Energy Policy 38 (2010) 6977–6988

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Energy Policy

0301-42

doi:10.1

n Corr

E-m

journal homepage: www.elsevier.com/locate/enpol

An overview of biofuel policies across the world

Giovanni Sorda a,n, Martin Banse b, Claudia Kemfert c

a E.ON Energy Research Center, Institute for Future Energy Consumer Needs and Behaviour (FCN), RWTH Aachen University, Mathieustraße 6, 52074 Aachen, Germanyb Johann Heinrich von Thunen-Institute (vTI), Federal Research Institute for Rural Areas, Forestry and Fisheries, Institute for Market Analysis and Agricultural Trade Policy,

Braunschweig, Germanyc Deutsches Institut fur Wirtschaftsforschung (DIW), Energy, Transportation and Environment Department, Berlin, Germany

a r t i c l e i n f o

Article history:

Received 14 April 2010

Accepted 30 June 2010Available online 4 August 2010

Keywords:

Biofuels

Policy

Renewable energy

15/$ - see front matter & 2010 Elsevier Ltd. A

016/j.enpol.2010.06.066

esponding author. Tel.: +49 241 80 49837.

ail address: gsorda@eonerc.rwth-aachen.de (G

a b s t r a c t

In the last decade biofuel production has been driven by governmental policies. This article reviews the

national strategy plans of the world’s leading producers. Particular attention is dedicated to blending

targets, support schemes and feedstock use. Individual country profiles are grouped by continent and

include North America (Canada and the US), South America (Argentina, Brazil, and Colombia), Europe

(the European Union, France, and Germany), Asia (China, India, Indonesia, Malaysia, and Thailand) and

Australia.

& 2010 Elsevier Ltd. All rights reserved.

1. Introduction

The objective of this paper is to provide a concise butexhaustive overview of the policies that have fostered theexpansion of the biofuel industry across the world. The largestproducing countries are discussed individually. Key laws, actionplans and incentive schemes of the past decade are reviewed.Current output targets, subsidies and import tariffs are high-lighted. We also identify the principal feedstock employed forbiofuels manufacture in each nation. These elements should allowpolicy analysts and socio-economic researchers to identify thedriving forces behind the recent growth of biofuel production,single out the agricultural products that are directly affected bylocal support schemes as well provide a basis for further and moredetailed investigations on the implications of current policies.

Over the last ten years biofuels production has increaseddramatically. Between 2000 and 2009 fuel ethanol outputexperienced an increase from 16.9 to 72.0 billion liters whilebiodiesel grew from 0.8 to 14.7 billion liters (Fig. 1).

The increment in production has been driven by governmentalinterventions. In the US, the world’s largest fuel ethanol producer,strong financial incentives are guaranteed for biofuel manufac-turers. In the European Union, the world’s largest biodieselproducer, biofuel consumption is mostly driven by blendingmandates in both France and Germany (see Tables 1 and 2 for theoutput levels of individual countries).

External incentives are required to achieve the biofuel targetsset by national administrations. Production is unprofitable

ll rights reserved.

. Sorda).

(Brazil being the only exception) and it needs to be promotedvia tax exemptions, subsidies or other forms of financialincentives (Rajagopal and Zilberman, 2007). The OECD estimatedthat in its member countries biofuel subsidies amounted to US$ 15billion in 2007 (OECD, 2007; OECD/ITF, 2008).

Biofuel policies are strongly distortionary. Due to the char-acteristic of their manufacture, commercially available biofuelsemploy almost uniquely food crops as their feedstock (predomi-nantly sugar cane and sugar-beet, corn and oily seeds; Larson,2008). In 2006 20% of the total US corn supply was reallocated tofuel ethanol production (EIA, Energy Policy Administration, 2007).Consequently biofuels have been at least partially blamed for theincrement in food prices between 2003 and 2008 (Mitchell, 2008;UNCTAD, United Nations Conference on Trade and Development,2008; Schmidhuber, 2007; Johnson, 2007; Mercer-Blackman et al.,2007). In the second half of 2008 the FAO’s food-price indexsubstantially dropped, while 2009 witnessed again a steadyincrement (OECD/FAO, 2009. In January 2010 the indexes forcereal grains, oils, and sugar prices were, respectively, 70%, 69%and 276% higher than the 2002–2004 average values.1

In addition to criticisms for the increased linkages between thefood and energy sectors, studies that measured the life-cycleassessment (LCA) of biofuels have highlighted a negative netcontribution to a reduction in GHG emissions for specific types offeedstock crops and processing techniques (Macedo et al., 2004;Pimentel and Patzek, 2005; Farrel et al., 2006; Crutzen et al.,2007). Whereas the results of LCA studies may vary considerably(for an overview see OECD, 2008), corn-based ethanol consistentlyshowed the most harmful LCA profile.

1 See the FAO Food Price Indices, retrived on 1 March 2010, available on

http://www.fao.org/worldfoodsituation/FoodPricesIndex/en/.

Fig. 1. World annual ethanol and biodiesel production, 1975–2009*. Note: Original data in US gallons; 2009 values are projections. For more information and a free

download of the book, see Earth Policy Institute on-line at www.earthpolicy.org. Note that all data was in US gallons, and were later changed by authors into liters (also see

below for exact values used in the figure, already converted into liters).

Source: F.O. Licht; Lester R. Brown, Plan B 4.0: Mobilizing to Save Civilization (New York: W.W. Norton & Company, 2009) Brown (2009).

Exact values of data in the figure

Ethanol (million liters) Biodiesel (million liters)

1975 551

1976 658

1977 1456

1978 2504

1979 3499

1980 4325

1981 4929

1982 7079

1983 9190

1984 12,755

1985 13,991

1986 13,065

1987 14,457

1988 14,757

1989 15,043

1990 15,064

1991 16,214 11

1992 15,729 87

1993 15,746 142

1994 16,712 280

1995 17,898 404

1996 18,569 541

1997 20,317 564

1998 19,017 581

1999 18,637 712

2000 16,940 797

2001 18,269 993

2002 20,318 1436

2003 24,104 1911

2004 28,231 2301

2005 31,022 3835

2006 38,583 6680

2007 49,154 9836

2008 65,690 14,574

2009* 72,072 14,716

Note: 2009 is a projection

2 Note that biofuels derived from algae may sometimes be referred as third

generation or advanced biofuels.

G. Sorda et al. / Energy Policy 38 (2010) 6977–69886978

In order to reduce the impact of biofuels production onfood commodities and improve their GHG emission-balance,greater attention has been devoted to the development ofsecond-generation ethanol and biodiesel. Second generationsimply refers to biofuels that are manufactured from non-foodfeedstock. The input of choice may be biomass rich in lignocellulose(such as woody crops or energy grasses, i.e. switchgrass and

miscanthus) or oily plants (e.g. jathropa).2 Hamelinck and Faaij(2006) provide an overview of second-generation processingtechniques.

Table 1World fuel ethanol production by country (2008–2007) in million liters.

Source: RFA, Renewable Fuel Association, Statistics, Annual World Ethanol

Production by Country (based on F.O. Licht estimates) (RFA, Renewable Fuel

Association, 2010). Original version in US gallons and here converted in liters.

Available at http://www.ethanolrfa.org/pages/statistics#E as of 29/06/2010.

