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IPC Position Paper

September 2010

Biouel and Biomass Subsidies in the U.S., EU and Brazil:

Towards a Transparent System o Notifcation

ByTim Josling, DaviD BlanDforDanD Jane earley


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Josling, Blandord and Earley

Biouel and Biomass Subsidies in the U.S., EU and Brazil: Towards a Transparent System o Notifcation

IPC fnds practical solutions that support the more open and equitable trade o ood & agricultural

products to meet the worlds growing needs.

2010 International Food & Agricultural Trade Policy CouncilAll rights reserved. No part o this publication may be reproduced by any means, either electronic or mechanical, without permission

in writing rom the publisher.

Published by the International Food & Agricultural Trade Policy Council

Acknowledgements:

The authors would like to thank Pedro de Camargo Neto, Stean Tangermann, Rol Moehler, Willem-Jan

Laan, Robbin Johnson, Charlotte Hebebrand, Alan Swinbank, David Orden, Geraldine Kutas, RonaldSteenblik and the participants in the IPC Plenary Meeting in Barcelona, May 2010, or many helpulcomments. We retain responsibility or the content o the paper.

Membership o the International Food & Agricultural Trade Policy Council

Carlo Trojan, Chairman| The Netherlands Carl Hausmann, Vice-Chairman| United States Marcelo Regunaga, Vice-Chairman| Argentina

Bernard Auxenans, France

Malcolm Bailey, New Zealand

Joachim von Braun, Germany

Piet Bukman, The Netherlands

Jason Clay, United States

Csaba Csaki, Hungary

Pedro de Camargo Neto, Brazil

H.S. Dillon, Indonesia

Franz Fischler, Austria

Michael Giord, Canada

Ashok Gulati, India

Jikun Huang, China

Sarah Hull, United States

Nicolas Imboden, Switzerland

Robbin Johnson, United States

Hans Jhr, Switzerland

Timothy Josling, United Kingdom

Willem-Jan Laan, The Netherlands

Rol Moehler, Belgium

Raul Montemayor, Philippines

Namanga Ngongi, Cameroon

C. Joe OMara, United States

J.B. Penn, United States

Carlos Perez del Castillo, Uruguay

Michel Petit, France

Henry Plumb, United Kingdom

Roberto Rodrigues, Brazil

Hiroshi Shiraiwa, Japan

James Starkey, United States

Marty Strauss, United States

Stean Tangermann, Germany

Robert L. Thompson, United States

Ajay Vashee, Zambia


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TABLE OF CONTENTS

EXECUTIVE SUMMARY ................................................................................................................................ 4

INTRODUCTION ............................................................................................................................................. 6

1. BIOFUELS POLICIES IN THE U.S., EU AND BRAZIL ................................................................................ 6

Biouel policies in the U.S. ................................................................................................................ 7

Biouel policies in the EU .................................................................................................................. 8

Biouel Policies in Brazil .................................................................................................................... 9

2. CLASSIFYING BIOFUEL POLICIES ........................................................................................................... 9

Support or Biomass Production .................................................................................................... 10

Support or Biouel Production ....................................................................................................... 11

Support or Biouel Consumption ................................................................................................... 11

Support or Research and Development ........................................................................................ 12

3. QUANTIFYING BIOFUEL SUPPORT ........................................................................................................ 13

Impact o Biouels Policies ............................................................................................................. 14

Impacts on Agricultural Markets..................................................................................................... 15

Biouels Policy and Market Instability ............................................................................................ 17

4. WTO RULES ON BIOFUEL SUBSIDIES ................................................................................................... 18

GATT Articles ................................................................................................................................... 18

TBT Agreement ................................................................................................................................ 18

Biouel Subsidies ............................................................................................................................. 18

5. WTO NOTIFICATIONS .............................................................................................................................. 24

Notifcations to the SCM Committee .............................................................................................. 25

Notifcations to the Committee on Agriculture ............................................................................... 25

The Doha Round Agricultural Talks ................................................................................................ 27

Doha Round Environmental Goods ................................................................................................ 30

6. IMPROVEMENTS IN TRANSPARENCY ................................................................................................... 31

CONCLUSION ............................................................................................................................................... 32

Reerences .................................................................................................................................................... 35

Annex A ......................................................................................................................................................... 39

Annex B......................................................................................................................................................... 40

Annex C ........................................................................................................................................................ 41

Annex D ........................................................................................................................................................ 43


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Executive Summary

Support or the production and distribution o biouels continues to expand in many countries. The mag-

nitude and impact o these subsides is imperectly understood, as is their relation to the reporting and

monitoring o subsidies in the WTO. This paper is intended to examine the way in which inormation on

biouels support is reported in the U.S., the EU and Brazil: the three major players in the biouels market.

It explores the relationship between these subsidies and the WTO monitoring o support under the Agree-

ment on Agriculture (AOA) and the Agreement on Subsidies and Countervailing Measures (ASCM). Both

supporters and critics o biouels subsidies need to be aware o the relationship between national biouel

policies and international constraints, though the pressure or measuring the extent o support tends

naturally to come rom those who are not convinced o the benets o biouels.

Biouels (principally ethanol and biodiesel) have made rapid inroads into the market or transportation

uel, rising to above 60 billion liters worldwide in recent years. The share o ethanol in gasoline-type uels

reached 5.5 percent in 2008, and biodiesel accounted or 1.5 percent o diesel use in that year. The U.S.

and Brazil accounted or 88 percent o ethanol production and the EU produced 60 percent o the worlds

biodiesel. Trade has become more important in recent years as Brazil has re-emerged as an important

exporter o ethanol. The main stimulus to growth in the use o biouels has been the adoption o targets

and blending mandates, typically requiring 5-10 percent o ethanol in gasoline and 2-5 percent o biodie-

sel in diesel. Many countries have oered subsidies or tax credits to blenders to deray some o the costs

o biouel incorporation.

