Financial Times: Transport: Big debate over benefits and costs of biofuels

By John Reed
Published: November 9 2007 04:36 | Last updated: November 9 2007 04:36

If money talks, then a terse deal announcement by Daimler and Volkswagen in October spoke eloquently about the car industry’s growing interest in biofuels. Europe’s two largest automakers said they would take a minority stake in Choren Industries, a German biofuel company building a biomass-to-liquids plant in partnership with Shell.

Carmakers, under pressure from regulators on both sides of the Atlantic and in Asia to improve their vehicles’ fuel economy and cut carbon emissions, are investing heavily in cars that run on alternative fuels or electric power.

Hydrogen is seen as one of the most promising low-emission vehicle technologies, but even according to executives at BMW – which last year launched a prototype Hydrogen 7 car – the technology is at least a decade away from becoming commercially viable on a large scale.

In the meantime, vehicles powered by biofuels are already on the road and the fuels are increasingly being blended into ordinary petrol and diesel. Production of biofuels and “flexi-fuel” vehicles are getting a big boost from lawmakers, whose decisions in turn are being influenced heavily by agricultural interests.

The European Union, which has already asked member states to increase the use of biofuels in transport to 5.75 per cent of the total by 2010, now wants their share to be increased to 10 per cent by 2020. The European Parliament is also considering changes in standards for petrol that would require 10 per cent ethanol content at pumps, with a similar 10 per cent biodiesel content required for diesel.

While Europeans worry about transport’s contribution to the greenhouse-gas emissions cuts they pledged under the Kyoto accords, in the US over-reliance on imported crude oil is more of a concern. However, the boost for biofuels is similar: President George W Bush has called for America to reduce its petrol consumption by 20 per cent over the next decade, largely by using more biofuels.

Carmakers are beginning to cash in on the changes, but the evolving rules pose some technical challenges. Most of their current vehicles can run on petrol or diesel containing up to 5 per cent ethanol or biodiesel, but the 10 per cent blend now on the drawing board in Europe would risk damaging the engines and particulate filters of most cars.

Carmakers also worry about infrastructure issues arising from the availability of alternative fuels that can influence their ability to produce them in sufficient numbers to make a profit. However, some European countries eager to promote biofuels are stepping in with pump-priming incentives for the sector.

But as production of biofuels and the vehicles capable of running on them expand, the debate over their true environmental benefits and costs is becoming louder. The biofuels industry has been attacked by critics on the pro-green left and free-market right alike as a factor behind higher food prices and environmental despoilation, and a Trojan horse for fatter subsidies for farmers in rich countries.

The biofuels industry will, in aggregate, benefit from support worth more than $92bn between 2006 and 2012, according to a report published in October by the Global Subsidies Initiative, a project that aims to spotlight subsidies’ “corrosive effects”. Environmental groups have warned of the carbon dioxide emissions generated during the processing and shipment of ethanol and biodiesel, and about the strains biofuel crops can put on food production and forests.

Analysts have also cited biofuel production – along with China’s and India’s growing appetite for more and better food – as a factor driving up the prices of foodstuffs for the world’s urban poor, from bread to tortillas.

Brazilian ethanol, made from sugarcane, is widely seen as both more environment-friendly and economically viable than the Midwestern corn that produces most of the US’s ethanol, or the wheat, maize and sugar beets that go into France’s. Sugarcane uses less fertiliser than corn or wheat and produces a higher yield. The ethanol is produced from the fibre cast off as waste during processing. However, the US and Europe levy high import tariffs on Brazilian ethanol, and show no signs of easing the barrier.

Farm lobbies are playing a big role in driving the industry’s development on both continents. However, some European politicians support a regulatory regime that will favour imports from developing countries.

Fiona Hall, an English MEP who serves as the Liberal Democrats’ spokeswoman on energy, points out that the higher food prices caused by the supposed crowding out of food crops by biofuel feedstock could actually end up benefiting farmers in poor countries. “There is space and capacity for biofuels to play a useful role, but it has to be done with a degree of caution and a strong element of sustainability,” she says.

Copyright The Financial Times Limited 2007