Country 2008 2007

USA 33,737 24,360

Brazil 24,261 18,815

EU 27 2748 2138

China 1882 1822

Canada 892 830

Thailand 337 297

Colombia 296 281

India 247 198

Australia 97 99

Other 480 311

World 64,981 49,112

Table 2World biodiesel production by country (2008–2007) in million liters.

Source: OECD/FAO, Agricultural Outlook 2009–2018. In particular, Agricultural

Outlook 2009-2018 database, where data was originally published in tonnes.

Conversion rate: 1 liter of biodiesel¼0.88 kg (OECD-FAO Database, 2009).

Data available available at: http://www.agri-outlook.org/document/6/0,3343,

en_36774715_36775671_40969158_1_1_1_1,00.html.

Country 2008 2007

EU 27 9164 7377

US 3078 2733

Argentina 1550 522

Brazil 1238 457

Australia 1051 524

Malaysia 609 240

Indonesia 405 327

India 227 114

Canada 114 99

Other 1036 895

World 18,472 13,060

3 The Government of Canada Biofuels Bill Receives Royal Assent, published in

EcoAction on 26 June 2008 and available at http://www.ecoaction.gc.ca/news-

nouvelles/20080626-eng.cfm.4 This target is ultimately to be interpreted as the energy content equivalent of

36 billion gallons of ethanol.5 Note that in the EPA definition, advanced biofuels include biomass-based

diesel, cellulosic biofuels and non-cellulosic advanced biofuel.6 Reductions in life-cycle GHG emissions for cellulosic biofuels must reach

60%.

G. Sorda et al. / Energy Policy 38 (2010) 6977–6988 6979

In an attempt to reduce oil dependency, increase the share ofrenewable energies and contribute to a reduction in declining farmincome, governments across the world have approved legislativeinstruments that foster the biofuel industry. Concerns over risingfood prices have led some countries to momentarily halt or reducesupport programs (e.g. China), while others have decided toincrement their investment in second-generation technologies(e.g. the US). Germany, on the other hand, has directly linked itsfuture biofuel consumption to GHG saving targets. The dangerouslinkage between energy needs and food consumption as well asthe goal of cost-competitive manufacture remain key issues in thepolitical agenda of biofuel producing nations. This article is meantto provide a useful overview of the current output targets andsupport schemes around the world in order to better understandsome of the key factors driving biofuels production.

The next sections present the largest producing nations (seeTables 1 and 2) grouped by continent. We include North America(Canada and the USA), South America (Argentina, Brazil andColombia), Europe (the European Union, France and Germany),Asia (China, India, Indonesia, Malaysia and Thailand) and Australia.

2. North America

2.1. Canada

The Canadian Environmental Protection Act Bill C-33 mandates a5% renewable content in gasoline by 2010 and a 2% renewable

content in diesel fuel and heating oil by 2012.3 In order to meetthe proposed targets a minimum of 1.9 billion liters of ethanolshould be produced given current trends on the sale of gasoline.The achievement of the 2% biodiesel federal mandate is presumedto require a production capacity of 520 million liters of biodieselby 2012 (Dessureault, 2008).

Ethanol production is almost uniquely based on cereal grains.In 2009 corn accounted for 69% of ethanol output, while wheatcontributed to a further 30%. Biodiesel is obtained primarily fromanimal fats. It is estimated that in 2009 tallow grease was theleading biodiesel feedstock (49%), followed by yellow grease (37%).Canola’s relevance in biodiesel production has been increasing andin 2009 it accounted for 14% of the total (Dessureault, 2009).According to the Doyletech report, the production of renewablefuels has an aggregate positive impact on the Canadian economyof CAN$2 billion annually (Doyletech, 2010).

Besides the federal share mandate, there are direct incentivepayments for production since April 2008. Through the EcoENERGY

for Biofuels Program ethanol manufacturers enjoyed a maximumincentive rate of CAN$0.10 per liter for three years from 2008 to theend of 2010. The payment declines by CAN$0.01 every yearthereafter until it reaches CAN$0.04 in 2015 and 2016. Themaximum incentive rate for biodiesel amounted to CAN$0.20 perliter from 2008 to 2010. The subsidy will then decreaseby CAN$0.04 every year until it is valued at CAN$0.06 in 2016.In addition to the EcoENERGY program, several fund schemes are inplace to expand biofuel production by targeting an enlargement ofmanufacturing facilities (econAGRICULTURE Biofuels Capital Initia-

tive), granting support to research clusters (Agricultural Bio-Products

Innovation Program and Sustainable Development Technology Canada)and accelerating the commercialization of innovative agriculturalproducts and services (Agri-Opportunities Program).

The federal biofuel mandates and support policies are furtherintegrated by specific legislative measures imposed and financedby individual provinces. Dessureault (2008, 2009) provides adetailed account of the various regional polices in place. Tradeprotection of the national biofuel industry is limited in comparisonto current custom polices set in the US and the EU. There are noimport tariffs on alternative fuels manufactured in NAFTAcountries. There is however a duty of CAN$0.05 per liter onethanol imports from Brazil.

2.2. The United States

In July 2010 the updated Renewable Fuel Standard (RFS2) wentinto effect, finalizing proposals made with the Energy Indepen-

dence and Security Act of 2007. An aggregate of 36 billion gallonsof renewables must be used in transport fuels by 2022.4 From2015 onwards, the volume of conventional biofuels (e.g. corn-ethanol) should be 15 million gallons. Cellulosic biofuels areexpected to amount to 0.1 billion gallons in 2010 and surge to 16billion gallons in 2022, while the total contribution of advancedbiofuels5 should not be less than 21 billion gallons by 2022(see Fig. 2).

RFS2 also require producers of advanced biofuels to reducelife-cycle greenhouse gas (GHG) emissions by at least 50%,6 while

Fig. 2. RFS2 volume requirements.

Source: Energy Policy Administration,‘‘EPA Finalizes New Regulations for the National Renewable Fuel Standard Program for 2010 and Beyond,’’ (February 2010)

(EPA, Environmental Protection Agency 2010) available at http://www.epa.gov/otaq/fuels/renewablefuels/regulations.htm.

G. Sorda et al. / Energy Policy 38 (2010) 6977–69886980

standard biofuels have to achieve a reduction in life-cycleGHG emissions of 20%.7 In addition, all renewable fuels shouldcertify the type of feedstock used and comply with regulations onland-use.

The obligatory consumption of given biofuel volumes was firstimplemented with the inclusion of Renewable Fuel Standards(RFS1) in the Energy Policy Act of 2005. The objective was toemploy 4 billion gallons of renewables in transport fuels in 2006and increment their share over the years. The new regulations(RFS2) further increase the biofuel targets, incentivise second-generation production and implement new criteria to ensure amore environmentally sustainable manufacture.

The guiding principle of biofuel policies has been a reductionin the country’s dependency on oil. One of the aims of the Energy

Independence and Security Act of 2007 was to decrease gasolineconsumption by 20% in the next 10 years. The Biomass Program8 of2008 had two primary objectivess. First, to decrease gasolineconsumption by 30% when compared to 2004 levels by 2030.Second, to make cellulosic ethanol corn-derived ethanol.