The incidence o mandates and their accompanying subsidies is complicated both by the number o ways

in which subsidies are paid and by the various stages involved in the production and distribution o biou-

els. Support or the production o biomass (predominantly corn and sugar cane or ethanol and oilseeds

and tree oils or biodiesel) is both through direct and indirect subsidies to producers. Trade policies some-

times increase availability o biomass, but more commonly make it more expensive by protecting local

producers. Support or the production and distribution o the biouels themselves includes cost-reducing

measures, guaranteed prices and taris on imported biouels. Support or the use o biouels comes in

the orm o tax credits or blenders and blending requirements. In addition, subsidies are common or

research, in particular into second and third generation biouels (rom plant waste, non-ood crops and

algae). Calculations o the level o support have been in the range o $7 billion in the U.S., $4 billion in the

EU: Brazilian support has not been quantied, but investment subsidies and fexible mandates support

the industry - though as the biomass used is produced at low cost, the need or subsidies is arguably less

than in other countries.

The impact o the use o corn or ethanol on agricultural markets and world ood prices became a matter

o concern in 2007-08, when commodity process surged. The OECD estimated the eect at an increase

in prices o 10-17 percent: other estimates show somewhat higher impacts in the tight market situation

o that period. This conrms the nding o several studies that price instability may have increased as a

result o the ethanol boom: the price o gasoline is seen as an additional source o variation in demand or

corn that may exacerbate price swings rom income-related demand.

Biouel subsidies are subject to the disciplines o the WTO Agreement on Subsidies and Countervailing

Measures, and support or agricultural biomass producers is covered by the Agreement on Agriculture.

Border policies that impact biouel and biomass prices are subject to the main General Agreement on

Tari and Trade (GATT) provisions or non-discrimination and national-treatment. But the application o


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the appropriate rules is complicated by the ambiguity o the classication o biouels: ethanol is traded as

an agricultural product (HS2207) whereas biodiesel is industrial (HS382490). The incidence o the subsidy

is also complex: a subsidy to the blender can be eectively passed on to the biomass producer through

a higher price, but a subsidy to the corn producer can be passed on to the blender through a lower corn

price and more abundant supply. Economic models are now appearing that promise the ability to trace

the impact o both mandates and corn subsidies.

Both the ASCM and the AoA have provisions or the notication o subsides and other means o support.

Unortunately there is little coordination between these notication requirements, and neither has been

comprehensive or transparent. The U.S. and the EU each include some o their biouels policies in their

ASCM notications. The U.S. reports total subsidies or 2006 o $2.7 billion, including the tax credit (at

that time 51 cents per gallon) and a subsidy or cellulosic ethanol. The EU mentioned an Energy Crops

Scheme (introduced in 2003 and later dropped) in its 2006 notication to the SCM Committee and also

included that subsidy in its notication to the Agriculture Committee. The U.S. included some subsidies

under a bioenergy and a biodiesel program in its notications to the Agriculture Committee in the years

2000-2005, amounting to $150 million. This compares with a possible gure o $3 billion or the benet

to armers rom the ethanol and biodiesel mandates. That level o support would not have put the U.S.

above the limit on its Total Aggregate Measure o Support (AMS) or those years, but the completion o

the Doha Round (or an adverse ruling on the eligibility o direct payments as non-trade distorting in the

current WTO Total AMS case) would change this picture.

Transparency in subsidies is both a prerequisite or wise expenditure o public unds and an aid to avoid-

ing trade disputes. Subsidies to both biouels and ossil uels are o interest as they relate to the price o

energy and the control o greenhouse gas emissions. Eventually there will have to be a proper accounting

or such subsidies i carbon pricing is widely adopted. The time is ripe or an initiative to clariy both the

status o biouel subsidies in the WTO rules and the magnitude o such subsidies. The alternative is con-

tinued contention and conusion.


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Introduction

Support or the biouels sector is widespread and shows little sign o abating. Countries around the world have

introduced policies that avor the production or use o non-ossil uels, both to diversiy their energy sources

and to gain environmental benets. Such policies oten emphasize ambitious and extensive biouel mandates,

supported by programs that include government nancing or biouel project development, orgiveness o

loans and avorable credit or biouel production, tax credits or uel blenders, and tax rebates or uel suppli-

ers. These policy instruments have resulted in high levels o support or producers o rst-generation biouels,

and expanded the markets or agricultural eedstocks used in the production o biouels.

This paper attempts to bring together recent studies and reports that examine the magnitude and impact

o biouel and biomass subsidies, relate these subsidies to WTO constraints, and suggest ways in which

the reporting o subsidies to the WTO could be improved to enhance transparency and make it easier to

identiy any conficts that might arise as trade in these products expands. The topic is the subject o some

controversy, and that makes the synthesis o existing studies useul but hazardous. Much o the literature

on the magnitude o subsidies to biouels comes rom groups that are not convinced that such subsidies

are a sound way to achieve energy or environmental policy goals. Supporters o biouels have little interest

in quantiying the benets they receive, and tend to emphasize the obvious advantages o less reliance on

ossil uels. But the issue o the place o biouel policies in the trading system should be o interest to both

camps. This paper attempts to clariy a murky area o trade policy rather than to join in the debate about the

desirability o biouel subsidies.

