Biofuel support policy, summary of the public thematic report · World biofuel production has risen...

COUR DES COMPTES

Biofuel supportpolicy

January 2012

�� Notice

Summaryof the Public Thematic Report

This summary is designed to make the Cour desComptes report easier to read and use.

The Cour des Comptes is responsible only for the content of the report.The responses of government departments, councilsand other organizations are appended to the report.

Summary of the Public Thematic Report by the Cour des Comptes

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Contents

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Introduction........................................................5

Facts ...................................................................7

Stakeholders .....................................................13

Results, costs and relevance of the biofuel support policy ...................................................21

Conclusion and recommendations .....................27

Introduction

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This assessment of the French Government’s biofuel support policy is a public poli-cy assessment made by the Cour des Comptes on its own initiative, in accordancewith Article 47-2 of the French Constitution and Article 111-3-1 on the French FinancialJurisdiction Code.

Like public policies in other areas, the one supporting biofuel must overcome the difficul-ty of having to meet a combination of objectives. In fact, it was initially linked with supportto agriculture, then with the quest for energy independence and later with environmental con-cerns. “Sustainability” encompasses not only the notion of environmental protection, but alsosocial equity and the inter-generational bond.

The later priorities are additions to and not substitutes for the earlier ones. Consequently,any assessment of the positive or negative effects of policies must take into account the wholepicture and consider the priorities in succession.

This makes it quite difficult to single out the effects of the various instruments in place:global, European and national regulations (incorporation mandates, border protection), taxinstruments (exemption from domestic consumption tax on fuel associated with production quotas, general tax on polluting activities), waste recycling by double counting tallow and used cooking oils.

The biofuel support policy is also impacted by those implemented in other countrieswhether in Europe (Germany) or elsewhere in the world (United States, Brazil or Indonesiafor example).

Government support for biofuels has increasingly become the subject of public debate.This is due to controversy about its environmental implications and because it is thought to beresponsible for the highly volatile agricultural commodity prices observed since 2007.

A number of questions must be asked: is biofuel policy a matter of agricultural, ener-gy or environment policy? Can its effects be verified and measured? Is public money being well-spent and is this spending justified? Who benefits? Are policy goals consistent with the instru-ments used to implement it? Is proper consideration given to uncertainties, especially thoseregarding sustainability and ethics?

This assessment covers all the “stakeholders” involved in this policy. Most of them areprivate natural persons or legal entities (including farmers, biofuel producers, oil companies, fuel

distributors and car manufacturers) and, as such, are outside the Cour des Comptes’ jurisdic-tion. This has called for the utmost transparency in conducting dialogue and the utmost objec-tivity in considering interests and viewpoints that were, by definition, different if not completely opposite.

The assessment was also based on the work of independent experts, selected for their specific individual skills before investigations began.

Lastly, international and, more specifically, European calibration was carried out.�

Introduction

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1 Facts

Biofuels and energyWhile energy is crucial for

human society in general, it nonethe-less poses a basic dilemma in that nosource is without its drawbacks.Biomass is no exception.

Transport currently accounts for25% of all energy consumed in theworld, mostly as liquid fuel (2.5 bn m3). There are two types ofliquid fuel, diesel oil and petrol. InEurope and especially in France,diesel oil is by far the more widelyused of the two, while petrol (orgasoline as it is called in the USA)dominates in the Americas.

This has an impact on procure-ment. French refineries are old andproduce more petrol than thedomestic market needs, but too littlediesel oil. As a result, the countrymust export its surplus petrol butimport large quantities of diesel oil,especially from Russia.

The biofuels currently availableon the market come largely fromenergy reserves from plant or animalwaste. They are blended with hydrocarbons.

In France, they are distributed intwo forms for use in motor vehicles:biodiesel, used in conjunction withdiesel oil, and bioethanol, which isadded to petrol.

Biodiesel is made in France notonly from home-produced rapeseedand sunflower oil and imported soy-bean and palm oil, but also from tal-low and used cooking oil. Crude veg-etable oil is not used in motors assuch, but as a derivative known asvegetable oil methyl ester or VOME.It is incorporated into diesel oil,generally at a rate of 7% v/v in B7diesel, which is the maximum per-mitted amount, or, in a very limitednumber of cases, at a rate of 30%v/v in B30 diesel in the captive fleetsof some cities or companies.

Biodiesel production is closelylinked to that of its main by-product, rapeseed and sunflowercake, which plays an important rolein livestock feed. It is also a majoreconomic issue because theEuropean Union has always beenforced to import large quantities ofsoya bean cake from North andSouth America. Similarly, biodieselproduction reduces to a certainextent diesel oil imports.

Bioethanol is an alcohol pro-duced either by fermenting sugarfrom plants (sugar beet, sugar cane)or through grain starch hydrolysis(wheat, maize). It can be addeddirectly to petrol at percentagesranging from 5 to 85% v/v. As it ismore difficult to handle thanbiodiesel, it was once chiefly used in

Cour des Comptes

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conjunction with a refinery residueto produce ethyl tert-butyl ether(ETBE).

Like biodiesel production,ethanol production generates by-products (beet pulp, wheat or maizedistillers grains) which are an impor-tant source of high protein livestockfeed.

World biofuel production hasrisen sharply over the past ten years,climbing from 16 million m3 in 2000to more than 100 million m3 in 2010.Significant as these figures are, theyrepresent no more than 2.5% of thetotal fuels used in road transport. At75% of the world total, ethanoldominates biofuel production, main-ly because 90% of this total is pro-duced by the United States andBrazil, where most vehicles run onpetrol. The European Union hasopted for biodiesel as most vehiclesrun on diesel oil. The EU produceshalf of the world’s biodiesel.

It should be noted that biofuelsoutput less energy by unit volume(LHV or lower heat value) than fos-sil fuels. This means that more bio-fuel than fossil fuel is required tocover a given distance. The gap iswider for ethanol (-34%) than forbiodiesel (-8.5%).