Historically, US biofuel policies have focused on the ethanolindustry. In 1978 the Energy Tax Act established tax credits forethanol blenders. Over the decades different degrees of credithave been guaranteed. However, some form of subsidies has been

7 The 20% threshold only applies to renewable fuel from new facilities that

commenced construction after December 19, 2007, with an additional exemption

from the 20% threshold for ethanol plants that commenced construction in 2008 or

2009 and are fired with natural gas, biomass, or any combination thereof (Federal

Register, Regulation of Fuels and Fuel Additives: Changes to Renewable Fuel

Standard, March 26, 2010, p. 14687). Interestingly, in California corn-based

ethanol does not qualify as a fuel that sufficiently reduces GHG emissions. Corn-

based ethanol/gasoline blends are not considered low carbon fuels (see the Low

Carbon Fuel Standard enacted by the California Air Resource Board in May 2009).8 DOE, US Department of Energy, Biomass Multi-Year Program Plan (March

2008), available at http://www1.eere.energy.gov/ biomass/pdfs/biomass program

mypp.pdf.

present ever since.9 Today, ethanol is mainly derived from corn.Its importance to the corn industry is gauged from the statisticthat 20% of the US corn supply was employed as ethanol feedstockin 2006 (EIA, Energy Policy Administration, 2007).

In the past few years the main source of financial support forbiofuels has been the Volumetric Ethanol Exercise Tax Credit

(VEETC).The VEETC was enacted in 2004 by the American Jobs Creation

Act and it is scheduled to expire in 2010. It is guaranteed for everydomestic or imported gallon of ethanol blended with other fuels.It is awarded without quantity limits and independently of theprice of gasoline. Blenders can claim 51 dollar-cent credit pergallon used (EIA, Energy Policy Administration, 2008). The EnergyInformation Administration estimated that the tax credit costedaround US$2.4 billion in 2006. If in 2010 the annual production ofethanol exceeds 11 billion gallons, the tax credit alone would costthe government almost US$5 billion (EIA, Energy Policy Admin-istration, 2007). Koplow and Steenblik (2008) calculated that thetotal yearly support for ethanol production (inclusive of local andstate subsidy programs, present especially in the mid-westregion) ranged from US$5.8 to US$7 billion in 2006 and couldreach US$11 billion in 2008.10.

The 2004 American Jobs Creation Act also guarantees tax creditsfor biodiesel under the VEECT. The subsidy amounts to US$1 pergallon for biodiesel produced from virgin oils (the main feedstock)

9 An important milestone in the development of the US ethanol industry was

the 1990 Clean Air Act Amendments of 1990. The latter mandated the adoption of

oxygenated fuels in areas with too high carbon monoxide levels (Hahn, 2008).

Either ethanol or methyl tertiary butyl ether (MTBE) were used by blenders to add

oxygen to gasoline in order to lower the engine’s carbon monoxide emission.

Whereas initially MTBE was the oxygenate of choice, following claims of cancerous

groundwater contamination it was later supplanted by ethanol.10 Koplow and Steenblik, 2008, p. 96. For a review of individual state policies

see Koplow (2006).

G. Sorda et al. / Energy Policy 38 (2010) 6977–6988 6981

or fats, and US$0.50 per gallon for recycled oils. Koplow (2006)estimated that the foregone tax revenue due to biodieselexemption would reach almost US$1.4 billion in 2008.

Import tariffs constitute an important measure to protect thenational biofuels industry from more competitive foreign manu-facturers (above all, Brazil). There are two taxes levied againstimported ethanol: an ad valorem duty of 2.5% and a tariff ofUS$0.54 per gallon applied under the Most Favoured Nations(MFN) scheme. The latter hinders imported ethanol from enjoyingthe government subsidy granted by the VEECT. North AmericaFree Trade Agreement (NAFTA) members (Canada and Mexico)can export ethanol to the States on a duty-free basis. Limitedduty-free imports are allowed from countries of the CaribbeanBasin Economic Recovery Act (CBERA), as long as their exports donot surpass 7% of domestic production.

Finally, consumption of ethanol is directly proportional to theengine requirements and the availability of fuels with highalcohol content. Since the 1970s all gasoline powered vehiclessold in the US can run on E10.11 In particular, the 1988 Alternative

Motor Fuels Act (AMFA) helps automakers counterweight Corpo-

rate Average Fuel Requirements (CAFE) when vehicles that run onalternative fuels are manufactured (Koplow, 2006).

3. South America

3.1. Argentina

Gasoline and diesel are required to contain a 5% biofuel sharestarting in January 2010 (Argentine Biofuel Law 26.093 of April2006, implemented in February 2007 under Decree 109/2007).The quality and technical requirements of fuel ethanol werespecified in November 2008 with Resolution 1295/2008. Biodiesel’squality specification were formalized as late as February 2010with Resolution 6/2010. The pricing scheme for ethanol destined tothe internal marked was established in 2008 with Resolution 1294/

2008, while biodiesel’s domestic price was set up with Resolution

7/2010 in February 2010.Biofuel manufacturers that export their products do not

enjoy tax incentives. Biodiesel and ethanol sold to the internalmarket are granted financial support. Producers can opt forthe reimbursement of the value added tax or accelerateddepreciation on capital investments. In addition, the governmentassures that the biofuel output will be purchased for the 15 yearsperiod that corresponds to the term of the Biofuel Law. However,financial incentives are reviewed annually (hence they arenot guaranteed) and prices are set by the government (Rutzet al., 2009).

Biodiesel production is based on soybean and centres on theexisting soybean processing cluster in Rosario.12 In recent yearsbiodiesel output and productive capacity have increased sub-stantially (an output increment of 433% between 2008 and2007—Argentine Renewable Energies Chamber, 2009). In 2009production is estimated at 880 million liters while outputcapacity is expected to reach 2.4 billion liters (Joseph, 2009).Ethanol production is substantially less developed (45 millionliters in 2009) and it is linked to the sugar industry.

Until the end of 2009 almost the entire biofuel production wasexported. While biofuel exports are not granted direct financialincentives, biodiesel receives favourable export tariffs in compar-ison to its feedstock (soybean and soybean oil). Soybean exports

11 E10 stands for fuels with 90% gasoline and 10% ethanol.12 The soybean industry plays an important role in the country’s agricultural

sector. Argentina is the world’s third largest soybean producer and the world’s

leading exporter of soybean meals and soybean oil (Joseph, 2009).

are taxed at 35%, soy oil at 32% and biodiesel’s effective levy is17.5% (a 20% export charge and a 2.5% tax rebate).

The current high trade volumes may be hindered by newregulations in the importing countries. According to the EU’sRenewable Energy Directive of 2009, a minimum 35% reduction inGHG emissions is required from biofuels. The same documentassumes that soybean oil reduces emission by only 31% (thuspreventing its use in the European market).13 Similarly, Argentineproducers are concerned about the revision of the NationalRenewable Fuel Standards in the US.

3.2. Brazil

Brazil has the most developed and integrated biofuels programin the world. Its initiation dates back to the oil crisis of the 1970s.In 1975 Brazil introduced the National Alcohol Program Pro�alcool

focusing on the production of ethanol from sugar cane. Theobjective was to limit energy supply constraints, provide a stableinternal demand for the excess production of sugar cane andcounterweight variations in international sugar prices (Walterand Cortez, 1999). The government also made agreements withmanufacturers in order to develop a market for purposelymodified vehicles. In the next decade the commercialization ofbiofuels proved successful and 96% of automobiles sold in Brazilin 1985 were ethanol powered (Colares, 2008).