Subsidies to biouels are a part o the larger issue o energy subsidies, which includes the desirability o ex-

tensive support or ossil uel production and use. The Group o Twenty nations (G-20) recently pledged to

eliminate subsidies or ossil uels, but the implementation o that pledge has been held up by questions about

what constitutes a subsidy. Hence, arguments made in this paper about the need or greater transparency in

biouels policy is equally valid or ossil uel policies. The paper does not make recommendations about the

continuance o policies that involve energy subsidies or their environmental success, but merely addresses the

need or more transparency so that inormed decisions can be made.

The paper opens with a brie overview o support or biouels in the U.S., the EU and Brazil, three o the

major players in the biouels market. It continues with an exploration o the rules or notiying subsidies to

the WTO (both the Committee on Agriculture and the Committee on Subsidies and Countervailing Measures)

and discusses how biouel support might be classied under these rules. The paper then examines whether

and how the three regions (U.S., EU and Brazil) are currently choosing to notiy support, and indicates the

magnitude o the notications. The biouel subsidy notications are then compared to the total notied

support or agriculture. The paper concludes by addressing ways in which the transparency o biouel no-

tications could be improved, and examining a number o conceptual and legal points that would need to

be overcome.

1. Biouels Policies in the U.S., EU and BrazilBiouels have made rapid inroads in recent years into the market or transportation uel. According to the UN

Environmental Program, world ethanol production or transport uel tripled between 2000 and 2007 rom 17

billion to more than 52 billion liters worldwide, while biodiesel production expanded eleven-old rom less than

1 billion to almost 11 billion liters (UNEP, 2009). A period o high oil prices urther boosted production o ethanol

and biodiesel in 2008. Although biouels only provided 1.8 percent o the worlds transport uel in 2007, the

share o ethanol in gasoline-type uel use reached 5.5 percent by 2008, and the share o biodiesel in diesel-


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type uel use reached 1.5 percent in that year. Ethanol use in the U.S. rose to 10.75 billion gallons in 2009 and

accounted or the equivalent o 7 percent by volume o the total gasoline and blended uel sold.1

The main producing countries or transport biouels are the U.S., Brazil and the EU. Brazil and the U.S. pro-

duced 55 and 35 percent, respectively, o the worlds ethanol production in 2009. The EU produced 60 percent

o the total biodiesel output. U.S. production consists mostly o ethanol rom corn; in Brazil the main product is

ethanol rom sugar cane; and in the EU most o the biouel is biodiesel rom rapeseed (UNEP, 2009, page 15).

Investment in biouels production capacity reportedly exceeded $4 billion worldwide in 2007 and continued

to grow rapidly in 2008. Industry has also invested heavily in the development o advanced biouels.22 Most

biouel is consumed domestically: international trade in ethanol and biodiesel has been small until recently

(about 3 billion liters per year in 2006/07). However, it is expected to grow rapidly in countries like Brazil, which

exported over 5 billion liters o ethanol uel exports in 2008 (UNEP, 2009, page 16). Indeed, U.S. exports o

ethanol have begun to rise in 2010 (RFA, 2010), as domestic demand runs up against a blend wall and inter-

national prices or ethanol are rm.3

The main stimulus to this extraordinary

growth in the use o biouels has been

the introduction o policies to encourage

a switch away rom ossil uels or road

transportation. Government policies have

essentially triggered the growth o bio-

uel demand by establishing targets and

blending quotas. Mandates or blending

biouels into vehicle uels have been en-

acted in at least 17 countries and many

states and provinces within these coun-

tries. Typical mandates require blending

510 percent ethanol with gasoline or blending 25 percent biodiesel with diesel uel. Recent targets haveencouraged higher levels o biouel use in various countries (UNEP, 2009, page 15-16). The range o policies

that have stimulated biouel demand by setting targets and blending quotas has been aided by supporting

mechanisms, such as subsidies and tax exemptions, as discussed in more detail below.

Biouel policies in the U.S.Government incentives or ethanol production date back some thirty years. In the Energy Policy Act o 1978,

a subsidy o 4 cents per gallon o gasohol (E10), equivalent to 40 cents per gallon o pure ethanol, was in-

troduced through a partial exemption o the ederal gasoline excise tax. Tyner (2008) attributes the launch o

1 The proportion is only 5 percent by energy content, as ethanol has less available energy per gallon (Thompson et al., 2009).2 Biouels are generally classied as rst generation i they are made rom corn, sugar or vegetable oils. Second generation

uels are rom eedstock such as switchgrass, miscanthusorjatrophaand rom woody biomass that do not, or are less likelyto, compete or land with ood production. These uels are close to commercialization (and have been or some time). Thirdgeneration biouels, mostly in an experimental stage, use such substrates as algae and thereore have a less direct connection

with agriculture.

3 A blend o 10 percent o ethanol in gasoline (E10) in the US is considered sae or use by most cars. The industry is cur-rently asking the Environmental Protection Agency to increase the possible blend to 15 percent (E15), but the decision hasbeen postponed until later in the year. In the absence o such an increase, the supply o ethanol could exceed the amountthat can be used in domestic uel blends.

The main stimulus to this extraordinary growth

in the use o biouels has been the introductiono policies to encourage a switch away rom ossiluels or road transportation. Government policieshave essentially triggered the growth o bioueldemand by establishing targets and blendingquotas. Mandates or blending biouels into vehicleuels have been enacted in at least 17 countries andmany states and provinces within these countries.