Biofuels from anagriculture andenvironment perspective

In France, a little less than 6% of the total agricultural area, or 1.7 million ha, was given over to the production of biofuel raw materials in 2010. Of that total,1.45 million ha was for biodiesel and250,000 ha for bioethanol. Yet agreater area is given over to oilseedplants (2.2 million ha, of whichoilseed rape covers two-thirds), asmuch of their production is intendedfor cooking oil (0.8 million tonnes).

The situation is quite different forethanol. Only a very small amount ofwheat (4.4%) is used for ethanol pro-duction, the rest being used for otherpurposes. The same is true for maizeand, to a lesser extent, sugar beet. Theworld and European sugar marketreform limited France’s export capaci-ty regarding sugar beet, thereby reduc-ing the area given over to this crop.Ethanol production has made up forthis loss.

From an environmental angle, bio-fuels were viewed favourably at thebeginning since, unlike fossil fuels,they only release to the atmospherewhat they have captured during theirgrowth phase.

Facts


However, as of 2008 and thesharp rise in agricultural commodityprices, they were viewed more criti-cally, because the more crops wereused to produce biofuel, the fewerwould be available to producehuman food and livestock feed.

Also, the balance in terms ofgreenhouse gas (GHG) emissionshas been constantly revised down-wards. In addition, cost-benefitanalyses have begun to give properconsideration to: a) the energyrequired to produce biofuels, com-pared with the energy they generatedduring combustion; b) the land usechanges induced by the allocation ofincreasingly large areas of land tocrops intended for their production.

The French Environment andEnergy Management Agency (Agencede l’environnement et de la maîtrise del’énergie, ADEME) was asked to carryout several studies on these points.The results of the first, completed in2002, were rather positive, while theconclusions of the last, conducted in2009/2101 and based on the lifecycle analysis method, were ratherless so, although they have been con-tested. According to the Agency,biodiesel GHG emissions are cur-rently between 59 and 90% lowerthan those of the reference fossilfuel, while ethanol represents a 49-72% drop. Using the same refer-ence fossil fuel, it takes 68 to 84%less fossil energy to produce

biodiesel and 18 to 85% less to pro-duce ethanol. Environmentalgroups, however, contest this data.They do not agree with the by-product energy allocation methodused and claim that the data makesno allowance for land use changes,especially indirect changes.

A great variety of rules

Many rules govern biofuel pro-duction, imports, distribution and consumption.

Tariffs are applied to biofuels,but only partly so. Biofuels are not,for example, singled out with respectto other uses of similar products(e.g. food-grade alcohol).Furthermore, oilseed products(including biodiesel) are duty-freefor historical reasons. As an agricul-tural product, bioethanol should bewell-protected. But this is almost nolonger the case if it is blended - nomatter how slightly - with petrol.The resulting “chemical product”isbarely taxed at all. Lastly, an increas-ing number of suppliers come fromthe developing world and, as such,benefit from preferentialtariff treat-ment, frequently paying no duty atall.

Several European directives laydown a wide array of principles:

- tax support measures are permitted provided they do not

Facts

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overcompensate for the difference inproduction cost compared with fossil fuels;

- biofuels must meet the sustain-ability criteria defined in theEuropean renewable energy directive;

- recommended minimum levelsexist for biofuel incorporation:5.75% by lower heat value (LHV);

- maximum levels are definedwith respect to fuel quality: 7% v/vfor diesel oil, 10% v/v for ethanol;

- waste recycling is supported bythe “double-counting” rule appliedto tallow or used cooking oils.

Lastly, there is a draft directiveon energy taxation which would taxenergy on the basis of CO2 emis-sions and energy content (i.e. actualenergy) that a product yields.

In France, regulations in this areaare set out in the government’s 2005fuel plan, which provides for anincorporation rate of 7% by LHV asof 2010, taking into account thelower energy output of biodiesel andethanol. The 7% incorporation rateis equivalent to 7.57% v/v forbiodiesel and 10.28% v/v forethanol. These values are above therespective maximum permitted

incorporation rates for B7 diesel oiland SP95E10 petrol. As these targetsare not legally mandatory, a very stiffgeneral tax on polluting activities(taxe générale sur les activités polluantes,TGAP) was created in 2005 to bepaid if the incorporation rate is not met.

French incorporation targets areabove and beyond European ambi-tions. In reality, however, they areincompatible with fuel quality tech-nical requirements (maximum incor-poration rates) or distribution infra-structure realities or with the strate-gy of industrial stakeholders (oilcompanies and car manufacturers).Consequently, incorporation resultsfall short of the target. This wasalready the case for ethanol in 2009and could also be true for biodieselas of 2010.

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Financial expenditure isalmost entirelybalanced byadditional revenue

To meet the targets set out in its bio-fuel plan, France introduced a numberof financial instruments as part of itsgeneral fuel tax system, under whichfuels are subject to VAT and a domestictax on petroleum products (taxe intérieuresur la consommation, TIC). The cost ofthese instruments since 2005 appearsquite significant.

The TIC was thus significantly low-ered, more so for ethanol (€37/hl in2005) than for biodiesel (€33/hl). At thetime, this difference was justified by thefact that ethanol costs more to producethan biodiesel. It has fallen steadily sinceits introduction and now stands at only€14 and €8/hl respectively.

To limit the impact of this taxexpenditure on fiscal revenues, the TICreduction was only granted under sixyear production licences or “approvals”(agréments). The beneficiaries were pro-duction units selected by a competitivebidding process to meet EC regulations.Fifty-three such approvals were granted:twenty-nine for biodiesel, twenty forethanol and four for ETBE. The last of

them expire in 2015. Generally speak-ing, they were oversized and the numberof production units actually built hasfallen well short of expectations, especially for ethanol.

Over the period concerned by thisreport (2005-2010), TIC reductionsamounted to €1.8 bn for biodiesel and€0.85 bn for ethanol, making a total of€2.65 bn.