The decline of oil prices that followed 1985 led to a set-back inthe diffusion of fuel ethanol. Sales of ethanol powered vehiclesplummeted to 1% by the late 1990s and the over-valuation ofBrazilian currency (1994–1999) increased ethanol productioncosts. The government tried to limit these drawbacks byimplementing legislation in 1993 that required 22% ethanolcontent added to gasoline. In 2003 this percentage was raised to25%. During the 1990s further deregulatory decrees in the energyand fuel markets were implemented. In 1998 the governmentliberalized the price of hydrated alcohol to be used in fuels and in1999 it stipulated that hydrated ethanol fuel sales were to becarried out through public auctions.14

The surge in oil prices that characterized the 2003–2008period brought ethanol back to its initial success. Ethanol becameonce again a cheap and sought after alternative to oil. Further-more, the introduction of Flex-Fuel engine technology, whichallows drivers to run on gasoline or on ethanol, contributed to thisresurgence. In 2006 83% of the cars sold in Brazil were Flex-FuelVehicles (FFV) and the country achieved oil independence(Colares, 2008). According to de Almeida’s et al. (2008) estimates,‘‘FFVs could make up 27% of the Brazilian car fleet in 2010 and 43%in 2015.15’’

The success of the Pro�alcool program is reflected in theimportance that sugar and ethanol production play in theBrazilian economy. The two industries account for 3.6million jobs and 3.5% of GDP, while ethanol production aloneconsumes 50% of the total sugar cane supply (de Almeida’s et al.,2008).

The relevance of Brazilian biofuels production goes beyond itsnational borders. Brazil’s ethanol is recognized as the mostprice-competitive biofuel in the world. Macedo and Nogueira(2005) estimated ethanol costs in the Centre-South region ofBrazil to be US$0.23 per liter. According to Kojima and Johnson(2006), fuel ethanol average production costs range betweenUS$0.23 and US$0.29 per liter. These values would make ethanol

13 Directive 2009/28/EC of 23 April 2009, see Article 17 (on the sustainability

criteria for biofuels and bioliquids) and Annex V.14 World Trade Organization, Trade Policy Review—Brazil 2008 (2005).15 de Almeida’s et al., 2008, p. 156.

18 The percentage of feedstock purchased from family farmers varies across

regions: 30% for the Northwest, Southeast and Southern regions; 10% for the

Center-West and North regions (for crops harvested in 2009/2010); 15% for the

Center-West and North regions (for crops harvested in 2010/2011). See Barros

(2009).

G. Sorda et al. / Energy Policy 38 (2010) 6977–69886982

competitive with oil prices at about US$30 per barrel. deAlmeida’s et al. (2008) calculated the average production cost ofnew ethanol projects to be around US$0.37 per liter. In this casean oil price of US$42 per barrel would make ethanol cost-competitive.

Brazil’s low manufacturing expenses are the result of severalelements. First of all the production feedstock, sugar cane, isrelatively cheap. High levels of land productivity are combinedwith almost no needs for irrigation. In addition, the mills are ableto satisfy almost all of their energy needs through co-generationpower plants based on bagasse,16 a by-product of sugar cane(de Almeida’s et al., 2008). Finally, several years of governmentalsupport allowed large investment in research and technologydevelopments that perfected the transformation processes andlowered manufacturing costs.

As of today, however, there are no direct subsidies forethanol production. The government maintains nonethelesspreferential treatment of the ethanol industry compared togasoline producers. Since 2004 ethanol does not face any excisetax. Federal duties are also much higher for gasoline, which ischarged at US$0.26 per liter, compared to US$0.01 per liter forethanol. Fuel’s VAT is determined by state regulation and variesacross the country. In the S~ao Paulo State, where most ofproduction is located, the VAT component of gasoline’s consumerprice is 47%, while ethanol’s duty remains at 22%. In theRio de Janeiro State the difference is lower, with the VAT ongasoline accounting for 50% of the consumer’s price comparedto 36% for ethanol. de Almeida’s et al. (2008) estimate thatethanol enjoys tax incentives for a total value of US$977 millionper year. They also calculate that between 1979 and themid-1990s government support amounted to around US$16billion. These numbers remain relatively small compared to thelevel of subsidies granted by the US for ethanol as estimated byKoplow (2006).

Based on the successful experience of the bioethanol plan,Brazil is now also investing in biodiesel. The National Program on

Biodiesel Production and Usage (PNPB) was inaugurated in 2005.17

PNPB initially required 2% of petrol based diesel to be replaced bybiodiesel from 2008 to 2012 and increase to 5% from 2013onwards (Colares, 2008). On 1 July 2009, the Brazilian govern-ment has already mandated a 4% biodiesel blending share. It ispossible that the 5% biodiesel target will occur before 2013, asspecified in the current legislation. Biodiesel production isprojected at 1.5 billion liters in 2009 (Barros, 2009). In order tomeet the required consumption shares a large capacity expansionis underway. There are 65 plants already operating and 12 plantswaiting for an official authorization. The total output capacityreaches the 4 billion liters.

Brazilian biodiesel production is mostly based on soybean,though other important vegetable oil plants are castor bean, palmtree and jathropa. Contrary to ethanol, biodiesel is not cost-competitive and is subsidized. There are two main supportschemes. The first one refers to auctions organized by thegovernment, where the National Petroleum Agency (ANP) buysgiven quantities of biodiesel to ensure supply targets. The pricespaid in the auctions have been higher than production costs, thusstimulating supply. The second form of assistance is grantedthrough tax exemptions with a focus on the regional location ofproduction and on the provenience of the feedstock (‘‘Social FuelStamp’’ scheme). A minimum percentage of raw materials have tobe purchased from family farmers to qualify for the fiscal

16 Bagasse is a by-product of sugar cane, it is estimated that one tonne of sugar

cane generates 280 kg of bagasse, 90% of which is employed as feedstock for heat

and power generation.17 Federal Law 11.097 of 13 January 2005.

benefits.18 Depending on the type of feedstock and its regionalprovenience, tax incentives vary from 73% to 100% of the existingfederal levy (Barros, 2009).

3.3. Colombia

In 2001 the government mandated a 10% bioethanol blend incities with a population above 500,000 inhabitants (Law 963). Thelaw went into effect in late 2005 (Pinzon, 2007). In 2009, 75% oftotal gasoline consumed in Colombia had 10% ethanol content(Rutz et al., 2009). The government aims to cover the entirenational demand with the 10% blend by 2010 and subsequentlyincrease the ethanol content up to 25% by 2020 (ProExportColombia, 2008). Ethanol is primarily derived from sugar cane andits prices are fixed by the government on the basis of internationalsugar prices. In addition, fuel ethanol is exempt from the VAT.

The promotion of production and consumption of biodieselstarted with Law 939 of 2004 and Resolution 1289 of 2005. Thelatter established an obligatory 5% biodiesel blend by 2008(Pinzon, 2008). Future plans of the biodiesel promotion programinclude an increment of the blend up to 10% in 2010 and 20% in2012 (Rutz et al., 2009). Palm oil is the feedstock of choice forbiodiesel production. The latter enjoys sales tax and fuel taxexemptions. Furthermore, income obtained from crops used asbiodiesel feedstock is also exempted from taxation.

Financial instruments and policies are in place to support thelocal biofuel industry by giving incentives to new agro-industrialprojects. Finally, in 2009 the government has required with Decree

1135 that from 2012 60% of all new vehicles sold in Colombiamust support a E85 flexi fuel technology.19 The above mentionedquota shall increase to 100% by 2016 (Rutz et al., 2009).