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the ethanol industry to this policy.4 The level o ethanol subsidy has varied over the years but presently stands

at 45 cents per gallon, operated through a volumetric ethanol excise tax credit (VEETC). Biodiesel blenders

receive a tax credit o $1.00 per gallon.5 In addition to the ederal tax credit, many states have tax exemptions

and credits or the use o ethanol. The range o programs that exist or individual states is a testament to the

strength o the lobbying eort o proponents o alternative uels and vehicles that make use o those uels. It

also illustrates the diculty o creating an eective notication mechanism or governmental assistance.6

The rst mandate was established in 2005, under the Energy Policy Act o that year. This mandate is oper-

ated through the Renewable Fuel Standard (RFS) that sets a foor on the quantity o biouel used in the U.S.

(Thompson et al., 2009). The original RFS was expanded in the 2007 Energy Independence and Security

Act (EISA). The new U.S. RFS requires that some 36 billion gallons o biouels be used in the U.S. or road

transportation by 2022, an amount that could account or perhaps one quarter o all road transport uel sales

by that year (Earley, 2009). It contains annual volumetric minimum quotas, including the use o 22.5 billion

gallons o renewable uel by 2015, o which 5.5 billion is to be contributed by advanced biouels (other than

those produced rom corn starch). The dierence o 15 billion gallons will probably be made up by ethanol

produced rom corn, which is classied under EISA as conventional biouel. Ethanol produced rom sug-

arcane is not viewed to be a conventional biouel under the Act: it can be used to make up the advanced

biouel mandate and (i cost-competitive with other biouels) the dierence between the overall mandate and

the advanced mandate (Echols, 2009).

The mandate or total renewable uel is increased under EISA to 36 billion gallons by 2022. The mandated

use o advanced biouels increases to 21 billion gallons and there is a cellulosic biouel requirement o 16

billion gallons. The cellulosic requirement counts against the advanced mandate such that the dierence (5

billion gallons less any extension o the mandate on the use o biomass-based diesel) will probably be made

up by imported ethanol rom Brazil (Yano et al., 2010b). The actual use o biouels exceeded the mandated

levels in 2008, as high oil prices made blending ethanol attractive (with the help o the tax credits). In uture

years one could see imports o ethanol rom Brazil to meet the advanced uel criteria, while U.S. ethanol

is exported as demand reaches the blending wall (RFA, 2010).

Biouel policies in the EUEU biouels policy has evolved over the years rom modest support or ethanol production as an agricultural

by-product to the elaboration o mandates or renewable uels (Swinbank, 2009). Surplus wine was taken o

the market or distillation or decades, and used mostly as bioethanol. There are additional national aids or the

production o ethyl alcohol o agricultural origin and occasional tenders or surplus crops to be converted to

bioethanol. By 1997, the EU Commission was contemplating the prospect o doubling the renewable energy

contribution to 12 percent o domestic use (Swinbank, 2009a). An EU Biouels Directive was proposed by the

European Commission in 2003 and a European Strategy or Biouels was adopted in that year (Banse et al.,

4 In addition to the avorable tax treatment, the development o the ethanol industry was stimulated by the high supportprice o sugar that led to the growth o corn wet-milling to produce high ructose corn syrup: the same plants were capableo producing ethanol.

5 The ethanol tax credit stood at 54 cents per gallon rom 1990 to 2005, when it was reduced to 51 cents. The current rate o45 cents came into eect in 2009. The biodiesel tax credit lapsed in January 2010, but may be restored retroactively in thecoming weeks.

6 For example, Caliornia has 27 laws and regulations in the area o alternative uels and vehicles, and 29 incentive programsthat oer grants and tax credits or their use. The US Department o Energy maintains a database o both ederal and stateincentives or alternative uels, including tax reductions and exemptions. See the Alternative Fuels and Advanced VehiclesData Center website: www.adc.energy.gov/adc.


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2008). A specic energy crops scheme was introduced in 2003 that provided per acre subsidies, though

this was removed in 2010. Several member states began their own schemes or expanding biouel use in the

context o renewable energy programs.

The EU passed legislation in 2008 that mandated the use o biouels in the transportation sector. As a part

o its Climate Change Package, the EU adopted the Directive or Renewable Energy (DRE) in 2009, which

established an EU-wide binding target o 10 percent o transport energy rom renewable sources by 2020 (EU

2009) along with a requirement that 20 percent o all energy come rom renewable sources (up rom 8 percent

in 2009).7 Implementation is in the hands o the Member States, many o which have legislation in place to

achieve these levels. In the United Kingdom, or example, electricity suppliers must source a specied propor-

tion o their supplies rom renewable sources or pay a penalty (the buy-out price), creating a nancial incen-

tive (borne by the consumer) to generate electricity rom renewable sources. For road transport, a lower road-

uel tax applies on biouels in the UK, and in addition a Renewable Transport Fuel Obligation is implemented,

so both users and taxpayers in eect support the uptake o biouel.

Biouel Policies in BrazilBrazil has been the world leader in mandated blending o biouels or over 30 years, primarily under its Pro-Al-

cool program.8 This program was introduced in the wake o the jump in oil prices in 1973: it satised both the

need to lower dependence on imported oil and to create a new market or the countrys sugar crop (Sandalow,

2006). The government o the day stimulated the development o the industry through low-interest loans and

enlisted a state-owned enterprise, Petrobras, to incorporate the product into gasoline. Through benecial tax

treatment, ethanol was available at a price that made it competitive with gasoline, and automobile manuactur-

ers were persuaded to produce cars that were able to use the uel at levels above traditional gasoline-powered

vehicles. The enthusiasm or ethanol altered in the 1990s, as price controls in an economy with extreme

infation reduced market incentives to sugar mills to produce ethanol. Demand outstripped supply or a time

and led to a consumer reaction against cars designed to operate on hydrous ethanol (93-96 percent ethanol

and 4-7 percent water). But the market or ethanol re-emerged when fex-uel cars (those able to use gasoline

or pure ethanol as well as variable gasoline-ethanol blends) were developed and were received avorably byconsumers (Sandalow, 2006).

