The Rising Tide Of Biofuels

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The sustained rise in world oil prices has made renewable energy more cost-competitive. Previous oil price increases have tended to spike but then subside without having provided sufficient stimulus for large-scale private and public capital investments in plant and equipment for the production of biofuels. The rise in oil prices and the attendant increase in the production of biofuels from 1999 to 2006 are illustrated in Figure 6.2. The higher oil prices coincided with maturing technology for the production of biofuels. The increase in world biofuel production in 2006 over 2005 was 27.6 percent (Table 6.1). While in the short term, prices may continue to fluctuate, in the long term they are likely to do so around a higher average price.

In the US in 2001 the discovery that methyl tertiary butyl ether (used

□ Other liquid biofuels

■ Biogasoline x Oil price

35000 -

2 30000 -c

■■§ 25000 -2 20000 -"S 15000 -10000 -5000 -0

1999 2000 2001 2002 2003 2004 2005 2006

Sources: International Energy Agency, personal communication, 2008; BP (2008).

Figure 6.2 World biofuels production, 2000-2006, and West Texas Intermediate oil spot price as an additive in reformulated gasoline) was polluting groundwater led several states to ban its use, which led to its replacement by ethanol.

The 2005 Energy Policy Act established a renewable fuel standard that increased the mandated use of renewable 'efuels' including ethanol and biodiesel from 4 billion gallons in 2005 to 7.5 billion gallons in 2012. By the end of 2006 fuel ethanol use in the US had already reached almost 5 million gallons, far exceeding the mandate in the Act. President Bush's 35 billion gallon Renewable Fuels Standard will further increase present production by a factor of five by 2022. In 2000 US biodiesel production was 2 million gallons; anticipated production by 2010 as a result of policies adopted is 680 million gallons.

The increase in biofuel production in the US, the EU and most other producing countries has been driven by subsidies and mandates. In all there are about 200 support measures that cost between $5.5 billion and $7.5 billion a year in the US and reflect the support of $0.38 to $0.49 per liter of petroleum equivalent for biofuels (World Bank, 2008a: 2). The EU has a specific tariff of €0.192 per liter of ethanol and an ad valorem duty of 6.5 percent on biodiesel. Member states can also exempt excise taxes on biofuels.

A common policy tool is to mandate the blending of biofuels with fossil fuels. Brazil goes beyond all other countries with a blending requirement of 25 percent of ethanol. In addition there are tax incentives favoring ethanol and for the purchase of vehicles that run on blends or pure ethanol.

In the longer term the development of second generation biofuels using existing cellulosic feedstocks is said to be capable of producing 30 percent of current fuel needs by 2030. The impact on regional America by widely dispersed production and ownership of the new industrial infrastructure will be profound. This growth is said to represent an '[H]istoric opportunity for wealth creation in rural communities, both in the US and around the world' (Dorr, 2008: 1).

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