Owing to the lower energy densityof biofuels, however, the governmentbenefits from a mechanical increase inrevenues:

- at the current incorporation rate, additional earnings from TIC on bioethanol amounted to €260 million/year in 2011. Total rev-enue for the period 2005-2010 amount-ed to €1 bn;

- although the difference betweenbiodiesel and diesel oil is less than 10%in terms of LHV, the government ben-efits from increased TIC revenuesowing to the large quantities sold: €143 million in 2011 and a total €0.5 bnover 2005-2010.

Over the same period, the govern-ment collected a total of about €0.33 bnin TGAP, a figure that has risen sharplysince 2009. This is largely due to failureto meet the incorporation targets set outin the biofuel plan.

Facts

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Internationalcomparisons

Since 2006, the United States hasbeen the world’s leading producer ofbiofuels, for which it grants massivesubsidies. These are increasingly underfire today, to such an extent that themain subsidy was dropped on31/12/2011. Ethanol has seen a realboom in the country: production capac-ity rose from 6.4 million m3 in 2004 tomore than 41 million m3 in 2007.Biofuels are supported by domestic taxreductions which are applied not only tobiofuels intended for the domestic mar-ket but also to those destined for export.This led to an explosion in biodieselexports, particularly to Europe, until theEuropean Union took antidumpingmeasures in 2008 to check the situation.

Brazil, which is historically the worldleader in ethanol production, still has adecisive edge in the field and has nowbegun to develop biodiesel production.The world’s leading sugar producer,Brazil transforms nearly half its produc-tion into ethanol, which is highly com-petitive as “bagasse” (sugar caneresidue) provides the energy required to

produce it. An estimated $1 bn/year iscurrently spent in tax subsidies. Despitethis, Brazil has not exported any ethanolin the past two years as, owing to poorsugar cane harvests, it has barely pro-duced enough to meet fast-growingdomestic demand. From zero production in 2005, the country nowproduces 1.6 million m3 of biodiesel peryear.

Biodiesel is experiencing spectaculardevelopment in Argentina where it ben-efits from an export tax system that canbe likened to a subsidy. Indonesia andMalaysia are also becoming major play-ers on the biodiesel market. They are theworld’s two leading palm oil producersand are both developing significantesterification capacities for this product.

EU Member States have also intro-duced measures to support biofuel pro-duction to varying degrees. There aretwo exceptions: Germany, which hasdrawn back considerably from its initialposition as one of the leading propo-nents of this policy and Sweden, whichhad built its entire policy on E85 petrol(85% biofuel), flexible-fuel engines andimports, for which the country hadobtained a special dispensation from theEuropean Union.

Facts

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Cour des Comptes

2 Stakeholders

Oil companies and distributors

France is a European exceptionin that large retail distributors arethe outlet for 60% of the country’sdomestic market of 36 million t/yearof diesel oil (including trucks) and10 million t/year of petrol. Theother 40% is divided more or lessequally between Total and other oilcompanies.

Distributors see themselves firstand foremost as “blenders” toimplement incorporation rules.

Regarding biodiesel, oil compa-nies/distributors have until nowbeen very demanding about the qual-ity of oils used in making VOME. Inparticular, the resistance of oils tocold varies with their origin, whichcan be detrimental to engines. Thebest compromise from this point ofview is oilseed rape, although it hasthe drawback of a low energy yieldper hectare. Consequently, this com-modity has nearly reached its limitsin Europe in terms of usable landarea. In addition, as the use of dieseloil continues to grow, additionalresources must be sought, eitherthrough imports or the use of ani-mal fat or used oils.

Distributors procure theirbiodiesel from the leading manufac-turers and as there is little competi-tion, fossil diesel serves as the refer-ence price, plus a bonus negotiatedwith the main supplier, DiesterIndustrie. This bonus, which is theresult of the considerable burdenplaced on distributors by the TGAP,varies considerably with the relativeprices of diesel oil and vegetable oil.It is currently $400 to $500 pertonne.

Total considers that ethanol willnecessarily become the referenceproduct, since incorporation asETBE has only ever been a stopgapsolution in view of the small quanti-ty produced in France. Adapting dis-tribution facilities for the direct useof ethanol should not prove too dif-ficult as the cost involved is relative-ly low. Competition is tougher thanfor biodiesel as there is a genuineworld market for this product, whichrepresents 75% of all biofuel avail-able. As a result, the extra cost to bepaid compared with petrol is only$100 to $200 per tonne.

Total estimates that by 2020ethanol will still be the referencebiofuel and that Brazil will becomethe swing producer, capable of

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supplying ethanol at a competitive price,while meeting the sustainability criteriaset out in the new European directives.

One way of reducing the extra costof biofuels might be to make incorpora-tion rates a little more flexible by raisingthem when there is a slump in agricul-tural commodity prices and loweringthem in the opposite case.

Car manufacturers

Manufacturers in the automotiveindustry are closely concerned by any-thing to do with biofuels, since engineguarantees also apply to any fuel-induced mechanical problems. Car man-ufacturers feel they are up against twotypes of problem.

The first is to do with engine CO2emissions. Their gradual reduction willrepresent an unprecedented additionalburden over the next ten years. Until2008, CO2 emissions due to engines andfuels were considered together. As bio-fuels performed very well in thisrespect, they eased the pressure onengine manufacturers regarding emissions.

Since 2008, however, European reg-ulations have made a distinctionbetween these sources of emission.Consequently, manufacturers investingin a vehicle that can run effectively onbiofuels will not be rewarded for theirefforts to cut CO2 emissions. This

explains why manufacturers are losinginterest in biofuels. It also explains thedisappearance of Flex-Fuel Vehicles(FFVs) in France, which were subject toa CO2 emission penalty.