The current policy operates largely through the establishment o ethanol blending shares (which are obligatory

and not minimum levels) and are adjusted occasionally, but have remained in the range o 2025 percent o

anhydrous ethanol in gasoline. All gas stations are required to sell both gasohol (E25) and pure ethanol (E100).

The blending mandate has also been accompanied by a host o supporting policies, including retail distribu-

tion requirements, subsidized credit or ethanol storage and tax preerences or vehicles (Hebebrand and

Laney, 2007). Biodiesel, though not a major product in Brazil, is also subject to mandates, with a minimum o

5 percent blended with regular diesel (B5) (Harmer, 2009).

2. Classiying Biouel PoliciesAny detailed consideration o biouels policies requires a system o classication o instruments so as to make

analytical sense out o the complexity o regulatory and nancial interventions in the biouels market. The

7 Directive 2009/28/EC o the European Parliament and o the Council o 23 April 2009 on the promotion o the use oenergy rom renewable sources and amending and subsequently repealing Directives 2001/77/EC and 2003/30/EC,Ofcial Journal o the European Union, L140, 5 June 2009.

8 As in other countries, the original interest was in the introduction o oxygenation additives to gasoline and the removal o lead.


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classication o support into various categories is useul both to quantiy the extent o the policies involved

and to examine the way in which such support should be notied under WTO procedures or reporting and

or monitoring consistency with trade rules. In addition, it provides a sound starting point or a discussion o

the incidence o such support and hence its political implications. The issues o the WTO notication and the

incidence will be explored in later sections o the paper.

Support or biouels can be provided at

dierent levels o the supply chain rom

the production o biomass to the con-

sumption o blended (or unblended) uel.

Table 1 shows one classication, based on

OECD (2008), which emphasizes the up-

and downstream nature o subsidies in this

area. Policies are divided into those operating at the input level, the biouel production or distribution levels,

and the consumer level. Production o biomass can be stimulated by subsidies either or the biomass itsel or

to reduce the costs o production. I an energy eedstock also goes to markets other than uel (corn or etha-

nol or or eed), then support can either be limited to the biomass market or be applied to total production.

Production o biouels can be aided by a range o capital grants, guaranteed loans and tax credits. Biouel

revenues can be enhanced both by subsidies and by protection rom oreign competition. There can also be

xed prices or biouel sales. Subsidies to encourage the distribution o biouels are paid in some cases: these

can be in the orm o tax credits or direct subsidies. They can entail obligations to aid biouel distribution, such

as the required introduction o pumps that can dispense biouel; alternatively the development o new inra-

structure to deliver biouel to consumers

can be subsidized. Many biouel policies

rely on supporting the demand or biou-

els, through subsidies and tax credits to

blenders to supplement the mandates that

attempt to control the share o biouel inblended products.

Support or Biomass ProductionThis range o policy instruments is evident in the approach o the EU, the U.S. and Brazil. The EU experi-

mented with the direct subsidization o energy crops in the 2003 Reorm, but removed it in the 2009 Health

Check. In addition, the EU allowed the cultivation o energy crops on set-aside land (thus letting a biomass

crop be grown where others were not allowed (Swinbank, 2009a)). This indirect subsidy was also removed in

the Health Check. The general system o arm support in the EU (known as Pillar 1, and now channeled mainly

through the Single Farm Payment) does not particularly avor energy crops such as rapeseed.9 Rural develop-

ment programs (Pillar 2) provide planting grants or second-generation biomass (such as Miscanthus), but the

quantities involved are small. Indeed, one could argue that the Common Agricultural Policy (CAP) as a wholekeeps the price o biomass within the EU at a higher level than in countries that do not support their agricultural

sectors through taris.

The U.S. has a rat o arm programs that support the production o corn and soybeans, with direct

payments based on historical entitlements, countercyclical payments that compensate or low prices,

9 One exception to this statement was the provision that allows sugar produced over quota to be used or ethanol production:it could not otherwise be sold on the domestic market.

Support or biouels can be provided at dierentlevels o the supply chain rom the productiono biomass to the consumption o blended (orunblended) uel.

Many biouel policies rely on supporting the de-mand or biouels, through subsidies and tax creditsto blenders to supplement the mandates that attempt

to control the share o biouel in blended products.


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and loan deciency payments that give a measure o price support. Subsidized crop insurance is avail-

able, along with a new orm o revenue insurance (Average Crop Revenue Election, also known as ACRE)

introduced in the 2008 Farm Bill. However, these programs operate regardless o the nal use o the crop

or ood, eed or uel.

Brazil has ew programs presently that specically subsidize the production o cane sugar, though the ag-

ricultural sector as a whole enjoys the benet o certain credit programs (Nassar and Ures, 2009). These

programs aim to oset the high cost o credit in Brazil, but the actual interest rate reduction is modest. The

cost o producing sugar cane in Brazil is low, and the biouel sector is thereore competitive without subsidiz-

ing eedstocks. However, when sugar prices are high, the protability o processing sugar cane into ethanol

can be reduced.

Support or Biouel ProductionAt the level o the production o biouels, incentives are mainly through taris. The EU maintains a tari on

ethanol o 10.2 euro per hectoliter (about 45 percent at current prices) and a somewhat lower tari on biodiesel

o 6.5 percent (Swinbank, 2009a). Biodiesel can contain up to one percent o mineral diesel, and a consider-

able amount o the product known as B99 was imported rom the U.S.10 Countries with preerential access

into the EU ace a zero duty. Other production incentives include capital grants at the member state level.