4. Europe

4.1. The European Union

In April 2009 the parliament of the European Union endorsed aminimum binding target of 10% for biofuels in transport by 2020as part of the EU Directive 2009/28/EC on renewable energy. Thedirective also specified a minimum 35% reduction in GHGemissions to be achieved by biofuels during their life cycle, atarget that is meant to increase to at least 50% starting from2017.20 Sustainability criteria for indirect land-use changes arealso provided. No bio-feedstock shall originate from primaryforests, highly bio-diverse grassland, protected territories andcarbon-rich areas.

In 2003 Directive 2003/30/EC set a 5.75% target of biofuelsmarket penetration by 2010, although the quota was not bindingand individual countries were allowed to present their ownnational action plans. Each country was asked to aim at anindicative 2% share by 2005. However, in 2005 biofuels accountedfor only 1% of transport fuels. Similarly the 2010 goal is likely tobe missed, with an expected share of 4.2%.21

19 For vehicles above 2000 cm3 the requirement applies from 2013.20 Minimum GHG reductions vary depending on the type of feedstock and

processing technique employed.21 Data disclosed in the ’’Proposal for a Directive of the European Parliament

and of the Council on the promotion of the use of energy from renewable sources’’

[COM(2008) 30_nal], 23.1.2008.

Table 3EU 27 fuel ethanol production by country (2008–2007) in million liters.

Source: European Bioethanol Fuel Association, Production Data, available at http://

www.ebio.org/statistics.php?id=4 (European Bioethanol Fuel Association, 2009).

Country 2008 2007

France 950 539

Germany 581 394

Spain 346 348

Poland 200 155

Hungary 150 30

Slovakia 94 30

Austria 89 15

Sweden 78 120

Czech Rep. 76 33

Other 291 139

EU 27 2855 1803

Table 4EU 27 biodiesel production by country (2008–2007) in million liters.

Source: European Biodiesel Board (2009), Statistics, Production by Country.

Original data in tonnes, conversion rate: 1 liter¼0.88 kg. Note that data for

2007 is no longer on website. Data available at http://www.ebb-eu.org/stats.php.

Country 2008 2007

Germany 3203 3284

France 2063 991

Italy 676 413

Belgium 315 189

Poland 313 91

Portugal 305 199

Denm./Sweden 263 168

Austria 242 303

Spain 235 191

Other 1199 664

EU 27 8813 6492

G. Sorda et al. / Energy Policy 38 (2010) 6977–6988 6983

The above policies are part of a greater plan to foster theadoption of alternative sources of energy in the EU. In 2001Directive 2001/77/EC set a 12% target for gross national energyconsumption and a 22.1% share of electricity to be derived fromrenewables by 2010. In 2008 the European Commission expectedthat a share of 19% – rather than the 22% proposed – will bereached by 2010. More recently, the EU Directive on Renewable

Energy of 2009 endorsed a binding target of 20% share ofrenewables in energy consumption by 2020.

In several countries tax reductions or exemptions have beenimplemented in order to support production or consumption.Directive 2003/96/EC on Energy Taxation specified the incentivesallowed for the promotion of biofuels and for the achievement ofthe targets set by the common agenda. Tax exemptions can becarried out by single countries after approval of the EUCommission. The exemptions are expected to be proportional tothe blending levels and should account for raw material prices inorder to avoid overcompensation. In addition, they are limited induration to six years but may be renewed. We discuss in moredetail the individual tax and incentive policies of the two leadingproducers (France and Germany, see Tables 3 and 4) in Sections4.2 and 4.3.

Import tariffs for Most Favored Nations (MFN) amount to a6.5% ad valorem duty for biodiesel.22 There are however littleimports of biodiesel, of which the EU is the world’s leadingproducer (UNCTAD, United Nations Conference on Trade andDevelopment, 2006). Vegetable oil for biodiesel production canenter for industrial use as ‘‘crude soy oil,’’ ‘‘crude sunflower oil’’ or‘‘crude rape oil’’ and face a tariff of 3.2%. Alternatively, ‘‘crudepalm oil for industrial use’’ has no inbound duties (Kutas et al.,2007). Imports of ethanol are substantially larger and amountedto 250 million liters in the 2002–2004 period. About 30% ofimported bioethanol came from MFN countries under theclassification of ‘‘denatured alcohol’’ at a levy of h0.102 per literor as ‘‘undenatured alcohol’’ at h0.192 per liter.23 Reduced or noduties are granted to less developed countries belonging to theGeneralized System of Preference (GSP), Cotonneou Agreement(ACP) and Everything But Arms (EBA).

It is also important to mention the role played by the Common

Agricultural Policy (CAP) in the evolution of the biofuel industry.24

22 Biodiesel enters the EU borders under the item ‘‘other chemicals’’.23 Brazil was the largest MFN exporter, with a 25% quota of the total EU

imports.24 The CAP is a long standing aid program aimed at helping farmers, fostering

the quality of food and protecting rural areas. The program currently costs around

55 billion euros annually and it receives more than 40% of the EU’s budget. See the

EU’s web page on agriculture at http://europa.eu/pol/agr/index en.htm.

In 1992 the Mac-Sharry CAP reform25 was introduced in order toreduce surpluses in the production of cereals and oil seeds. Mostimportantly, mandatory fixed shares of non-food set-aside landwere established. In 2005 more than 95% of the non-food set-aside areas were allocated to energy crops.26 A further CAP reformin 2003 maintained obligatory shares of non-food set-aside land,included direct aid for energy crops and introduced SinglePayment Schemes (SPS) that decoupled producer support fromproduction decisions.27 For a maximum guaranteed area of 1.5million hectares, an incentive of h45 per hectare was granted togrowers of energy crops. In January 2009 the Council Regulation

(EC) No 73/2009 promulgated a new reform of the CAP. Mandatoryset-aside was suspended. In the light of potential food shortagesand rising prices, the policy’s original objective to eliminatecereals surpluses was obsolete.

Next we discuss the legislative framework of biofuels produc-tion in France and Germany, the two leading biodiesel andethanol producers in the European Union (see Tables 3 and 4).

4.2. France

French biofuel policies include mandatory blending ofbioethanol and biodiesel as well as fiscal incentives. The aggregateshare of biofuels in the transport sector was set at 1.2% in2005 and it is expected to increase to 7% in 2010. The aggregatebiofuel percentages were calculated with respect to net calorificvalues. The corresponding volume of biodiesel consumption isexpected to amount to 2.7 million tonnes (equivalent to 7.6% oftotal diesel volume) in 2010, while bioethanol demand shouldreach 0.81 million tonnes (comparable to 10.7% of total gasolinevolume) (Hennard, 2008). Initial plans from the previous govern-ment to reach a 10% target for biofuels integration have beenhalted and currently there are not specific biofuel goals after2010.

Specific quotas of biofuel production benefit from tax rebates.Production quotas are allocated through public tenders (Kutaset al., 2007). All manufacturers within the EU can participate inthe tender and so far a few foreign companies situated nearbyFrance’s borders have also qualified. The production quotas areallocated for a period of six years. A failure to reach the targetedincorporation rate incurs in a penalty. Each company is granted afavourable tax treatment on a limited quantity of biofuels. The tax

25 Council Regulation (EEC) No 1765/92—the Mac-Sharry reform.26 See ‘‘Report from the Commission to the Council on the Review of the

Energy Crops Scheme’’, COM (2006) 500 Final, 22.09.2006, p. 6.27 Council Regulation (EC) No. 1782/2003.

