Tax Exemption for Biofuels in Germany:

Is Bio-Ethanol Really an Option for Climate Policy?

Jan Michael Henke, Gernot Klepper, Norbert Schmitz

International Energy Workshop24-26 June 2003, Laxenburg,

Austria

• In 2002 the German parliament decided to exempt all biofuels from the gasoline tax

• The European Commission as well declared its intention to promote biofuels

I. Introduction

Alleged positive effects on climate, agricultural and energy policy

We examine bio-ethanol as a substitute for normal fuels

II. Institutional and market conditions for the

production of bio-ethanol

• Tax exemption, agricultural and trade policy

issues

III. Can bio-ethanol contribute to energy and

climate policy goals?

• Evaluation based on

• energy balances, alternative land use

• greenhouse gas balances, CO2 abatement

costs

IV. Conclusions

Contents

1. Exemption from the gasoline tax

• Gasoline tax on normal fuels: 65.5 cent/liter

• Production costs of normal fuels: 20 cent/liter

• Production costs of bio-ethanol in Germany: 50

cent/liter

II. Institutional and market conditions for the production of bio-ethanol in

Germany

Price advantage for bio-ethanol: 35,5 cent/liter

Predicted tax loss: ca. 250 Mio. in 2005

• Market organization for sugar

• Set-aside premium

• In Germany: Market organization for

ethanol

• Reforms of the Common Agricultural

Policy

2. Agricultural policy issues

3. Trade policy issues

• Tariffs: currently up to 19.2 EUR/hectoliter

• No tariffs for ACP and other developing countries

• April 2003: regulation for European ethanol market: import licenses, tariff-quotas, emergency measures

• Possibilities for accession countries

Two premises must be fulfilled:

1. An increased use of bio-ethanol must lead to energy-savings and a reduction in GHG emissions

2. Abatement costs must not be greater than for alternative strategies

III. Can an increased use of bio-ethanol contribute to energy and climate policy

goals?

Analysis of available evidence for Germany

Net Energy Balance (NEB)• Compares the fossil energy input during the

production of bio-ethanol to the energy content of traditional fossil gasoline that is avoided due to the substitution by bio-ethanol (different calorific values are accounted for)

The first premise is tested with energy and GHG balances:

Net Greenhouse Gas Balance• Compares the GHG emissions during the

production of bio-ethanol to the emissions avoided due to the substitution of traditional fossil gasoline by bio-ethanol

• Estimate entire energy input and GHG emissions during complete production chain:

1. Input/emissions during agricultural production

• Crucial assumptions: fertilizer input, energy needed, yields/hectare, by-products

2. Input/emissions during conversion

• Crucial assumptions: plant-size, technological standard, type of energy input, by-products

• Ratio of substitution between bio-ethanol and gasoline

Computing energy and GHG balances for bio-ethanol

Figure 1: Net energy balance for the substitution of gasoline by bio-ethanol based on wheat

-15,00

-10,00

-5,00

0,00

5,00

10,00

1985 1990 1995 2000 2005 2010 2015year

Cre

dit

fo

r s

ub

sti

tute

d g

as

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les

s t

he

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d p

roc

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s e

ne

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Marr

ow

IEA

*

Ecotr

affic

CC

PC

S

ER

L

Austm

eyer

et al.

IEA

(pro

gnosis

)

CC

PC

S (

pro

gnosis

)

MJ/l

meó 2002

Figure 2: Net energy balance for the substitution of gasoline by bio-ethanol based on sugar beets

-15,00

-10,00

-5,00

0,00

5,00

10,00

15,00

1985 1990 1995 2000 2005 2010 2015

year

Cre

dit

fo

r su

bsti

tute

d g

aso

lin

ele

ss t

he r

equ

ired

pro

cess

en

erg

y

MJ/l

Ma

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Au

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eye

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t a

l.

