Dear editor, Angel Gurría is right to argue that “subsidies … should target cleaner energy innovations and practices, and not distort or protect markets.” (No. 258/259, December 2006). Unfortunately, apart from a few billion dollars being spent on R&D, distortions and protected markets are exactly what we are witnessing in the biofuels area.
Viewing biofuels as a way forward is perhaps understandable in the current climate, but people are being told only the “feel good” part of the story. The US Administration, for instance, has proposed that 35 billion US gallons (132.5 billion litres) a year of the nation’s transport fuel needs in 2017 be met by “alternative fuels”, implying that achieving such a goal would make a major contribution to the country becoming independent from imported oil. What it has not discussed is the cost of meeting that goal.Currently, fuel ethanol sold in the US benefits from a $0.51 per gallon ($0.135 per litre) tax credit, among a host of other support measures provided by both the federal and various state and even local governments. That tax credit is due to expire at the end of 2010, but it is likely to be extended.If most of the target volume in 2017 were to be met by ethanol alone, and the tax credit extended, the cumulative cost to the US Treasury over the next 11 years would reach at least $118 billion. Any biodiesel in the mix, because its unit subsidy is larger than ethanol’s, would drive that cost higher. And state-level measures could inflate the total by as much as 50%. Talk about “picking winners”! And none of this really addresses the demand side of the equation.The US, which applies a stiff duty of 2.5% plus $0.54 per gallon ($0.143 per litre) on imports of ethanol from Brazil and many other countries, is not alone in providing protection for its domestic industry. The EU applies an even higher tariff of €0.192 (around $0.25) per litre. And Australia, which generally charges low or zero tariffs on imported agricultural goods, applies a duty of 5% plus A$0.38143 (around $0.30) per litre on imported ethanol–twice that of the US.If ethanol is such a great fuel for the environment, and its production outside the Middle East reduces geographic risk, why are so many OECD economies doing their level best to thwart trade in it?
Ronald SteenblikDirector of Research, Global Subsidies Initiative of the International Institute for Sustainable Development Geneva and Winnipeg© OECD Observer N° 260, March 2007