The second problem concerns thelack of stability in regulations issued bythe European and French authorities.The various policies implemented in thisarea are subject to considerable interruptions and inconsistencies.Renault, for example, developed a rangeof vehicles using alternative energysources, E85, B30 and LPG for themost part. The range is considerableand includes ten models running onE85 and six, including two utility vehi-cles, running on B30. These vehiclesnever found a market, however, forwant of adequate support measures, andproduction was discontinued after onlya few hundred or few thousand vehicleshad been sold.

Long-term visibility is by far themost important factor. Engine manufac-turers claims that it is easier and lesscostly for them to work on a limitedincorporation range, even at a highincorporation rate, than on a broaderrange. In other words, over a period offive to eight years, they could produceengines compatible with fuel blendsranging from E10 to E30. It would bemuch harder to make an engine capableof absorbing blends ranging from E10to E85.

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Biodiesel producers

Sofiprotéol and its subsidiaryDiester Industrie dominated thebiodiesel market until 2010. The firmwon 78% of approvals granted in2009 and met the growing demand forbiodiesel: 1.9 million m3 in Franceand 0.8 million m3 for export. It hasseven plants in France and six moreelsewhere in Europe. It explains thisdomination by stressing that it wasthe first firm to go into business at atime when the profitability of the sec-tor was far from certain. It is nonethe-less a fact that competition came lateto this sector and that the newcomersare mainly companies that treat ani-mal waste and take advantage of thedouble-counting rule.

Relations between Sofiprotéol/Diester Industrie and oil compa-nies/distributors have been quite con-flictual until recently. Under pressurefrom TGAP, distributors were com-pelled to accept Sofitprotéol’s pricesfor lack of any real competition.Conditions were made even tougherby the high price of cooking oil, for itwas in Sofiprotéol’s interest to pro-duce oil for cooking purposes ratherthan for esterification. This forceddistributors to accept high prices forVOME. The situation changed rapid-ly, however, in 2010 and even more soin 2011. This was due to the increased

use of tallow and used cooking oils,which count double in the incorpora-tion rate, and to the growth of veg-etable oil and even ester imports fromArgentina and Asia.

In 2011, Diester Industrie claimedit had lost an estimated 700,000 t inVOME production, due largely to thefact that its competitors imported350,000 t of tallow. The firm wouldtherefore like to see the double-counting rule abandoned or at leastrestricted. Introduced by a Europeandirective, this rule has been trans-posed into French legislation, whileGermany, for example, has ignored itand so far escaped any rebuke fromthe European Commission. A FrenchOrder reconsidered the rule inSeptember 2011 and significantly lim-ited its application.

Bioethanol producers

The ethanol sector is more diver-sified than the biodiesel sector andsome competition exists. It is domi-nated by two organizations:Cristanol, a public company with a55% stake belonging to an agricul-tural cooperative association; andTéréos, a cooperative associationresulting largely from the acquisitionof part of former Béghin-Say com-pany assets. According to its mem-bers, the sector invested €1 bn from

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2005 to 2010 to build five produc-tion units. These supply 13 of the 45million hl of ethanol produced inthe European Union.

The stakeholders appreciate thenew opportunities provided byethanol and by-products intendedfor livestock feed. Bioethanol pro-vides sugar beet growers with betterprices for the part of their produc-tion that does not go into sugar pro-duction. Similarly, ethanol stabilizescereal growers’ income by addingvalue to wheat when prices are low.Although this is not the situationtoday, as wheat is currently worthbetween $250 and $300 per tonne onworld markets, operators point outthat when the bioethanol sectorstarted up in 2005-2006, it was traded at no more than $80-$90/t.

Stakeholders in the sector areconcerned about Europe’s domesticmarket protection being circumvent-ed. Circumvention practices inducedby the difference in customs dutiesapplied to ethanol and blends haveseen a considerable increase. Apartfrom the antidumping measurestaken against the United States, theEuropean Commission is neitherable nor willing to take effectiveaction against such practices. Ratherthan adopt a purely defensive atti-tude, the French ethanol sector haslooked beyond Europe’s borders. In

particular, it has set up plants inBrazil to benefit from the country’sthriving sugar sector and fromincentives aimed at promoting theuse of ethanol fuel. Oil groups haveadopted the same strategy.

Farmers’ federations

Farmers’ federations have arather positive outlook on both sec-tors. Production was initially devel-oped as a matter of agricultural pol-icy, aimed in particular at making useof the fallow land imposed by thefirst reform of the CommonAgricultural Policy. Today, however,the focus is on biofuels as a renew-able energy source and on reducinggreenhouse gas emissions.

Biofuels offer the following advantages:

- they provide farmers with anadditional outlet which is bound tohave a positive impact on sellingprices and, therefore, on income.Furthermore, production unit pro-curements are agreed on a contractu-al basis, thus enabling farmers to sta-bilize their relations with their back-end operations. Be that as it may,prices are determined principally byworld market factors. This makes ithard to establish any direct linkbetween the tax advantages granted

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to biofuels and the market price ofthe commodities used in makingthem;

- they have allowed more land tobe given over to oilseed crops with-out impacting other crops orexports: biofuel by-products are tak-ing over increasingly from wheat inlivestock feed;

- they have helped to create ormaintain around 18,000 jobs in asector that, by definition, cannot berelocated.

In environmental terms, oilseedrape and sunflower growing pro-motes biodiversity and soil fertilityand helps reduce inputs.

These advantages are neverthe-less under threat from new competi-tors. All the efforts made over thepast seven years could be simplywiped out unless effective borderprotection is set up.

Lastly, there is no conflictbetween food crops and crops usedto produce biofuel in Europe andFrance. France’s vocation as a cerealexporter remains intact even withthe 2010 incorporation target. Inaddition, 400,000 ha of land is avail-able with some of the fallow landbeing used for crops.