G. Sorda et al. / Energy Policy 38 (2010) 6977–69886984

rebates are reviewed annually and have been reduced over theyears. In 2005 biodiesel and bioethanol enjoyed 0.33 and 0.38 h/lreductions, respectively. In 2009 biodiesel manufacturers wereentitled to a 0.15 h/l rebate while ethanol producers were granteda 0.21 h/l saving over given quantities of output (Flach, 2009). Thefiscal rebates are expected to phase-out by the end of 2011.

Biofuels production has increased substantially despite therecent decline in fiscal incentives. Bioethanol is obtained fromwheat, corn and sugar-beet. Biodiesel is based on vegetable oils(especially rapeseed). In 2010 French biodiesel consumption isprojected to surpass its German counterpart for the first time with2.7 million tonnes. In output terms, Germany still leads theEuropean biodiesel market with a projected 2.66 million tonnesoutput, while French companies are expected to produce 2.3million tonnes in 2010. On the other hand, France remains theleading ethanol producer of the Euro region with a forecasted700,000 tonnes of ethanol in 2010 (Flach, 2009). Germany andFrance should display similar consumption and productionpatterns of both ethanol and biodiesel in the medium term andwill remain the leading European biofuel markets.

4.3. Germany

In July 2009 the German government approved a revision of itsmandatory biofuel targets.28 The overall mandatory biofuels sharein the transport sector was adjusted to 5.25% for 2009 and it willbe held at 6.25% from 2010 until 2014 (all percentages aremeasured in net calorific values). In addition, the minimumbiodiesel content in transport diesel was retroactively set at 4.4%for 2009 and it will be kept constant until 2014. Similarly theshare of ethanol in gasoline was fixed at 2.8% over the 2009–2014interval.29 From 2015 onwards, the biofuel quotas will bedetermined on the basis of GHG emission reductions. The Germangovernment is currently discussing how to implement andmonitor the forecasted reductions in CO2 emissions. Germany isthe first country in the EU to propose biofuel quotas based onGHG emission savings.

In September 2009 the German government has promulgatedthe sustainability decree for biofuels,30 which encompasses theregulations proposed in the EU Directive 2009/28/EC. Besides theGHG savings, biofuels will have to certify that the provenience oftheir feedstock does not include primary forests, highly bio-diverse grassland, protected territories and carbon-rich areas. Inaddition, Hydrotreated Vegetable Oils (HVO) have been proposedas an alternative to the standard biofuels (i.e. biodiesel andethanol), pending approval from the European Union.

Starting from 1 January 2007, Germany eliminated fuel excisetax exemptions and replaced them with quota obligations and taxrebates.31 Previously the total revenue loss due to biofuel taxexemptions reached 1.98 billion per year (Kutas et al., 2007).Budget constraints eventually led the German government to

28 See ‘‘Draft Law on the Amendment of the Promotion of Biofuels’’ (originally

as Anderung der Forderung von Biokraftstoffen), 18 July 2009.29 Fuel producers are required to supply a mandatory biofuel share equivalent

to 5.25% of their aggregate production in 2009. In their attempt to meet the above

mentioned quota, there are minimum binding requirement for the production of

diesel and gasoline. The share of biodiesel in diesel production must not be lower

than 4.4%, whereas the bioethanol content of gasoline must correspond to at least

2.8%.30 Biokraftstoff-Nachhaltigkeitsverordnung—BiokraftNachV, 30 September 2009.31 See State aid No N 57906 - Germany and the European Commission Document

C(2006)7141, published on the 20.12.2006 in reference to State aid No N 579/

06—Germany; Tax rebates for biofuels (amendments to an existing scheme)

and Gesetz zur Einfhrung einerBiokraftstoffquote durch Anderung des Bundes-

Immissionsschutzgesetzes und zur Anderung energie- und stromsteuerrechtlicher

Vorschriften (Biokraftstoffquotengesetz—BioKraftQuG).

abolish the excise duty exemptions as a form of subsidies. Taxexemptions were initially replaced by tax rebates only for purebiodiesel on the amounts exceeding the imposed quotas.Currently pure biodiesel and vegetable oil are taxed differentlythan regular diesel (0.186 h/l for pure biodiesel B100 versus0.47 h/l for diesel), though the discrepancy is expected to the levelout over time.

Ethanol production is based on sugar-beet and grains. Ethanolproduction capacity amounts to 880,000 tonnes per year,32 whileactual output is forecasted to reach 500,000 tonnes in 2010.Biodiesel is mainly derived from rapeseed and its productioncapacity is estimated at 4.8 million tonnes per year,33 thoughproduction is estimated at 2.7 million tonnes in 2010 (Flach, 2009).

5. Asia

5.1. China

China’s biofuel policies focus on ethanol production. Biodieselhas been only marginally promoted by the government (despitethe fact that diesel is the predominant transport fuel), as China isa net importer of vegetable oils.

Over time the position of the Chinese government has shiftedfrom its initial unconstrained support to a more careful con-sideration of the potential impact of biofuel production on thefood markets.

In 2001 the government issued standards for denatured fuelethanol and for bioethanol gasoline for automobiles. The Ethanol

Promotion Program was launched in 2002 in order to make use ofexcessive maize stock-piles. The State Scheme of Pilot Projects on

Bioethanol Gasoline for Automobiles followed shortly. In 2004 theNational Development and Reform Commission (NDRC) extendedthe scope of the pilot project to the national level and initiated theState Scheme of Extensive Pilot Projects on Bioethanol Gasoline for

Automobiles (SSEPP). Ethanol production and distribution wasrigidly controlled by the government that also imposed CNCP orSinopec as the distributors of choice. At the beginning of 2006,extensive pilots projects carried in five provinces and 27 cities hadachieved the 10% blending target34 (Dong, 2007).

In December 2006 the NDRC proposed the ambitious goal of6.6 billion liters of biofuel output by 2010 as part of the 11th Five

Year Plan.35 However, the proposal was not approved by the StateCouncil due to the rising food prices (Latner et al., 2007).

In August 2007 the National and Development Reform Commis-

sion (NDRC) announced a Medium and Long Term Development Plan

for Renewable Energy. Renewable energy as a share of totalprimary energy consumption should rise to 10% by 2010 and to15% by 2020. Biofuels are expected play an important role in theachievements of these targets. Ethanol production is projected toreach 2 million tonnes by 2010 and 10 million tonnes by 2020.Biodiesel consumption should correspond to 200,000 tonnes by2010 and 2 million tonnes by 2020 (GSI, Global SubsidiesInitiative, 2008).

However, the government is unlikely to grant productionpermission to new factories employing corn or maize feedstocknor to authorize capacity expansion (GSI, Global SubsidiesInitiative, 2008). The attention has been switched to non-grain

32 German Confederation of Ethanol Producers, Bundesverband der Deutschen

Bioethanolwirtschaft e.V., available at www.bdbe.de/.33 Federation of the German Biofuels Industry, Verband der Deutschen

Biokraftstoffindustrie e.V., available at www.biokraftstoffverband.de/.34 The vehicles in the pilot cities and provinces were required to use E10.35 Data reported in GSI (2008) as 5.2 million tonnes of ethanol. Conversion

rate used: 1 l of ethanol¼0.7894 kilograms (kg).