U.S. taris on ethanol are also high: the regular tari o 2.5 percent is supplemented by a tax classied as

other duties and charges o 45 cents a gallon (about 35 percent at recent ethanol prices) to oset the eect

o the tax credit to blenders (see below). Once again, preerential suppliers can avoid the duty, and this has

encouraged shipments rom countries in the Caribbean Basin. Brazil has been able to supply some ethanol

despite the tari and some Brazilian ethanol may arrive in the U.S. through countries that have preerences.

Brazil, as a major exporter o ethanol, does not maintain high internal prices: indeed, ethanol prices are gener-

ally less than those o gasoline and are not supported by high taris (Nassar and Ures, 2009). Biodiesel is also

protected by a tari on imports into the U.S. o 4.5 percent ad valorem. Brazil until recently imposed a 20 per-

cent tari on imported ethanol, but this was removed in April 2010. Indeed, Brazil has been importing ethanolin recent months as high sugar prices make the processing into biouels relatively less attractive.

Support or Biouel ConsumptionThe most signicant policies are those that infuence the use o ethanol and biodiesel in blending or retail

gasoline and diesel supplies. Blending is done by rms that deliver uel to retail outlets and who are typically

separate commercial entities rom biouel producers. The EU has established a mandate or at least 20 percent

use o renewable energy by 2020, to be implemented through member state laws. This mandate also includes

a target or 10 percent renewable energy or transportation. No EU subsidies are directly involved, though in-

dividual members are obliged to establish the conditions or the mandate to be realized. Subsidies in the orm

o tax incentives vary among member states.

The U.S. mandate or the use o biouels is somewhat more complex but will undoubtedly continue to have a

major role in the uture o the biouel sector. An overall mandate sets a target or the use o biouels under the

RFS and secondary targets are set or advanced uels that oer to lower carbon emissions even urther. The

10 The practice o shipping biodiesel rom the U.S. to the EU was encouraged by the act that U.S. biodiesel producersreceived a blending credit under the EISA (2007) even on exported uel, and received tax credits in the EU as the prod-uct qualies as biouel. The European Commission imposed anti-dumping and countervailing duties on such imports inMarch 2009; in July 2009 it announced the imposition o a temporary tari to be in eect or ve years.


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corn-based ethanol share o this market is eectively set by the dierence between the overall mandate and

that or advanced uels.11 Within the advanced uel mandate, separate quantities are specied or cellulosic

and biodiesel uels. Automobile manuacturers are beginning to introduce cars that can run on various blends

o gasoline and ethanol, and new pumps that allow consumers to choose are under development. But cur-

rently the support or biouel consumption is limited by inrastructure and blending limits.

In the case o Brazil, the mandates take the orm o compulsory blending o ethanol (between 20 and 25 per-

cent o anhydrous ethanol) into transport uel (biodiesel is not a signicant actor in this market). In addition, in-

creasing quantities o hydrous ethanol are being sold in direct competition with gasoline outside the mandate.

The introduction o fex-uel cars and their widespread adoption has let policy makers with options that the

EU and the U.S. do not have: the biouel market may be able to survive even in the absence o mandated use.

Support or Research and DevelopmentIn addition to support or current production, many countries have initiated programs or research into biouels, par-

ticularly those produced rom new orms o biomass, and ways to transorm it into liquid uels, that may be cheaper

and do not compete with the ood use o cereals and oilseeds (OECD, 2008). The two countries with the largest

expenditures in this area in 2006 were the U.S. at roughly $90 million and Japan with roughly $60 million. In the

U.S., public spending on biomass research and development totaled $800 million over the period 1993-2004, more

than eight times the amount spent by Japan, the Netherlands and Sweden, which were the next largest spenders

in this area. In addition to EU member countries, the EU Commission provides unding or research into biouels.

Table 1: Classifcation o Types o Government Incentive or the Biouel Sector

Classifcation o program Instruments used Examples

Support or Production o Biomass Direct Subsidies or biomassproduction

EU ECA introduced in 2003 (subsequently removed); eligibility o biomassor conservation payments

Indirect subsidies or biomassproduction

Fuel, ertilizer and water subsidies; crop insurance and income subsidiesto biomass producers

Trade policies on biomass Tari concessions; export restrictions

Support or Biouel Production andDistribution

Reduction o capital and inra-structure costs

Capital grants or biouel plants; concessional loans or ethanol producers inU.S. under ESA (1980); enhanced capital allowances under the tax code

Reduction o production costs Income tax credit (U.S. Energy Policy Act (2005)

Direct subsidies or productiono biouels

Subsidies per unit o production

Guaranteed prices paid bydistributor

Minimum price or biouels; eed-in tari; green bonus or biouels

Trade policies on biouels Taris on imported biouels

Reduction o distribution costs Fuel excise tax credit to blenders as in U.S.; direct subsidies or distribu-tion (Sweden)

Quantitative promotion Quota obligation schemes and inrastructure (e.g. uel pump) mandates;subsidies or inrastructure

Support or Consumption o Biouels Price reductions or biouels Excise tax exemption, VAT exemption; income tax credit

Quantitative requirements orblending

Quota obligation schemes; blending requirements

Support or Research and Development Support or research into biouels Development o second and third generation biouels

Source: Adapted rom OECD (2008)

11 Ethanol rom sugar cane has been dened as an advanced uel under US law: this would imply that imported cane-basedethanol can help to ulll this RFS requirement.