The French farmers union,Confédération paysanne, does not sharethis optimism at all and is extremelycritical about the whole issue:

- first, it considers that the tar-gets do not reflect real requirements,but variations in momentary trends.As environmental concerns havemoved back to centre stage, the agri-cultural lobby has seized upon theobjectives that meet these concerns.Although growing oilseed rape madeit possible to sidestep the pressurethat came to bear on oilseed cropproduction following the 1992Common Agricultural Policy reform,the by-product, rapeseed cake, isharmful to animals. In addition,oilseed rape is a fragile plant thatremains in the ground a long time.This calls for many inputs, pesticidesin particular, and runs counter to thegoal of halving the amount of pesti-cides used in agriculture defined bythe French environment round table(Grenelle de l’environnement);

- the environmental performanceof biofuels falls well short of expec-tations. If direct and indirect landuse changes are taken into consider-ation, biodiesel GHG emissions arefound to be twice those of fossildiesel oil. Producing biofuels as asafety valve in the event of a cerealsurplus would be acceptable, if needbe. The problem in these days of“compulsory” incorporation is thateveryone depends on biofuels.Virtually all French rapeseed goesinto biodiesel production, but not allbiodiesel is made from rapeseed oil.

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An increasing proportion comesfrom imported palm oil, the produc-tion of which also has disastrouseffects on ecological balance in theproducing countries.

Consumers associations

Apart from an article in the review“UFC-Que choisir ?” in 2007, con-sumers associations have publishedlittle in the way of in-depth studies onthe topic. According to the abovearticle, biofuel tax incentives weremainly to the advantage of producers.Under these conditions, French con-sumers purchasing biofuel at a rea-sonable price would benefit fromimported ethanol - from Brazil in par-ticular - without the need for costlytax resources. Furthermore, it wouldbe extremely difficult to conduct acost-benefit analysis of biofuels,especially in terms of environmentalperformance.

Environmental groups

Initially, most green associationstended to be in favour of biofuels.They are now more reserved, if nothostile, towards them. The reasonsfor this often match the concerns ofscientists and include land usechanges, deforestation, the negative

impact on biodiversity, competitionwith human food crops and exploita-tion of less developed countries.

One of the most controversialissues is land use change. Indirectland use change refers to a situationwhere the conversion of conven-tional food crops into energy cropscan lead to the same amount ofunfarmed land being given over tofood crops in another part of theworld. If combined with thedestruction of carbon reserves ingrasslands, forests and peatlands,this process generates high green-house gas emissions. Although indi-rect land use change is seen as a realproblem, it is extremely difficult tomeasure and no consensus has yetbeen reached as to a possible solu-tion in this respect. The EuropeanCommission is currently under greatpressure to adopt a new approach tothe issue.

Another hotly debated topic isthe competition between energycrops and food crops. The Frenchfarmers union, Confédération paysanne,considers that the extreme elasticityof food commodity prices in rela-tion to demand means that a smallshortage of cereals on the marketcan cause prices to double. Thereverse phenomenon is also true. Itconcludes that “what’s good for thehuman race would be disastrous forcereal growers.”

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The cautious conclusions of theG20 on agriculture, held in Paris inJune 2011, can also serve as a con-clusion to these controversies. TheG20 conclusions accept that thedemand for biofuels is a contribut-ing factor to price increases. Therecommendations made lean towardsabolishing subsidies and compulsoryincorporation, and opening up inter-national markets so that renewablefuels and their raw materials are pro-duced and grown where they are themost economically, environmentallyand socially viable.

The diverging views of differentministerial departments

The French Ministry ofAgriculture considers that support-ing biofuels is justified as it repre-sents a commitment to operators inboth sectors of biofuels productionand meets the need to protect thedomestic market. The ministry isparticularly concerned about the cir-cumvention of tariff protection. Itconsiders this situation to be espe-cially damaging as an estimated 53%of ethanol production capacity isnot exploited and too sharp a rise inimports is bound to undermine asector that is already weak. Similarly,recycling animal waste and the

double-counting rule should havebeen approached with more forethought.

Consequently, tax exemptions arestill justified to recoup investmentsin new production units and reform energy taxes.

No final conclusion can bereached as to the impact of biofuelson food commodity prices and landuse change.

At the Ministry of Ecology, theCommission for SustainableDevelopment (Commissariat général audéveloppement durable, CGDD) sees taxexemption as a tax loophole that“might be environmentally harm-ful”. It considers that the TGAP atits currently excessive level serveslittle purpose with a reduced TICand that any environmental benefitto be expected from biofuel crops isdiminished by other effects.

It sees three possible future sce-narios: totally abolishing tax exemp-tions as of 2012, gradually reducingthem, or maintaining them withinthe framwork of an initiative to stan-dardize European energy tax systems.

The General Directorate forEnergy and Climate (Direction généralede l’énergie et du climat, DGEC) con-siders that it is pointless prolongingcostly subsidies and that externalfactors induced by energy crops -particularly their impact on waterresources - should be studied more

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closely. It shares the view that theimpact of biofuels on world foodprices is hard to ascertain because ofthe many factors involved. It recom-mends continuing research into theeffect of indirect land use change.Lastly, it believes that second-gener-ation biofuels will not be availableuntil 2015-2020 in view of the R&Dwork still required before leaving thelaboratory and proceeding to production on an industrial scale.

At the Ministry of theEconomy, the Directorate Generalof the Treasury (Direction générale duTrésor) considers that the high penal-ty imposed by the TGAP and thefact that it can be passed on to theconsumer provides biofuel produc-ers with a captive income that can belikened to a subsidy. It also finds itrather inappropriate to implement abiofuel support policy as an agricul-tural development tool in that thefarms concerned are already amongthe wealthiest and enjoy higher-than-average public support under theCommon Agricultural Policy.

This analysis needs to be adjust-ed according to the sector con-cerned, however, as the ethanol sec-tor is more fragile and more exposedto international competition. Oncethe cost of almost all production

facilities is written off, there will nolonger be any justification for con-tinuing public support, even forethanol.