G. Sorda et al. / Energy Policy 38 (2010) 6977–6988 6985

crops such as cassava, sweet sorghum and sweet potatoes. Thelimited non-grains feedstock supplies constrain the growth of thebiofuel sector, where the ethanol production was forecasted toreach the 1.7 million tonnes in 2009 (Beckman and Junyang,2009).

The price of fuel ethanol is controlled by the government at alevel that would make ethanol production unsustainable withoutexternal financial assistance.36 In 2007 a subsidy of US$200 pertonne of ethanol was granted to producers (equivalent toUS$0.158 per liter). From 2008 the fixed subsidy has beenreplaced by payments based upon the yearly evaluation ofindividual plants’ performance (GSI, Global Subsidies Initiative,2008). The licensed ethanol producers are exempted from the 5%consumption tax and the 17% VAT. Financial assistance is alsogranted to intermediate inputs such as grains and fertilizers. Inaddition, the Ministry of Finance provides direct support ofsecond-generation cultivations with allowances amounting toUS$438 per hectare for jathropa plantations and US$394 perhectare for cassava cultivations. No direct subsidies are currentlygranted for biodiesel. There are no national biodiesel standards,thus preventing the latter from being blended and distributedacross the nation.

5.2. India

The Indian government has set ambitious biofuel targets.The National Policy on Biofuels was approved in September 2008.By 2017, a 20% share of biodiesel and bioethanol shall beblended with mineral diesel and gasoline,37 respectively. A keyfeature of the policy requires biodiesel production to employnon-edible oil seeds to be cultivated on waste and marginalland. In order to support growers, a continuously revisedMinimum Support Price (MSP) for biodiesel oil seeds is beguaranteed by the government. A Minimum Purchase Price(MPP) for bioethanol and biodiesel is also being implemented(Altenburg et al., 2009).

Previous biofuel policies included the Ethanol Blended Petrol

(EBP) program and the National Mission on Biodiesel (NMB). The EBPwas initiated in 2003. Mandatory blending of 5% ethanol wasrequired in four union territories (out of seven) and in nine states(out of 28). The 5% target was later extended to 20 states fromNovember 2006. However, governmental plans to raise the ethanolshare requirements to 10% in 2008 have so far been delayed duefluctuations in the availability of sugar molasses associated to sugarcane production, the main ethanol feedstock. In addition, the use ofimported ethanol to meet the requirements of the EBP program isnot allowed by the government in an attempt to foster the domesticbiofuel industry (Singh, 2007; 2009).

The year 2003 also marked the beginning of the National

Mission on Biodiesel. The government initially intended to plantjathropa on 11.2 million hectares of wasteland by 2012 andachieve a 10% blending target. However, biodiesel productioncosts surpassed its purchasing price (which is predetermined bynational regulators on a six months basis), thus effectivelyhindering the ambitious targets proposed by the government(Singh, 2009).

Fiscal incentives for biodiesel production include the exemp-tion from the central excise tax (4%), though most stateadministrations have maintained the state excise duty. On theother hand, there are no direct financial tax incentives for ethanol

36 GSI (2008) reports this price to be 0.911 times the ex-factory price of RON

(research octane number) 90 gasoline (p. 23).37 As reported in an article by Rajkumar Ray and Mayank Bhardwaj, ‘‘India sets

new biofuel target, risks food price row,’’ published by Reuters on the 11.09.2008.

production. Nevertheless, subsidized loans are offered by thegovernment for sugar mills constructing an ethanol productionunit.

5.3. Indonesia

In October 2008 mandatory levels of biofuel consumptionwere introduced in Indonesia. By 2010 the biodiesel share shouldamount to 2.5% and reach the 20% mark by 2025. The ethanolcomponent of gasoline is required to be 3% in 2010 and increaseup to 15% by 2025 (Dillon et al., 2008). The latest requirementsreformulated previous governmental plans that predicted a 10%biofuels share by 2010 (Bromokusumo, 2007).

Fluctuations in feedstock prices have hampered biofuelblending. In 2006 Pertamina, the state owned oil and fueldistribution company as well as the only supplier of biofuels,started selling a blend with 5% biodiesel (B5). Over time the costof palm oil increased and in the first half of 2009 the blendingshare of biodiesel dropped to around 1% (Bromokusumo, 2009).

However, output capacity for both ethanol and biodiesel hasbeen expanding. By 2010 biodiesel capacity is forecasted toexceed 4 million tonnes per year. Ethanol capacity is lower and itwas estimated at 11,400 tonnes in 2008. New facilities are underconstruction in order to reach an output volume of 3 milliontonnes by 2010 (Dillon et al., 2008).

The government subsidizes fuel prices. Dillon et al. (2008)estimated that fuel subsidies totalled more than US$14.5 billionby October 2008. Ethanol and biodiesel blends are sold to end-consumers at the same price as standard petroleum basedgasoline and diesel. As Pertamina is a government ownedcompany, the losses it incurs in order to match the mandatorybiofuel shares can be considered as subsidies to the biofuelindustry. Between 2006 and June 2008 the losses endured byPetromina due to biofuel blending amounted to US$40 million. Inaddition, indirect financial aid is also given by the support policiesof importing countries such as the US and the EU.

5.4. Malaysia

The Malaysian government hoped to take advantage of theincreasing interest in biodiesel and the country’s leading positionin the production of palm oil. In 2005 the National Biofuel Policy

(BNP) was launched. A 5% biodiesel (B5) mandate was envisaged.Legislation to regulate and assist the biofuel industry wasformulated by the Biofuels Industries Act of April 2007. However,the 5% biodiesel mandate has yet to be officially implemented.

Two types of biodiesel are being produced. Envodiesel isobtained from the direct blending of petroleum diesel with rawpalm oil. The latter is used for domestic consumption, though carmanufacturers discourage its use. Alternatively, palm methylesters (PME) biodiesel is manufactured via transesterification ofpalm oil. PME is destined for the international markets andconstitutes the largest share of biofuel production. In 2007Malaysia exported 95,000 tonnes of PME, equivalent to around75% of total biodiesel production (Lopez and Laan, 2008).

Biodiesel producers may be eligible for financial incentives byclaiming either the Pioneer Status (PS) in the biofuels sector or byapplying for an Incentive Tax Allowance (ITA). Both supportschemes are based on the Promotion of Investment Acts of 1986(Hoh, 2009). The PS scheme allows at least 70% tax reductions onthe statutory income obtained from biodiesel production for 5years. The ITA plan targets companies with high investment costsin equipment and machinery. Given allowances spent on fixedassets can be detracted from the taxable statutory income for a 5years period. In addition, there are no export duties on processed

G. Sorda et al. / Energy Policy 38 (2010) 6977–69886986

palm or biodiesel, while there are export charges on crudepalm oil.

Petroleum is also highly subsidized. End-user prices are set bythe government at lower rates compared to international prices.The total amount of fuel subsidies varied over the years: in 2006 ittotalled US$4.3 billion and in 2007 it reached US$4.7 billion. Theintegration of biofuel shares was meant to lower the budget spenton petroleum subsidies. However, the rising costs of palm oil(also caused by increased demand for biofuels) contributed tobiodiesel’s higher production costs in comparison to petroleumbased diesel. Due to this reason it is likely that the governmenthas hesitated to turn the 5% biodiesel mandate into law. Lopezand Laan (2008) estimated the potential loss incurred by thegovernment if the B5 integration target was mandatory at US$675million per year. The biofuel industry is nonetheless able to enjoyan indirect form of financial assistance. Through the large share oftheir output destined for exports, Malaysian companies takeadvantage of the subsidies in place in the EU and in the US.

