Thursday, July 17, 2008

The OECD reveals the inefficiency of biofuel subsidies

A leaked World Bank report has alread alerted us to the fact that biofuels have pushed up food prices by 75 per cent. Now, the direct financial cost of biofuel subsidies is becoming clearer. Yesterday, the OECD released a study on biofuels showing just how expensive and ineffective the subsidies are.


Government support for the industry in the US, Canada and the EU was $11 billion in 2006 and is expected to rise to $25 billion by 2015. All that will achieve is a 0.8 per cent cut in greenhouse gas emissions from transport fuel by 2015. What's really incredible is the cost per tonne of greenhouse gas emissions saved, between $950 and $1,700. These costs can quite easily be compared with the benefits.


The benefits of saving a tonne of carbon dioxide are referred to as the "social cost" of a tonne of carbon dioxide emissions. For more information on this concept see Box 1.1 in this report (PDF). We last surveyed the major academic and official estimates of the social cost of carbon dioxide emissions for the report The Economic and Political Case Against Higher Fuel Duty (PDF). Nordhaus, who the Economist has called the father of climate change economics, puts the social cost at $7 per tonne. The IPCC and Tol, another respected climate economist, studied dozens of academic estimates of the social cost of carbon dioxide emissions and the averages they reported, at $12 and $6 respectively, were in the same ballpark as Nordhaus's estimate. Finally, the estimate reported in the Stern Review was $85 per tonne. Stern's result is very different to that obtained by Nordhaus, Tol and the IPCC for reasons discussed in Box 1.3 of this report (PDF).


If we compare the cost of subsidising biofuels with what we gain by saving a tonne of carbon dioxide emissions the results are pretty stark:



The costs of subsidising biofuels are between 11.3 and 229.7 times the social cost of just burning fossil fuels and not worrying about carbon dioxide emissions. Biofuel subsidies are a waste of money and should be abandoned.


There may be a day when technological advance delivers efficient biofuels. Just as there may be a day when wind and solar plants can deliver power at a low cost, reliably and in the quantities required to make a big contribution to our energy needs. At the moment, neither biofuels nor renewables are anywhere near efficient enough to replace fossil fuels. Pretending otherwise and throwing huge amounts of subsidy at technologies that just aren't ready for the big time is a ruinously bad idea.


Cross-posted from the TaxPayers' Alliance blog.

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Life can show no mercy
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Things have seem to changed
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And we can fly, fly, fly away

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