While the Treasury Directorateaccepts bioethanol producers’ calcu-lations concerning the extra tax col-lected by the government due to thelower energy density of this fuel, itconsiders that they make noallowance for certain “general equi-librium” effects, a term referring toreduced consumption (and thereforetax revenue) in other areas as a resultof pressures on household budgets.

Although importing low-costAmerican biofuels subsidized by for-eign taxpayers may seem to makeeconomic sense, using tariffs to pro-tect the domestic market should helpto develop sufficient productioncapacity to generate economies ofscale and compete with importedbiofuels. More broadly speaking, itmight be wise to promote better-integrated biofuel markets in orderto import biofuels at a lower price.

Lastly, although the connectionbetween biofuel production and ris-ing food commodity prices has by nomeans been proven, it might justifymodulating incorporation ratedaccording to the price of these commodities.

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Cour des Comptes

3 Results, costs and relevance of the biofuelsupport policy

Many instruments ofdiminishing effectiveness

The biofuel plan was complied withup to 2009 as regards ethanol incorpora-tion; the requirements for biodieselincorporation were only fulfilled from2010 when so-called “off-road” dieseloil, i.e. diesel oil used by trains, bulldoz-ers and tractors, was taken into accountunder the Renewable Energy Directive.However, this was a mere statisticalmanipulation.

Some of the approved productionunits have been built, with an indis-putable success from the point of viewof agro-industry. However, approvalshave been vastly in excess of require-ments, particularly for bioethanol whichremains financially weak. A number ofprojects have been either abandoned orredirected towards another use. Someexisting units have been shut downbecause they are unprofitable.

The targets set up by the Frenchauthorities, which were higher than theEuropean ones, are now impossible tomeet because of the lack of an adequatedistribution network and because oftechnical difficulties related to fuels witha high biofuel content (E85).

The most effective instrument forensuring that targets are met is theTGAP; its very high rate discouragesdistributors and oil companies from notincorporating biofuels.

Lastly, domestic market protectionis more imaginary than real. Ethanol ispoorly protected because of circumven-tion of tariffs by blended products, butbiodiesel is better protected, not by non-existent tariff barriers but by a lack ofcompetition on product quality.However, this situation is changing veryquickly with the emergence of interna-tional competition, particularly fromArgentina, which is indirectly subsidized.

In addition to this, the vegetable oilsector has suddenly been thrown out ofbalance by competition from animal fatand used cooking oils, which have thedouble-counting rule in their favour.This means that, when it comes to pay-ing the TGAP, their actual incorporationrate counts as double. The rule wastransposed into national law without anyimpact assessment, and implementedimmediately as from 2010. With it camemethods of circumvention and in 2011it led to a 20% to 30% drop in the pro-duction of VOME and the shutdown ofsome production units. The rule wassuspended in September 2011.

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From the point of view of environ-mental policy, the legal qualification ofthe description of national biofuels assustainable was confirmed by the lifecycle analysis conducted by ADEME,with a greenhouse gas emission savingof 35%, already required, and even of50% required for 2017.

The ethanol sectorhas generated revenue for thegovernment despiteremaining fragile

It has benefited from a substantialtax exemption giving it partial protec-tion in the beginning from imports andfrom higher production costs than fossilpetrol, and this has ensured that it couldcover its investment costs.

This was also facilitated by fixingcommodity prices such as to balance theoperating costs of the production units,therefore at a lower level than currentmarket prices.

The government’s support budget iscurrently in the black at €0.47 bn (thedifference between the reduction in theTIC and the extra tax revenue generatedas a result of the lower energy value ofethanol, plus €0.32 bn in TGAP).

The biodiesel sectorhas benefited froma large captiveincome

It was able to set advantageousprices in the first few years after theTGAP was introduced in 2005, becauseof the lack of any real competition.

It has benefited from support worthmore than the cost of its investments.

In the end it had a net cost to thetaxpayer of €1.29 bn (the differencebetween tax expenditure of €1.8 bn and€0.5 bn in additional tax revenues fromextra consumption plus €0.01 bn inTGAP).

It benefited from a captive incomedue to the threat from the TGAP but isnow exposed to competition both fromanimal and used oil and from high quality imports.

The total cost of bothsectors to the tax-payer will have beenno more than €820 million from2005-2010 and willgenerate revenue inthe future

In the future, if TIC exemptions areextended until the end of the approvalsin 2015 as the government has prom-

Results, costs and relevance of the biofuel support policy

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ised, the cumulative amount shouldreach €350 million and €170 millionrespectively for the two sectors over the2012-2015 period, assuming the exemptions are kept at the same level.

Over the same period, the govern-ment should collect extra tax of morethan €0.5 bn from extra consumption ofdiesel oil and more than €1 bn fromextra consumption of petrol, giving apositive balance of €0.98 bn excludingthe TGAP.

It is the consumerwho foots the bill inthe end

Because of extra fuel consumptionand the TGAP, over the 2005-2010 peri-od, consumers paid nearly €3 bn extra(€1.54 bn for consumption and addi-tional taxes, €0.32 bn in TGAP forethanol, €0.9 bn for consumption andadditional taxes, and €0.01 bn in TGAPfor biodiesel). Added to this, is the high-er price of biofuels at the pump, con-tributing in 2010 to an estimated rise ofbetween €0.5 and 0.7 bn.

The total extra cost of bioethanolincorporation into petrol when filling upwith 50 litres, for the same mileage, isapproximately €2.3. For biodiesel, theextra cost under the same circumstancesis close to €0.60.

Relevance that hasfallen victim to toomany objectives

As with any policy that has multipleobjectives, it is difficult to attribute theeffects to only one of them and the dis-tribution criteria between the objectivesare themselves very difficult to workout.

A mixed result,erring on the positive for agriculture

From this point of view the resultsseem to be mixed. For the majority ofthose involved, the results are positive,but they are becoming increasingly con-troversial. Although the objective ofbringing set-aside to an end has beenachieved, the objectives concerningeffects on agricultural income are muchmore difficult to measure, since farmers’income can change for many otherreasons.