5.5. Thailand

Thailand has successfully promoted the implementation ofbiofuels, with a forecasted consumption level of 970 million litersin 2009 (Preechajarn and Prasertsri, 2009). The government’spolicy is two-folded. Biodiesel blending has been mandatory since2008. Ethanol consumption, on the other hand, is incentivisedthrough tax exemptions that allow ethanol blends to besignificantly cheaper than regular gasoline.38

Ethanol production is primarily derived from sugar cane andmolasses, though a significant expansion in tapioca-basedproduction capacity is under construction. In 2009 the expectedtotal ethanol production capacity (inclusive of under-constructionsites) amounted to 12.3 million liters per day39 (Prasertsri andKunasirirat, 2009). Ethanol blended with gasoline is marketed as‘‘gasohol’’. The gasohol E10 blend has contributed to a significantdisplacement of standard gasoline. Between 2007 and 2008gasohol E10 consumption increased from 4.8 to 9.3 million litersper day and its aggregate demand reached nearly 50% of thegasoline market share (Preechajarn and Prasertsri, 2009). Gasoholis exempted from the excise tax. This allows the price of the E10blend to remain 10–15% below gasoline prices. In an attempt tofurther boost demand, the government is also promoting E20 andE85 blends and fuel-compatible vehicles. The price of E20 and E85blends is expected to be, respectively, 20% and 50% lower thangasoline prices thanks to exemptions from the excise duty as wellas an additional price subsidy from the State Oil Fund (Preechajarnand Prasertsri, 2009)

Biodiesel with 2% methyl ester content (B2) has replacedstandard diesel across the country in 2008. The B5 blend shouldbe enforced by 2011. Demand for pure biodiesel (B100) hasincreased substantially, as the government requires B100 to beblended with standard diesel in order to reach the requiredbiofuel share. In 2011 consumption of B100 should amount to 935million liters to meet the blending target (Preechajarn, 2010). Inorder to incentive consumption of B5 before 2011, price subsidiesfrom the State Oil Fund allow B5 prices to be lower than those ofB2 blends. In addition, the Committee on Biofuel Development and

Promotion (CBDP) has been set up in order to increase domesticproduction of palm oil, the main biodiesel feedstock (Peerchajarn

38 Gasohol was meant to replace premium gasoline by the beginning of 2007,

but concerns over insufficient ethanol supplies and the share of cars that required

standard gasoline reversed the decision (Peerchajarn et al., 2007).39 However, note that in 2008 production capacity exceeded internal demand,

plants were running at less than full potential and 31 million liters of surplus

ethanol were exported (Prasertsri and Kunasirirat, 2009).

et al., 2008). Nonetheless, Thailand is expected to import around200,000 tonnes of palm oil between 2011 and 2015 in order tomeet the envisaged biodiesel share (Preechajarn, 2010).

6. Australia

In 2001 the Australian government set a non-binding target of350 million liters of yearly biofuel production by 2010. Eventhough the targets established by the federal government are notmandatory, in 2006 the state of New South Wales set a 10%binding share of ethanol in gasoline by 2011 and the state ofQueensland required 5% ethanol content in gasoline by 2011.

Australia has a relatively limited biofuel production. In 2007ethanol processing capacity was 140 million liters and biodieselproduction capacity reached the 323 million liters, with plannedfuture capacities in excess of 1 billion liters for both biodiesel andethanol (AGRIRDC (Australian Government Rural IndustriesResearch and Development Corporation), 2007). Its actual pro-duction is much lower and amounted to 83 million liters ofethanol and 77 million liters of biodiesel in the 2006–2007 fiscalyears (Quirke et al., 2008).

Despite the low output, biofuels are highly subsidizedcompared to other Australian industries if measured in EffectiveRates of Assistance (ERA). The most important assistance policy isa tax rebate (the Ethanol Production Grant and the Energy

Grants—Cleaner Fuels Scheme) that exactly offsets fuel excise dutyof A$0.38143 per liter for both ethanol and biodiesel until 2011.On the 1st of July 2011 the Ethanol Production Grant will beeliminated while the actual excise duty will decrease to A$0.125.However, an alternative set of payments will be made via theEnergy Grants—Cleaner Fuels Scheme starting with A$0.1 per literand decreasing by A$0.025 per year until 2015, when it willdisappear. Biodiesel enjoys a similar treatment. From 2011 itsexcise duty will drop to A$0.191 per liter and the EnergyGrant—Cleaner Fuels Scheme will reduce its incentives from theprevious A$0.38143 to A$0.153 and continue to decrease until itwill be eliminated in 2015.40

Import levies on ethanol (both denatured and undenatured)amount to an ad valorem tariff of 5% (with the exception ofimports from the US) and an excise duty of A$0.38143 per literuntil 2011 (imported ethanol does not benefit from the govern-mental subsidies provided by the Ethanol Production Grant). From2011 onwards the excise duty imposed on imported ethanolmatches the effective tax rates paid by national producers.Biodiesel enters custom as a duty-free good. The latter has toface the A$0.38413 per liter levy but it can also enjoy the nationalincentive schemes and it is therefore taxed in the sameproportions as domestically produced biodiesel.

7. Conclusion

In the last decade biofuels production has been driven bygovernmental policies. The key instruments widely adopted tofoster production and increase consumption have been manda-tory blending targets, tax exemptions and subsidies. In addition,governments have intervened on the production chain bysupporting intermediate inputs (feedstock crops), subsidizingvalue-adding factors (labour, capital, and land) or grantingincentives that target end-products. Import tariffs have alsoplayed a significant role by protecting national industries fromexternal competition.

40 For exact excise duty values for biodiesel and ethanol as well a year by year

value of the government’s tax incentives, see Quirke et al. (2008) on p. 32 and p. 45.

G. Sorda et al. / Energy Policy 38 (2010) 6977–6988 6987

Concerns over the impact of biofuels on food prices and GHGemissions have entered the political debate and new rules arestarting to guide the support granted to bioethanol and biodiesel.The US are focussed on the development of second-generationtechnologies and have set significant production targets fromcellulosic sources. In the EU and in the US legislation is beingimplemented to require substantial reductions in GHG life-cycleemissions. The impact of bioethanol and biodiesel production onindirect land use has also been taken into account andmanufacturers have to certify the origin of their feedstock.Germany recently went as far as to set its future biofuel targetsin terms of GHG reductions rather than with respect to outputvolumes.

However, it will be a challenge for policy makers and industryexecutives alike to preserve the continued expansion of thebiofuel sector while abiding to ecologically sustainable produc-tion requirements. There are yet no large scale productionfacilities of second-generation biofuels. Most countries continueto produce biofuels based on grains, sugar or vegetable oils.

A further concern for governments will be to decrease thesupport that has so far sustained the development of the biofuelsector. Despite the financial aid granted (in the U.S. alone,financial backing is projected to reach US$ 16 billion yearly by2014; Koplow, 2007) current production capacity is limitedrelative to the aggregate consumption of transport fuels. Inaddition, the share of vehicles able to run on blends with highbiofuel content (e.g. E85) is negligible. While higher oil priceswould make biofuel production and consumption relativelycheaper, it remains unclear how much more support will beneeded before the biofuel industry will be independent ofgovernmental assistance. It will be a demanding task to couplecapacity expansion with environmentally sustainable productionwhile limiting biofuels’ burden on national budgets.

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