Are biofuel mandates and tax credits such a good idea? It may be wise to learn from the EU’s experience…
After passage of the new Renewable Fuel Standard (RFS) late last year (see earlier post), which mandates production of 15 billion gallons of corn-grain ethanol by by 2015, many of us are left contemplating the vast implications for US industry, not to mention commodity prices, auto manufacturing, and the greater course of biofuel research and development.
Rewind to 2003, when the European Union (EU) passed a biofuel directive requiring 5.75% of transport energy to come from biofuels by 2010, increasing to 20% by 2020. When paired with tax credits for biodiesel production, business boomed, at least for a while:
Mirroring the U.S. experience with ethanol, European companies rushed to make biodiesel out of a range of things, including rapeseed crops and used McDonald’s frying oil. Low raw-material costs and generous tax breaks meant margins were high. By last year, Europe’s annual capacity to make the fuel had climbed to 10 million metric tons from two million tons in 2003.
As with ethanol in the U.S., though, Europe now has a glut of biodiesel. The world consumed only nine million tons of biodiesel last year. Europe’s producers found buyers for just five million tons. The industry is in trouble, under pressure from soaring costs, disappearing tax breaks, less-costly imports and waning public support.
‘Glut’ is not entirely accurate. Rather, Europe is facing a feedstock crisis which is driving biodiesel prices through the roof. Few will buy the fuel in significant quantities if it can’t compete on price:
Since January, prices for the crops that make most biodiesel have doubled, driving the cost of a ton of biodiesel up 50%, to around $1,440 a ton, or about $4.80 a gallon. Prices for regular crude-oil-based diesel have risen sharply, too, but only to $840 a ton, or $2.80 a gallon. Biodiesel has become more expensive for oil companies to buy than fossil fuel, and they are cutting back.
As in the U.S., the biodiesel industry in Europe depends on tax credits for its survival, and many of these credits are now being phased out or canceled entirely (Germany canceled their tax credit in August 2006).
If this seems shocking, keep in mind the U.S. ethanol production (not to mention the petroleum industry) also depends on billions of dollars in direct subsidies and import tariffs. But it’s more likely we’ll see a proper glut before facing the EU’s problems:
Buoyed by $7 billion a year in subsidies and a tariff on foreign imports, U.S. farmers planted a quarter more corn this year, most of it going toward making ethanol. But supply of ethanol is outstripping demand, mainly because of the difficulty and cost of transporting ethanol, which needs special pipelines. Some U.S. ethanol producers are idling production and a debate has begun over whether the pressure that ethanol production puts on agricultural land is worth the modest cuts in carbon-dioxide emissions it yields.
Where this roller-coast will take us is anyone’s guess, but it wouldn’t hurt to avoid mistakes that have already been made.
WSJ (Dec. 27, 2007): Europe’s Biodiesel Drive Sputters