Market News

 October 03, 2007
The Environmental, Economic and Policy Aspects of Biofuels

 The World Bank's Development Research Group has released a study on the environmental, economic and policy aspects of biofuels (September 2007) that further reinforces the already critical assessment that are being made about the positive and negative aspects of this expanding source of energy.

The study notes that world is witnessing a sudden growth in production of biofuels, especially those suited for replacing oil like ethanol and biodiesel. But many questions remain about the possible effects of these types of biofuels, particularly on their environmental impacts and their capacity to reduce greenhouse gas emissions.

The analysis finds three key conclusions.

  • First, the current generation of biofuels, which is derived from food crops, is very intensive in terms of land, water, energy and chemical inputs.
  • Second, the environmental literature is dominated by a discussion of net carbon offset and net energy gain, while indicators relating to impact on human health, soil quality, biodiversity, water depletion, etc., have received much less attention.
  • Third, there is a fast expanding economic and policy literature that analyzes the various impacts of biofuels from both micro and macro perspectives, but there are several gaps.
  • The report notes there is a bewildering array of policies - including energy, transportation, agricultural, trade, and environmental policies - is influencing the evolution of biofuels. But the policies and the level of subsidies do not reflect the marginal impact on welfare or the environment.

    In summary, all biofuels are not created equal and while biomass plays an important role in rural areas of developing countries, the use of biomass for producing fuel for cars can affect not only access to energy and fodder b ut also access to food.

    In essence, concerns about climate change, security, and reliability of energy supply and the growing demand for oil are likely to make biofuels ever more attractive. This will trigger competition for agricultural land; therefore, it is imperative to analyze the impact on agricultural markets, trade, and the environment along with the analysis of impact on energy markets.

    As far as energy is concerned, the main contribution of biofuel will be in augmenting the supply of fuels for transportation. It may also in certain situations be a source for electricity and heat but those will be confined to places with either an abundance of biomass or with little access to the electric grid.

    For the most part, the future of biofuels will depend on energy policies and technologies that will affect demand for liquid fuels. Increase in fuel efficiency, hybrid and fuel cell vehicles, and carbon taxes will reduce the demand for fuel, while increase in income and highways will increase the demand for fuel. Such increases are more certain in developing countries.

    The authors noted there seems to be an exclusive emphasis on climate change to the detriment of other environmental problems in making the case for biofuels as an environmentally benign technology. The reality is that the overall impact of biofuels on energy security, environment, and economic welfare is hard to conjecture.

    The report is comprehensive and well written. For those interested in the future of biofuels, it is a useful reference source.

    The authors may be contacted at zilber@are.berkeley.edu and deepak@berkeley.edu.

    Source: World Bank .