New report calls for the EU to abandon targets for biofuels and renewable energy
22 January 2008
- Report finds that carbon taxes are the most effective way to cut emissions
Open Europe today publishes a groundbreaking new report by Europe Economics and calls on the EU to drop its targets to boost the use of biofuels and renewable energy.
The report by Europe Economics – one of the most respected firms of economists in the UK – looks at the different costs of reducing emissions using all the available policy options: different types of taxes, trading systems, subsidies for different technologies, energy efficiency measures, and targets for the use of biofuels.
It concludes that biofuels are one of the most expensive of reducing emissions, and that straightforward carbon taxes are likely to be a far more cost effective way to reduce emissions than subsidies for the heavy use of renewables.
The report finds that biofuels and many of the subsidies for renewables do not meet the Government’s own criteria for deciding whether a project is worthwhile – the so-called “social cost of carbon”.
In March 2007, EU leaders signed up to ambitious targets for expanding the use of renewable energy and biofuels. EU leaders promised that by 2020 the EU would cut emissions relative to 1990 by 20%. They agreed that by the same date 10% of transport fuels should come from biofuels and that 20% of overall energy consumption would come from renewables.
On Wednesday (23 January), the Commission is set to table the legislative proposals designed to bring about these policies and divide the burden of meeting the target between member states. Leaked reports in the Guardian suggest that the UK is seeking to reduce its share of the target.
Open Europe Analyst Hugo Robinson said:
“The EU is going down the wrong route. Heavy use of biofuels is certainly one of the most costly ways to reduce emissions. When you take into account the effect of deforestation, biofuels may well be a net negative for the environment.”
“Growing biofuels in Europe certainly does not make any economic sense. It’s tempting to conclude that biofuels are a bad way to save the planet, but rather a good way to save the CAP.”
“What we want from international and European agreements are demanding and binding overall targets. The EU should not try to micro-manage how member states should reach these targets. This is particularly important given that the EU’s current proposals will not deliver the maximum emission reductions at the lowest price.”
“At the moment policy makers are trying a bit of everything, with some policies even cancelling each other out. The EU’s targets for biofuels cannot be justified even in terms of the UK Government’s own criteria for environmental policies. It’s time for a serious debate about which emissions reducing policies actually work.”
Open Europe’s report can be downloaded at:
www.openeurope.org.uk/research/whatworks.pdf
Europe Economics’ report can be downloaded at:
www.openeurope.org.uk/research/eereport.pdf
Executive Summary
Biofuels, especially those grown in Europe, are one of the least cost-effective ways of reducing carbon emissions
Europe Economics’ figures clearly show that biofuels – especially those grown in Europe – are the most cost-ineffective way of reducing carbon emissions amongst the policy options modelled. They are also far more costly than the official social cost of carbon – e.g. sugar beet based biofuels cost over £300 for every tonne of carbon avoided, compared to a government guideline of £33 for the social cost of carbon.
Even the Commission’s 2006 strategy paper acknowledged that “Most available studies indicate that the abatement costs of EU-produced biofuels are quite high compared with the current ‘carbon price’. This means that EU-manufactured biofuels are currently not the most cost-effective way to reduce greenhouse gas emissions.” (Biofuels Impact Assessment, 2006)
Using estimates from the GSI and Europe Economics, Open Europe estimates that the 10% EU target would lead to total annual transfers to the wider biofuels industry of 11-23bn euros by 2020. Considering that the CAP currently accounts for around 40bn euros of annual EU spending, this is an enormous level of subsidy.
Other recent estimates include leaked figures from the EU’s Joint Research Centre (JRC), suggesting that biofuel targets would cost taxpayers 33-65bn euros between now and 2020. (Unpublished study cited by Financial Times 18.01.08)
Biofuel targets will spur deforestation and land-use change – resulting in huge carbon release
More cost-efficiency could be gained by sourcing biofuels from the tropics. However, this still has its own problems – most seriously rainforest destruction and land-use change. This is already happening as a result of current biofuels production (and indeed in anticipation of rising demand from the EU), and will inevitably get far worse as a result of EU targets.
Deforestation already accounts for 25% of greenhouse gas emissions, more than transport, which contributes around 15%. By trying to prescribe a small and costly reduction in carbon emissions from transport use, the EU will aggravate an even more serious issue, with potentially catastrophic consequences in terms of climate change and broader ecological damage.
The sheer scale of the EU’s targets for biofuel use will drive deforestation and land-use change – resulting in a net negative result in terms of carbon release. In a recent article in Science, Renton Righelato and Dominic Spracklen have calculated that the 10% target would mean turning over 38% of current agricultural land in Europe to biofuels.
Their research finds that “forestation of an equivalent area of land would sequester two to nine times more carbon over a 30-year period than the emissions avoided by the use of the biofuel.”
