ETHANOL AND OTHER BIOFUEL SUBSIDIES A WASTE, STUDY FINDS

by Jim Lobe

(IPS) WASHINGTON -- Despite an explosion of private investment in the U.S. liquid biofuels industry, taxpayers are contributing about $7 billion a year in subsidies which could be better used for other energy- and environment-saving technologies, according to a major new report released Oct. 25.

The 93-page report by the International Institute for Sustainable Development (IISD) said the industry is likely to receive even more money -- from $8 billion to $11 billion annually over the next few years -- from federal, state and local authorities if present policies remain in place, despite evidence that their ability to substantially reduce U.S. dependence on Middle East oil or the emission of greenhouse gases into the atmosphere is limited.

Moreover, according to "Biofuels -- At What Cost?" the unintended and potentially negative consequences of government subsidization of the industry are not being taken sufficiently into account.

Not only are the subsidies further distorting an already heavily subsidized agricultural economy, but the increased large-scale production of biofuel feedstocks, particularly corn and soybeans, and the emissions of the growing number of ethanol and biodiesel refineries are also posing new threats to the environment in the U.S. Midwest and Mississippi Valley.

In addition, subsidization is adding to concerns of growing competition between food and fuel production. By shifting the balance in favor of the latter, world food prices are likely to increase, with potentially devastating results for poor populations, particularly overseas, that depend on food aid or cheap imports, according to the report.

"Farm policy should be once again separated from energy policy," concluded the report, which called for a moratorium on new subsidies and a plan for phasing them out. "Far more efficient approaches should be used to achieve the often-stated underlying policy objectives of energy security and reduced greenhouse gas emissions."

The report is the first of six country studies on biofuel subsidies commissioned by IISD's Global Subsidies Initiative (GSI) and authored by Doug Koplow, founder and head of Earth Track, Inc., a Massachusetts-based research firm. The other country studies will include the European Union, Switzerland, Britain, Canada, and Australia.

Wednesday's report was released in the context of the continuing impasse, largely between the wealthy industrial nations and developing countries, over agricultural subsidies in the Doha Round of international trade negotiations.

Poor countries have demanded sharp reductions in the subsidies that wealthy nations lavish on their agricultural sectors, particularly in crops, such as cotton and sugar, in which many developing nations would have a strong comparative advantage if the subsidies were not allowed to distort the market.

The new report is focused primarily on the daunting task of compiling data on the more than 200 federal, state and local government production and consumption subsidies and other programs, such as tariffs and tax credits, that support biofuels production and consumption in the U.S.

"Many of these subsidies are poorly coordinated and targeted," according to Simon Upton, GSI's director. "All indications are that subsidies are being piled on top of one another without policy makers having a clear idea of their potential impact on the environment and the economy. Yet the potential for waste on a grand scale and other spectacularly perverse environmental outcomes is large."

The report estimates the total dollar value of biofuel subsidies at between $5.5 billion and $7.3 billion a year -- or roughly equivalent to the amount the government provides sugar and cotton producers combined -- more than 90 percent of which supports the production or consumption of corn-based ethanol.

But those subsidies are likely to grow significantly in the coming years because most of them are tied to output, which, fueled by private investors, as well as the subsidies themselves, is growing by leaps and bounds, according to the report.

Among biofuels, ethanol is by far the largest and oldest recipient of government subsidies, dating back to the late 1970s, when Washington, reeling from a spike in oil prices, launched several programs designed to reduce U.S. dependence on foreign oil.

That same rationale -- as well as the fact that biofuels emit fewer greenhouse emissions than fossil fuels -- is behind the current boom in the industry. According to Koplow, production capacity in ethanol alone increased 40 percent since the beginning of last year.

With government subsidies worth between $5.1 billion and $6.8 billion, including a 12 cents-per-liter federal tax credit, the ethanol industry produced some 16 billion liters of ethanol, according to the report. That amount represented nearly one-sixth of the country's total grain harvest but actually supplied less than 3 percent of its automotive fuel.

Besides ethanol, production of -- and subsidies for -- biodiesel fuel, which is made from vegetable oils or animal fats, is still relatively young but growing fast. Production grew from just 4 million liters in 2000 to 75 million liters last year.

A third biofuel, cellulosic ethanol, which is produced mainly from agricultural waste, is the "gleam in everyone's eyes," according to IISD President David Runnels.

Based on current programs, according to the report, the average annual values of governments over the next six years could rise to as much as $8.7 billion for ethanol and $2.3 billion for biodiesel, not counting many state programs worth hundreds of millions of dollars more that are just beginning to take effect.

But taxpayers will get very little in terms of both reduced greenhouse gas emissions and reduced reliance on foreign oil for their money, according to the report.

The report argues that biofuels are an extremely expensive method for reducing emissions. Under its calculations, it costs at least some $500 in federal and state subsidies to reduce one metric ton of CO2-equivalent emissions through the production and use of ethanol.

"That could purchase more than 30 metric tons of CO2-equivalent offsets on the European Climate Exchange, or nearly 140 metric tons on the Chicago Climate Exchange," said Koplow, in reference to the carbon-emissions trading markets that have been created in recent years.

Similarly, biofuels hold limited promise for reducing reliance on foreign oil, according to the report, which noted current forecasts that biofuels will account for less than 5 percent of total transport fuel use in 2010.

"Because most liquid biofuels will be consumed as blends with gasoline or petroleum diesel, they will for some time to come be complements to petroleum-based fuels, not major competitors with them," said Ronald Steenblik, GSI's research director.

He also pointed that some 75 percent of the vehicles that can use "E85," a blend of 85 percent ethanol and 15 percent gasoline, are gas-guzzlers -- sports utility vehicles (SUVs) and small lorries -- that have very poor fuel efficiency.

"Their inefficiency when running on E85 means that keeping one (of these vehicles) filled with E85 costs around $500 a year, just in federal tax credits associated with the production of the ethanol contained in the fuel," according to the report, which says that other subsidies may add another $200 to the taxpayer cost of keeping these vehicles on the road.

"There is an urgent need to examine the claimed benefits from biofuel subsidies, and to compare them with the costs of meeting the same goals in other ways," according to GSI's Upton.