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3. Quantiying Biouel Support

Quantication o the extent o the subsi-

dies provided or the production and dis-

tribution o biouels is a challenging task.

There are many and varied incentives giv-

en to the biouels sector, no doubt refect-

ing the emergence o new political coali-

tions with interests in the rapid growth o alternative energy sources. Moreover, the same policy instruments

used can have markedly dierent impacts in dierent countries. Economists have pointed out that one should

not need nancial incentives to comply with a government mandate (de Gorter and Just, 2008, 2010). In act,

to pay a subsidy as well as mandating a particular blend o biouel and ossil uel could backre and actually

lead to more ossil uel being consumed. But in political terms, the industry clearly supports the notion that the

subsidy is the appropriate way o encouraging compliance with a mandate: the alternative o enorcement at

the level o each rm would be too intrusive (Babcock, 2010).

The Global Subsidies Initiative (GSI) has published estimates o the total support or biouels provided by the

policy measures in place in selected OECD countries in 2006 - Australia, Canada, the EU, Switzerland and the

U.S. (Steenblik, 2007). These estimates are shown in Table 2. The total amount o support in these countries

at that time was estimated to be roughly $11-12 billion, 55-60 percent o which was provided by the U.S. and

most o the rest by the EU. Roughly two thirds o the total support was directed towards ethanol production

and the remainder to biodiesel, since the

production o the ormer is greater.12 The

GSI has also produced more detailed es-

timates by country (Koplow, 2006, 2007;

Kutas et al., 2007; Laan et al., 2009; Quirke

et al., 2008; Steenblik et al., 2008). In 2006,

the GSI estimated the extent o subsidies

in the U.S. at between $5.5 and $7.3 billion a year. Over the period rom 2006 to 2012, the totals o such sub-

sidies could be over $92 bill ion (Koplow, 2007). The subsidies provided by the EU were calculated at 4.7 billion

euro in 2006, equivalent to $5.2 billion. Two thirds o that went to support biodiesel.

It is equally challenging to quantiy the support provided globally to agriculture through the range o policy

measures designed to promote the production and use o biouels. The OECD does not provide such an

estimate or its member countries as part

o the Producer Support Equivalent (PSE)

calculated annually, although the OECD

(2008) has incorporated the major policy

instruments into an empirical model o

global agriculture in order to examine their

impact on production and consumption.13

12 By way o contrast, the total (commodity-specic) support to corn producers in the U.S. was estimated by the OECD tobe $727 million in 2008 (a year o high prices). The total Producer Support Estimate across commodities or the US was$23.3 billion and or the EU was $150.4 billion in that year (OECD, 2009).

13 The incorporation o the subsidy eect o biouels mandates into the PSEs would create problems. The concept o the PSEis to measure the impact on producers in one country o the actions o their own government. A boost to corn demand

Quantication o the extent o the subsidies provid-ed or the production and distribution o biouels is

a challenging task.

The total amount o support in Australia, Canada,the EU, Switzerland and the U.S. was estimated to beroughly $11 - 12 billion, 55-60 percent o which wasprovided by the U.S. and most o the rest by the EU.

It is equally challenging to quantiy the supportprovided globally to agriculture through the rangeo policy measures designed to promote the produc-tion and use o biouels.


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To the extent that biouels policies can be considered as agricultural support, the major measures used are

tax exemptions, credits or rebates or the use o biouels in preerence to ossil uels and biouel blending or

consumption mandates. These instruments are requently supported by border measures, in particular taris,

to limit import competition in domestic biouel markets.

Table 2: Estimates o the total support or ethanol and biodiesel in selected OECDcountries in 2006 (billion dollars)

Country Ethanol Biodiesel Total liquid biouels

United States1 5.4-6.6 0.5-0.6 5.9-7.2

EU25 1.6 3.1 4.2

Canada 0.15 0.01 0.11

Australia 0.04 0.02 0.05

Switzerland 0 0.01 0.01

Total 7.2-8.4 3.6-3.7 10.8-12.1

1 Range reects alternative treatment o uel-tax creditsSource: Steenblik, 2007.

Impact o Biouels PoliciesThere have been some empirical studies that evaluate the impact o U.S. biouels policy on international markets, al-

though much o the ocus has been on domestic implications. Since the U.S. is a major exporter o many o the agricul-

tural commodities involved (e.g., corn and soybeans), some international impacts can be inerred rom these studies.

In an early study, Elobeid and Tokgoz (2006) examined the impact o U.S. import duties on uel ethanol and

the tax credit provided to blenders. They estimate that the removal o the prohibitive U.S. tari would increase

world ethanol prices by roughly 24 percent relative to projected baseline values or 2006-2015. Brazilian etha-

nol exports increase by 64 percent. Expanded use o imported ethanol lowers the price o corn in the U.S. by

roughly 2 percent. I the ederal tax credit were also removed, the impact on the world ethanol market would

be reduced, since it would be less protable to blend ethanol with gasoline. As a result, Brazilian exports are

estimated to increase by 44 percent and the world ethanol price by 17 percent. In some related analysis, Elo-

beid et al. (2006) suggest that the protability o ethanol production under a continuation o existing policies

could lead to much greater expansion o ethanol production than assumed in the earlier study. Using a crude

oil price o $60 per barrel and production costs or a representative ethanol plant o 50 million gallons, they

estimate that ethanol production could continue to increase until corn prices reach $4.05 per bushel, at which

point roughly 32 billion gallons o ethanol would be produced. The $4.05 corn price projected by 2015 is 58

percent higher than that in their earlier analysis.