EU Commission ignored the warnings on biofuels – and internal reports maintain that this is bad policy
The EU Commission was fully aware of the harmful social and environmental effects of large-scale biofuel use – but pressed on with promotion of biofuels regardless. Its 2006 impact assessment noted "increased use of biofuels in the EU will be accompanied by an increased external demand for biofuels and their feedstocks, which is likely to have various effects on developing countries... In addition, there are substantial CO2 losses if grassland is ploughed up or forest cleared. These losses can be expected to outweigh CO2 gains from biofuels for many years." The report admits that "there will be increasing pressures on eco-sensitive areas, notably rainforests, where several millions of hectares could be transformed into plantations." (Commission Biofuels Impact Assessment, 2006)
More recently, the Commission’s own scientists have said that "The costs [of the target] will almost certainly outweigh the benefits”, and suggest that the plan for targets for transport fuel use should be ditched. "The uncertainty is too great to say whether the EU 10 per cent biofuel target will save greenhouse gas or not," it notes. (Unpublished study cited by Financial Times 18.01.08)
That the Commission was aware, and continues to be aware, of the uncertainty and potentially serious consequences of such huge biofuel targets suggests a major failure in EU policy-making, and an irresponsible approach.
EU biofuels targets will lead to food poverty in the developing world
Production of biofuels diverts large amounts of agricultural production from food to fuel, restricting food supply. Filling a 95-litre fuel tank with pure ethanol requires about 200 kg of corn, which has enough calories to feed a person for a year. It is certain that this shift to biofuels will contribute to higher world food prices – this is already happening as a result of US demand, with 2007 seeing dramatic rises in food bills.
The OECD and FAO predict global food price rises of between 20 and 50% for different food products over the next decade. Their report notes that increasing biofuel use is “one of the main drivers”. The IFPRI estimates increases of up to 26% for various staples created by biofuel demand alone. Professors CF Runge and B Senauer from the University of Minnesota estimate that for every percentage increase in real prices of staple foods, 16 million extra people will be drawn into food insecurity. This would mean 240 million people being pushed into food insecurity, of which the EU would be responsible for 60 million.
Biofuels will mean more expensive food in the UK and Europe
Open Europe calculates that by 2020 the average family of four in the UK can expect, in today’s prices, a rise in annual food expenditure of between £200 (260 euros) and £260 (340 euros) as a result of worldwide biofuel demand. Of this, the EU would be responsible for £50 – 65 (65 – 85 euros).
EU biofuel policy based on non-existent technologies
The Commission’s 2007 impact assessment assumes that one third of EU biofuel production will come from so-called ‘second generation’ biofuel sources by 2020. But there is no scientific consensus on how soon (if at all) industrial supply of second generation fuels will be viable. The EU has gambled global social and environmental wellbeing on non-existent future technologies, the development of which is highly uncertain.
Biofuels can only have a very marginal effect on climate change
Open Europe estimates that the 2020 target of 10% biofuel use in Europe’s transport would deliver only around 0.9 - 1.1% reduction in overall EU greenhouse gas emissions. This also assumes that biofuels do not contribute to deforestation or land-use change – which is practically impossible given the sheer size of the targets. It is entirely possible that biofuel targets will lead to a net increase in atmospheric carbon.
This is a serious misallocation of resources
If the huge expense of achieving the miniscule reduction in greenhouse gases through biofuels were to be redirected towards reforestation projects, almost 28% of the EU’s total emissions would be saved. Even if it were to be redirected towards (relatively cost-inefficient) renewables (at current costs), these funds would deliver a 2 – 5% reduction.
Focus on sustainable sources misses the central point – ditching targets rather than tinkering around the edges is the only solution
In response to mounting concern over the potentially colossal risks of large-scale biofuel use, EU policy now seems to be swinging behind the idea of introducing a system of certification of sustainability.
However, even if it could somehow be guaranteed that all biofuel used in Europe did come from ‘sustainable’ sources (the current draft proposal suggests all land cleared up to the end of 2007 would qualify), this would still be an inadequate solution to the core problem of land pressure created by such massively increased demand for biofuels.
In other words even if it were possible to monitor and prevent rainforest from being cleared for biofuels (almost impossible), the increased demand for biofuels will lead to increased food prices and force increased rates of clearance for food.
Given the huge social and environmental risks associated with such ambitious biofuels targets, and the meagre, uncertain rewards, the priority for the EU should be to immediately ditch these targets, together with subsidies for the biofuel industry.
Renewables are likely to remain relatively expensive options for reducing emissions
Europe Economics have found that whilst some renewable technologies may become cost effective by 2020, the overall picture is that “renewables generation technologies are typically a very costly way to reduce carbon emissions. In many cases, this is true even once the potential for costs to fall through time has been taken into account”.
According to officials in Whitehall and Brussels, it is likely that the UK will be assigned a target of 14% overall energy consumption to be sourced from renewables (a seven fold increase on today’s levels) - implying costs of up to £11bn. It is clear that large-scale subsidy will be required to bring EU members into line with the Union’s 20% target.
