing demand for biofuels and the resulting higher agricultural commodity prices offer important opportunities for some developing countries. Agriculture could become the growth engine for hunger reduction and poverty alleviation.

Production of biofuel feedstocks may create income and employment, if particularly poor small farmers receive support to expand their production and gain access to markets. Promoting smallholder participation in crop production, including for biofuel, requires investment in infrastructure, research, rural finance, market information and institutions and legal systems.

Among the risks, however, food security concerns loom large, said FAO. High agricultural commodity prices are already having a negative impact on developing countries that are highly dependent on imports to meet their food requirements. Particularly at risk are poor urban consumers and poor net food buyers in rural areas. Many of the world's poor spend more than half of their incomes on food.

"Decisions about biofuels should take into consideration the food security situation but also the availability of land and water," the FAO Director-General said, stressing that "All efforts should aim at preserving the utmost goal of freeing humanity from the scourge of hunger."

When looking at the environmental dimension, the balance is not always positive. "Expanded use and production of biofuels will not necessarily contribute as much to reducing greenhouse gas emissions as was previously assumed," the report found. While some biofuel feedstocks, such as sugar, can generate significantly lower greenhouse gas emissions, this is not the case for many other feedstocks.

The largest impact of biofuels on greenhouse gas emissions is determined by land-use change. "Changes in land use -- for example, deforestation to meet growing demand for agricultural products -- are a great threat to land quality, biodiversity, and greenhouse gas emissions," Diouf observed.

The report stated that sustainability criteria based on internationally agreed standards could help to improve the environmental footprint of biofuels, but they should not create new trade barriers for developing countries. The next generation of biofuels currently under development but not yet commercially available, using feedstocks such as wood, tall grasses, forestry and crop residues, could improve the fossil energy and greenhouse gas balance of biofuels, said FAO.

"There seems to be a case for directing expenditures on biofuels more towards research and development, especially on second-generation technologies, which, if well designed and implemented, could hold more promise in terms of reductions in greenhouse gas emissions with less pressure on the natural resource base," Diouf said.

According to the FAO report, two years ago, there were high expectations surrounding liquid biofuels as a resource that could potentially mitigate global climate change, contribute to energy security and support agricultural producers around the world. Many governments cited these goals as justification for implementing policies promoting the production and use of liquid biofuels based on agricultural commodities.

Since then, there has been a marked change in perceptions of biofuels. Recent analysis has raised serious questions regarding the full environmental impacts of producing biofuels from an already stressed agricultural resource base.

The costs of policies aimed at promoting liquid biofuels -- and their possible unintended consequences -- are beginning to attract scrutiny, said the report. Food prices have risen rapidly, sparking protests in many countries and giving rise to major concerns over the food security of the world's most vulnerable people.

The recent emergence of liquid biofuels based on agricultural crops as transport fuels has reasserted the linkages between energy and agricultural output markets. Liquid biofuels have the potential to exert a significant effect on agricultural markets, but they are, and are likely to remain, a relatively small part of the overall energy market.

According to the report, the world's total primary energy demand amounts to about 11,400 million tonnes of oil equivalent (Mtoe) per year; biomass, including agricultural and forest products and organic wastes and residues, accounts for 10% of this total. Renewable energy sources represent around 13% of total primary energy supply, with biomass dominating the renewable sector.

Liquid biofuels play a much more limited role in global energy supply and account for only 1.9% of total bioenergy. Their significance lies mainly in the transport sector, but even here they supplied only 0.9% of total transport fuel consumption in 2005, up from 0.4% in 1990. In recent years, however, liquid biofuels have grown rapidly in terms of volume and of share of global demand for transport energy.

Nevertheless, said the report, the contribution of liquid biofuels to transport energy and, even more so, to global energy use, will remain limited. Global primary energy demand is, and will remain, overwhelmingly dominated by fossil fuels -- with coal, oil and gas currently accounting for 81% of the total. This share is forecast at 82% in 2030, with coal increasing its share at the expense of oil.

Notwithstanding the limited importance of liquid biofuels in terms of global energy supply, also compared with that of solid biofuels, their direct and significant effects on global agricultural markets, on the environment and on food security are already generating debate and controversy, said the report.

This new source of demand for agricultural commodities creates opportunities, but also risks, for the food and agriculture sectors. Indeed, the demand for biofuels could reverse the declining trend in real commodity prices that has depressed agricultural growth in much of the developing world over recent decades.

A stronger link between agriculture and the demand for energy could result in higher agricultural prices, output and gross domestic product (GDP). At the same time, there is a risk that higher food prices could threaten the food security of the world's poorest people, many of whom spend more than half of their household incomes on food.

The report noted that most recent growth in biofuel production has occurred in the Organisation for Economic Cooperation and Development (OECD) countries, predominantly the United States and the European Union (EU) countries. An exception is Brazil, which has pioneered the development of an economically competitive national biofuel sector based largely on sugar cane.

The main drivers behind OECD country policies have been the objectives of energy security and climate-change mitigation through reduced greenhouse gas emissions combined with a desire to support agriculture and promote rural development. However, said the report, the role of biofuels in addressing these concerns, including the appropriate policies to be applied, is now coming under closer scrutiny.

It noted for instance that the policies being pursued are costly. Indeed, estimates of prevailing biofuel subsidies are high considering the still relatively limited role of biofuels in world energy supply. Estimates by the Global Subsidies Initiative for the EU, the United States and three other OECD countries suggest a total level of support to biodiesel and ethanol in 2006 of around $11-12 billion.

For decades, agricultural subsidies and protectionism in numerous OECD countries have led to major misallocation of resources at the international level, with heavy costs both to consumers in the OECD countries and to developing countries. Such misallocation risks being perpetuated and exacerbated by current biofuel policies in OECD countries.

The report said that increasing demand for biofuels may offer opportunities for farmers and rural communities in developing countries and thus contribute to rural development. However, their capacity to take advantage of these opportunities depends on the existence of an enabling environment.

At the global level, current trade policies -- characterized by high degrees of support and protection -- do not favour developing country participation or an efficient international pattern of biofuel production, said the report.

The report said that ensuring environmentally, economically and socially sustainable biofuel production requires policy action in the following broad areas: protecting the poor and food-insecure; taking advantage of opportunities for agricultural and rural development; ensuring environmental sustainability; reviewing existing biofuel policies; and making the international system supportive of sustainable biofuel development. +