ER

L

CC

PC

S

IEA

*

Su

ed

zuck

er/

Ste

ph

an

Su

ed

zuck

er/

Bue

rcky

IE

A (

pro

gn

ois

)

Ma

rrow

meó 2002

Results from the energy balances

Nevertheless energy savings are rather low

Other land use strategies allow for larger energy gains on a given amount of land

• Variation between different studies is bigger for sugar

beets

• Bio-ethanol based on sugar beets is more favorable

• IEA predicts larger savings

• Simulated positive/negative scenario

Strategies of Agricultural Land Use

0

50 000

100 000

150 000

200 000

250 000

energy gain

fossil input

Sugar beet Wheat Corn Rapeseed Wood

MJ/ha

For the production of:

Bio-ethanol

Electricity

RME

Figure 3: Net GHG balance in the production of bio-ethanol based on

wheat

-1 000

-500

0

500

1 000

1 500

2 000

2 500

3 000

3 500

1985 1990 1995 2000 2005 2010 2015year

red

uce

d C

02-e

mis

sio

ns

thro

ug

hsu

bst

itio

n l

ess

pro

cess

em

issi

on

s

Mar

row

IEA (prognosis)*

CC

CP

S (

prog

nosi

s)

IEA

*

Eco

traf

fic

CC

PC

S

ER

L

Aus

tmey

er e

t al.

kg CO2 eq./ha

meó 2002

Figure 4: Net GHG balance in the production of bio-ethanol based on

sugar beets

-4 000

-2 000

0

2 000

4 000

6 000

8 000

10 000

12 000

1985 1990 1995 2000 2005 2010 2015

year

red

uc

ed

C0

2-e

mis

sio

ns

th

rou

gh

su

bs

titi

on

le

ss

pro

ce

ss

em

iss

ion

s

CO2eq./ha

Marr

ow

Austm

eyer

et al.

ER

L

CC

PC

S

IEA

*

Suedzucker/

Ste

phan

Suedzucker/

Buerc

ky

IE

A

(pro

gnosis

) *

IFE

U (

ET

BE

)

meó 2002

Results from net GHG balances

• Bio-ethanol based on sugar beets is more favorable

• IEA predicts larger savings• Simulated positive/negative scenario

Nevertheless net GHG savings are rather low

CO2-abatement costs of the bio-ethanol and alternative

strategies• GHG emissions always have the same environmental

impact

Efficient climate policy requires reduction of emissions at sources with the lowest abatement costs

• Given the commitment in the Kyoto-Protocol, abatement costs in the EU vary around 30 €/ton CO2

Benchmark for the evaluation of the bio-ethanol strategy

Figure 5: Relationship between process costs and CO2 abatement for producing biofuels

-2 000

0

2 000

4 000

6 000

8 000

10 000

0 500 1000 1500 2000 2500 3000 3500 4000 4500 5000

Excess Cost of Producing Biofuels (in EUR/ha)

CO

2 R

edu

ctio

ns

Rel

ativ

e to

Co

nve

nti

on

al E

ner

gy

So

urc

e

50 EUR / t CO2

400 EUR / t CO2

1000 EUR / t CO2

Wood/Electricity (IEA)

kg/ha

9

8

76

54

3

2

1

15

14

12

11

10

13

wheat sugar beets

Results for abatement costs

• Simulated best case scenario: at least 200 €/ton of CO2

• Abatement costs for bio-ethanol strategy are much

higher than for alternative strategies

• Possibilities to lower costs: use by-products, optimize

production processes, large-scale production

IV. Conclusions

However: • There are better options of agricultural land use• Expensive strategy with little effects

No economically viable option for climate policy

Justification with energy and agricultural policy objectives questionable

Analysis of the promotion of bio-ethanol in Germany from a climate policy point of view:

• Net energy balances have improved• Net greenhouse gas balances have improved

Thank you for your attention!

Questions: jm.henke@ifw-kiel.de