The diversification of marketopportunities has been good for beet,extremely modest for wheat, and slight-ly better for maize. The question doesnot even arise for oilseed rape, forwhich biodiesel is by far the main market.

The impact of by-products, espe-cially rapeseed cake, on livestock farm-


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ing has been significant but is disputed.Some believe they have a negative effect(Confédération Paysanne), but others(FNSEA) see them as having positiveconsequences. Although slightly lessbeneficial from a nutritional point ofview, rapeseed cake has, in part, takenthe place of cake made from soya infeeding livestock, its price havingdropped dramatically.

As far as the impact on food pricesis concerned, those who believe it hasonly been slight, argue that prices variedsignificantly between 2007 and 2010 (upfirst, then down, and then up again)despite the volumes used for biofuelsnot changing much. However, this doesnot constitute proof that they have hadlittle impact, because it is not knownwhether the prices would have stayedthe same without biofuels. Conversely,in the absence of biofuels, there is noth-ing to say that producers would not haveadjusted production as a result.

Not as good anenergy source as itmight seem

Despite cautious estimates andsome controversy, the ratio of fossilenergy used to energy produced is con-sidered positive. Moreover, the energyefficiency of both products is constant-ly improving, due to both the inputs(genetic improvements to beet, higheroilseed rape yields) and the production

processes (esterification of vegetableoils, distillation of wheat and beet, dry-ing of draff). The problems posed bydistribution are relatively easy to solve.At fairly low incorporation rates, such asthose practised in the European Unionat the moment, engine adaptation prob-lems do not arise, or arise very little. Thecontinuing rise in the price of a barrel ofoil is making biofuels more competitive,particularly as they demand less fossilenergy in their life cycle.

Having said that, to make a signifi-cant impact in terms of energy inde-pendence, higher incorporation rateswould be needed. This would cause anumber of problems as regards bothengine adaptation and the amount ofland necessary to meet the need.

For example, if France wanted toreplace all of its diesel oil consumptionwith B30, 30% of its agricultural landwould have to be given over to this.

From an environ-mental point ofview, relevance isvery difficult tomeasure andincreasingly controversial

There is controversy over the envi-ronmental impact of biofuels on severallevels.

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The first is the argument that theaim in terms of transport is to travelless, and biofuels are simply an excusefor continuing to drive around as muchas before, despite fossil fuels runningout and biofuels destroying biodiversity.

From the point of view of green-house gas emissions, the debate stillrages over how the relative energy con-tent of biofuels and their by-products isworked out. This method is very sensi-tive to changes in the defenition of aproduct: a useful product contributes tothe positive impact, but the same prod-uct categorized as waste has a negativeimpact.

One method of quantifying thereduction in greenhouse gas emissionseconomically is to use the cost per tonneof carbon dioxide saved. Taking as a ref-erence the target price set by theEuropean Commission of €32 in 2010and €56 in 2020, several independentstudies estimate that the price resultingfrom the introduction of biofuels toreplace fossil fuels is around €186 to€259 for ethanol produced from beetand €263 to €347 for biodiesel producedfrom oilseed rape.

Since these figures seem very high, itshould be pointed out that the price pertonne of carbon dioxide saved is alwayshigher for transport than for other sectors of the economy.

Finally, these analyses do not takeaccount of the issue of land use change,whether direct or indirect, the impact of

which (especially for the latter) is impossible to quantify seriously.

Simulating the allocation of support to the different objectives

Because no robust method exists foraccurately apportioning the cost of apolicy to its different objectives, thedecision was made to produce a briefapproximation by allocating a third ofthe total costs to each of the threeobjectives, agricultural, energy and environmental.

Based on total public expenditure of€2.65 bn over the period 2005-2010, athird is approximately €850 million.

Dividing this by the average amountof land used over the same period forbiofuels i.e. approximately 1.7 millionhectares, it gives a cost of €500 perhectare over 6 years, or €80 per hectareper year. This can be compared, forexample, with the energy crop premiumintroduced by Brussels from 2004 to2009, of €40 per hectare per year. Ifaccount is taken of the jobs retained,the amount of the support is obviouslylower.

As far as hydrocarbon imports areconcerned, it can be estimated that theproduction of biofuels has saved11.5 million tonnes from being import-ed. It can therefore be inferred from this

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that the cost per tonne not imported is€74, only a fraction of the market priceover the period, which fluctuatedbetween €200 and €600/tonne forcrude and €300 to €750/tonne forrefined diesel oil.

The contribution per tonne of car-bon dioxide emissions avoided can alsobe estimated. Based on an estimate of20 million tonnes of CO2 emissionsavoided, a figure of €42.5/tonne isobtained, to be compared with the fig-ure of €32/tonne used by the EuropeanCommission for 2010.

Biofuel support,world hunger, ethical issues

In the absence of any certaintiesconcerning competition between cropsdestined for biofuels and crops destinedfor human or animal foodstuffs, most ofthe recent reports on this subject rec-ommend, as a precaution, relaxing theincorporation rules in developing coun-tries and stopping the various subsidiessupporting biofuel production.

Similarly, the concept of sustainabil-ity is increasingly being linked with theconcepts of social equity and ethics aspublic awareness of these issues grows,particularly through the work of NGOs.

Biofuels can only be labelled as sustain-able when they have achieved ethicaland social acceptability. A number ofcountries, particularly the UK, takeaccount of these factors in their publicpolicy on the environment. The moralvalues under debate are global equity,climate change, environmental ethics(especially effects on biodiversity),respect for human rights, and solidaritywith vulnerable populations, particularlyas regards the acquisition of land indeveloping countries by large westerncompanies.

