The Madness of US and EU Biofuels Policy

Sometime you just cannot make sense of the madness.

In its desire to rid itself of the ravages of foreign oil addiction, the US is subsidizing domestic ethanol production.

The success of this programme means that nearly four out of ten bushels of this year’s corn crop will be made into fuel for your car.

But here’s the rub – aside from the blatently obvious fact that this food to fuel policy is forcing up food prices – This ethanol is now being exported  in record quantities.

Recent US government data showed that 251m gallons in fuel ethanol were exported in the nine months to September 30, more than double the 2009 total.

So on the one had the US is subisidising ethanol production to wean itself of foreign oil, but that oil is now being exported to foreigners.

Does it make sense? Of course not.

The way the US ethanol market is being subsidised is by tax credits to companies that blend ethanol with petrol.

Indeed US government support to the ethanol industry totalled $7.7bn in 2009, according to the International Energy Agency.

But using tax credits to facilitate an export boom does not make sense to Rob Vierhout of ePure, a European ethanol trade association, who tells today’s FT: “The blender’s credit was not set up with the intention to facilitate exports” and warned of legal action to halt US shipments subsidised by the credit.

The threat of European legal action is not the only threat to the tax credit behind the exports. It is due to expire at the end of the year and could be challenged from other quarters, although continuing the credits will be seen as vital by politicians from the corn belt.

Moreover US suppliers argue that the market is saturated at home and so they have to export:  “The domestic market here in the US is essentially saturated. We are looking for a home for the surplus,” argues Geoff Cooper at the Renewable Fuels Association, a US trade group.

But the EU is also caught between a rock and a hard place. It if does not import US ethanol, it will have to grow it itself and this could have devastating consequences.

A recent report by the independent Institute for European Environmental Policy (IEEP) found that plans to make European motorists use more biofuels could take an area the size of Ireland out of food production by 2020 and accelerate climate change.

The report bases its predictions on plans that countries have submitted to the EU detailing how they intend to meet their legal requirement to include 10% of renewable energy in all transport fuels by 2020.

IEEP calculations suggest that the indirect effect of the switch will be to take between 4.1m and 6.9m hectares out of food production. In addition, say the authors, opening up land to compensate for the food taken out of production will lead to between 27m and 56m tonnes of additional CO2 emissions, the equivalent of putting nearly 26m more cars on the road.

David Baldock, Executive Director IEEP, commented that: ‘Promoting the use of biofuels with no consideration of indirect land use change (ILUC) has the potential actually to increase the EU’s greenhouse gas emissions. It is vital that this situation is rectified”.

So a policy that is meant to reduce CO2 actually increases CO2.

As I said, sometime you just cannot make sense of the madness.