The Commission has estimated that a 20% renewable target would mean additional average costs compared to conventional supply options ranging from 10.6bn to 18bn euros per year. This is a huge amount, but could well be an underestimate given the size of the UK-only estimate and the current costs of subsidising renewables.
Across Europe, renewables use will need to jump from around 6% today to 20% in 2020, or for the electricity sector from just over 15% to around 34%. Much of the existing renewables capacity in Europe is long established, based on large-scale hydro-power in mountainous regions. However, there is limited scope for expansion in these (often protected) areas. Since large-hydro power is by far the cheapest form of renewable energy available, expanding renewable capacity further will have to come from other, more expensive technologies. This increase must be achieved through new and more expensive technologies that currently account for a very small proportion of renewable capacity – and currently just under 5% of overall capacity.
The marginal costs per tonne of achieving carbon reductions through renewables will also increase as the opportunities to realise cheaper options within these boundaries become progressively diminished – i.e. as the best sites are used up.
The sheer magnitude of the EU targets would inevitably mean that investment would have to be forced towards far more expensive renewables options – irrespective of whether this extra expenditure could be better spent on achieving greater emissions reductions through other means.
Renewable energy targets contradict and cancel out other key EU environment policies
The EU often claims its primary tool in combating climate change is the EU Emissions Trading Scheme (ETS), which relies on restricting quantities of carbon that can be emitted. Scarcity in carbon should therefore lead to a price for carbon. But notwithstanding the serious problems that affect the EU ETS specifically, renewables targets are not compatible with the scheme. In order to meet renewables targets, it is almost certain that large amounts of subsidy will continue to be required to spur investment in this form of generation.
However, since this would reduce scarcity of carbon within the sectors subject to emissions trading, the price of carbon would also decrease – meaning less incentive to cut carbon.
Put simply, the EU ETS and renewables targets are mutually contradictory, and risk creating a ‘waterbed’ effect – reducing emissions in some areas, but leading to increases in other areas. UK officials, in leaked papers, have already expressed their concerns on this issue: “If the EU has a 20% GHG [greenhouse gas] target for 2020, the GHG emissions savings achieved through the renewables risk making the EU ETS redundant, and prices to collapse.”
Another source of tension with the ETS will arise as a result of free allocations of carbon permits to participants in the scheme. It is widely acknowledged that free allocation is a form of covert industrial subsidy, meaning that high carbon alternatives to renewables (especially brown coal in Germany) are effectively being promoted under current EU policies. If the EU is serious about encouraging more renewables investment, the most obvious place to start would be removing favourable treatment to fossil fuel power sources. But the EU will not even consider this until after 2013. The adoption of renewables targets in spite of these problems is indicative of the ill-conceived and contradictory nature of much of the EU’s climate change policy.
Tax cuts on energy efficient goods and green taxes are likely to be far more cost effective solutions
According to Europe Economics, greater energy efficiency measures are likely to lead to direct financial savings, as well as reduced carbon emissions. However the EU currently actively hinders energy efficiency improvements through import tariffs and VAT on a variety of energy-saving goods. For example, a single energy efficient light bulb equivalent to 60 watts can cost as much as £4. Open Europe has estimated that without the antidumping duty and the VAT, the price would be 66p - a price drop of more than 80%.
Europe Economics’ research has also found that placing a clear and stable price on carbon, and using the revenues to lower taxes elsewhere in the economy would bring net economic benefits by reducing the deadweight loss of taxation – as well as encouraging investment in lowering emissions. They recommend an ‘upstream’ tax on the consumption of all primary fuels (e.g. coal, gas, oil) in proportion to their carbon content. Unlike emissions trading this would allow a carbon price to be extended across the entire economy. It also has the advantage of price stability, and predictability for business.
Levying taxes on a negative externality such as CO2 emissions should not solely be regarded as a means of restraining pollution. It also creates an opportunity to cut taxes in other areas of the economy, effectively relieving the burden of taxation on productive wealth-creating activity, and shifting it towards a harmful activity that does incur a long term cost that would not otherwise be internalised by business if the market were left to its own devices.
Investment in the most effective and efficient renewables would naturally follow as a result of taxation on carbon emitting means of energy production once more cost effective options for carbon abatement are realised. It would also drive emissions reductions through investments in greater energy efficiency – from new industrial plants to car sharing.
The EU should focus on targets for absolute emissions reductions – not try to micro-manage national energy policy
There is a rationale for internationally binding targets for absolute carbon emissions, but setting targets as to the means by which different countries should achieve this end is a step too far. What fundamentally matters is getting as much carbon out of the atmosphere as possible at the least cost.
Simple targets for carbon reductions would not stop member states from pursuing ambitious renewable policies if they choose to do so, but would at least allow them to judge first whether this is the most effective way of cutting carbon emissions. Renewable energy investment could well be stimulated as a result of other policy instruments, most obviously a carbon tax described above – but this would only happen after more cost effective options for carbon abatement are tackled first.
Notes for editors:
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