The prospects fornew generation biofuels

Leaving aside any considerations ofeconomic feasibility, the new generationbiofuels, which rely on the non-edibleparts of plants or on algae, will clearlynot be available on a large scale foranother 10 or 15 years. Moreover, noserious study has yet been done offuture industrial processes, in terms oflife cycle analysis.

Consequently, in the short andmedium term the first generation biofu-els will in all probability remain themain, if not the only, means of meetingthe European targets for 2020.

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The Cour des Comptes makes thefollowing recommendations:

�continue supporting productionand sale of first generation biofuels, while meeting the followingconditions:

�recognise that the Frenchauthorities’ desire to be more ambi-tious than their European partners hasresulted in incoherent objectives whichare now making it impossible to meetthe targets for incorporating biofuelsinto fossil fuels.

�redefine these targets to makethem more realistic, while adapting

them to the technical constraints ofboth distribution (network adaptation)and engine manufacturers. Enginemanufacturers can obviously adjust tomost constraints, provided that theyare clearly expressed (incorporationranges of N% +/- 10%) and stableover time.

�this could be compatible withintroducing flexible incorporation rateswithin these ranges to take account offluctuations in food prices, as suggest-ed by the preparatory work for themeeting of G20 agriculture ministersin Paris in June 2011.

The finding is that after 15 years ofpolicies in favour of biofuels, withintensified commitment to biofuels inthe last six:

� the only equilibrium that hasreally been changed by these policieshas been agricultural (growing ofoilseed rape, production of cooking oiland rapeseed cake, new markets forbeet);

� no other equilibrium, whetherenergy independence or the reductionof greenhouse gas emissions, has beenaltered a great deal, if at all;

� while, in France, there has beensome criticism of the cost/benefit ofbiofuels from the point of view of

their effect on the environment, thecontroversy surrounding this issue inother countries has been much largerand continues to grow;

� substantial amounts ofmoney, estimated for the first time bythe Cour des Comptes, have beentransferred from consumers/taxpayersinto the hands of agro-industry (farm-ers and biofuel producers). Thesetransfers have enabled the constructionof raw material transformation andbiofuel production facilities of signifi-cant size (capacity 1.91 million m3 ofbiodiesel and 1.25 million m3 ofbioethanol) to be set up, but theirfinancial stability is not entirely assuredtoday.

Conclusion and recommendations

Findings

Recommendations


- despite the fact that the largefluctuations in the price of staplefoods observed in the last few yearscannot reasonably be attributeddirectly or solely to the growth ofcrops for biofuels, it would be equal-ly foolish to think this is not puttingany pressure on demand when otherfactors are pushing prices up andtherefore making foodstuffs scarcer.

- If these conditions are met,then public support for the produc-tion/distribution of biofuels shouldinclude the following:

�development of a genuineknowledge, which is still lacking, ofthe financial data for the sector;

- reduction of the current sup-port, for both ethanol and biodieselfrom 2012, to below the level of theadditional tax revenues generated asa result of extra consumption, whichis itself a result of the lower energypotential of the biofuels.

�when the cost of most of theproduction facilities is either paidoff (in the case of the older ones) oris about to be paid off (in the case ofthe most recent), acceleration of thereduction in TIC exemption, whilemaintaining the current differencebetween biodiesel and ethanol untilthe tax exemption disappears, whichshould be envisaged without anynew approvals for 2015;

- the relative fragility of theethanol sector, which caters to limit-ed and shrinking French andEuropean markets justifies this dif-ference. Taxation of energy basedon energy value and CO2 emissions,which the European Union ispreparing for, seems the best solu-tion for preventing ethanol, which isconsidered less polluting in terms ofCO2, from being taxed more thanfossil fuel as is the case now.

�keeping TGAP at a fairly highlevel, guarantees that incorporationtargets will be met even though theyare not compulsory, particularly asthe windfall effects at its launch nolonger exist because of a more com-petitive environment.

Apart from tax and customsmeasures, a biofuel support policyshould also meet a number ofrequirements.

�first of all, it should meet therequirement of consistency. Theexperimental nature of policy overthe last few years cannot be used asan excuse for the inconsistenciesthat have affected that policy, andthis is even more the case for theyears to come. Incorporation ratesshould be clearly defined, along withwhether they are binding or not.Sustainability criteria, including thedouble-counting of animal fat,should be clarified in the light of rel-evant European directives and thefeasibility of checks. Engine manu-


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facturers should not be at the mercyof changing fashions, which affectfossil fuels (LPG) as much as alter-native fuels (E85);

- the targets defined (biofueltype, consumption level, productiondate) should be compatible with thetime scales for the design and indus-trial development of vehicles andshould, more generally, be part of acomprehensive and sustainableoverview of fuel use.

�then, it should meet trans-parency requirements in relation tothe public, consumers and taxpayers,by making it clear to the publicwhether biofuel policy is a genuinecomponent of an environmentalprotection policy or whether it issimply part of a policy to supportagro-industry.

- herein lies the credibility andacceptability of the package. Itwould be sensible to rely on adetailed opinion like the Englishreport on biofuels and ethics, writtenby an independent body like thenational ethics committee, and topromote a quantification of theeffects of biofuels on biodiversity inthis context.

�thirdly, increase our presenceon the subject at the European level.

- The interests need to be defended of:

- the sector as a whole has to beprotected against subsidised importsor imports that circumvent the rules,while ensuring strict respect for sus-tainability criteria on the part ofthese imports and their verification;

- French manufacturers (carmanufacturers and oil companies),have to be supported by promotingharmonization of the rules or curbson the diversity of fuels, which canintroduce complexity and extra costswithout any real environmental benefits.

�lastly, planning ahead for thefuture.

- Important negotiations will bestarting with our European partnerson energy taxation, which will pro-foundly affect the current gapbetween diesel oil and petrol andalso biofuels. The future beneficiar-ies of the taxation differencesshould be identified to ensure thepolicy offers incentives and notundue captive income.

Biofuel support policy, summary of the public thematic report · World biofuel production has risen...

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