The Biofuels Trade Challenge

There is rightly growing concern among the public and policymakers about climate change and its consequences. Combating climate change is an enormous and truly global challenge, requiring local, national, and international action. We must tackle it both effectively and urgently.
A key part of meeting our climate objectives is to minimize the harmful effects of transport on the environment. So-called “biofuels,” such as bioethanol and biodiesel, as well as developing the next generation of biofuels, must play a part in this. After all, every liter of petrol that is replaced with a biofuel benefits the environment.

Many countries around the world are producers or are emerging as producers of biofuels. Global production is rapidly increasing. World production of bioethanol, for example, doubled between 2000 and 2004. A further doubling is expected by 2010.

As output of biofuels increases, policymakers must ensure that global supplies are allocated effectively and smoothly between countries that produce and consume them. Free and open conditions for international trade are the most efficient way to allocate global resources, fully exploiting individual countries’ comparative advantages. This principle also holds true for the emerging biofuels market.
Today, however, trade in biofuels is limited. According to the United Nations Conference on Trade and Development, global trade in bioethanol accounted for less than 10% of global production in 2004, suggesting a large untapped trade potential. Part of the explanation no doubt lies in the presence of significant trade barriers.

For example, high tariffs are often placed on biofuels and biofuel feedstock – in some cases as high as 55% for bioethanol. At the same time, subsidies are widely used to encourage domestic production. Tax incentives are employed to stimulate use, as are mandatory blending requirements. In addition, different standards and certification requirements are applied.
While many of these measures are implemented for legitimate environmental policy reasons, they do pose challenges for trade in biofuels. As a first step toward eliminating unnecessary barriers, we must deepen our understanding of the effects on trade in biofuels of measures to promote their production and use.