The impact o biouels policies on agriculture extends beyond corn. Tolkoz et al. (2007) updated and expanded

the analysis in Elobeid et al. (2006), particularly in terms o assessing the impact o expanded ethanol produc-

tion on other commodities. The increase in corn prices caused by ethanol demand reduces soybean produc-

tion, raising the costs o corn-based and soybean-based eed or animal producers. The authors indicate that

the rate o expansion in ethanol production is very sensitive to the crude oil price higher petroleum prices

lead to a aster expansion o the industry and lower prices slow the expansion. They also show that a short

that assists corn producers in various countries would be dicult to include, as that would imply that one would apportionthe benets beyond the border. Similarly, policies that restrict supply through such instruments as a conservation reservealso have benets or other producers. The PSE calculations (intentionally) do not include the eects o support measureson the world price, since this would require a modeling approach that would raise its own problems.


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15

corn crop due to drought could introduce considerable instability into the corn market with a substantial all

in U.S. corn exports and a spike in corn prices as ethanol reners and domestic livestock producers bid corn

away rom international markets. The impact o biouel policy on the stability o ood and agricultural prices is

an important issue that is discussed urther below.

Impacts on Agricultural MarketsThe magnitude o the eect o the U.S. biouels mandate on agriculture is examined by other studies. Hayes et

al. (2009) examined the impact o the Renewable Fuels Standard o the 2007 Energy Independence and Security

Act (EISA) and the biouel tax credit. The baseline or their analysis, which ocuses on the terminal year o 2022,

assumes a petroleum price o $75 per barrel. The increase in biouel use under EISA and the ethanol tax credit

result in a substantial expansion o corn and soybean production. In the absence o the support provided by bio-

uels policies, corn production would be roughly 9 percent lower and the arm price o corn would be 18 percent

lower. The release o land rom corn production would lead to higher production o soybeans (+4 percent) but

lower soybean prices. Exports o corn are estimated to increase by 24 percent and soybeans by 10 percent. The

lower price o eed leads to higher production o pork, poultry and dairy products and exports o most livestock

products also increase, with the largest impact on pork exports (+66 percent).14 The price o petroleum is shown

to be crucial in determining the impact o biouels policy. Petroleum prices o $105 per barrel lead to substantial

additional expansion in the production o ethanol, with urther upward pressure on corn prices. Even under such

high oil prices, the removal o the biouel tax credit would have a signicant eect on production and prices since

the credit makes ethanol a highly attractive alternative to ossil uels. The removal o the credit lowers corn prices

(by 16 percent). As might be expected, the price-enhancing impact o U.S. biouel policies on corn and soybean

prices leads to increased production o these crops in countries such as Argentina and Brazil, and the removal

o the policies would have a corresponding production-depressing eect.

The impact o ethanol on the livestock sector is complicated by the production o by-products. Though corn

or ethanol competes with corn or animal eed, the corn wet milling process that produces ethanol yields dis-

tillers dried grains (DDGs) as an important by-product that is used as cattle eed. Up to one third o the corn

used in ethanol is in eect returned to the livestock industry through this eed source. While it is dicult toargue that this acts as a subsidy to livestock armers, it does reduce to some extent the negative subsidy that

is caused by the diversion o corn rom animal eed to uel uses.

Additional insight into the market eects o U.S. biouel policies is provided by Westo et al. (2008). They also

demonstrate the price-enhancing eect o the combination o EISA mandates and the tax credit, and illustrate

the supporting role played by the prohibitive import tari on uel ethanol. Their analysis indicates that the man-

dates have the greatest impact on eedstock prices: i these were not in place, corn and soybean prices at the

arm level would be 6-7 percent lower than projected or 2011-2017.15 Tari protection is the second most

signicant element in the policy mix: i the ethanol tari were removed, it is estimated that corn prices would

all by an additional 2.5 percent. In total, the package o policy measures in place or biouels adds 12 percent

to the price o soybeans and 14 percent to the price o corn.16

14 The same direction, i not the magnitude, o price changes or crops and livestock products attributable to biouels policieshas been ound by other analysts using dierent economic models, e.g., Peters et al. (2009); Rosegrant (2008).

15 The price-enhancing eect o a blending mandate or ethanol was identied by Schmitz et al. (2003) as a hidden subsidyto sugar producers in Brazil. Koizumi (2003) provided an early analysis o the impact o the development o ethanol pro-duction in Brazil on the world markets or sugar and ethanol. His analysis also indicates that Brazils blending mandate hasa price-enhancing eect on world sugar markets.

16 This analysis supports the conclusions reached by de Gorter and Just (2007) that the tax credit has little impact on market


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There has been less analysis o the impact o biouel EU policies on international markets. Banse et al. (2008)

evaluate the price eects o a 5.75 percent mandatory blending rate or biouels by the end o 2010 under the

EU Biouels Directive (BFD) and the increase in the rate to 10 percent by 2020. They determine that this would

lead to a reduction in a projected decline in real prices o cereals and sugar and a small increase in the real

price o oilseeds. Higher global prices or these crops result in expanded production, particularly in South and

Central America and increased exports o biouel rom these regions to the EU. Again, the price o petroleum

is ound to be an important determinant o uture agricultural price eects. Higher prices or ossil uels lead

to increased demand or biouels, with consequent upward price pressure on eedstocks such as corn and

oilseeds.

A report rom the OECD (2008) analyzes the impact o global biouel policies using a baseline or 2009-2017.17

The impact o budgetary support policies (tax concession, tax credits and direct production subsidies), man-

dates and import taris is assessed. The elimination o these measures is projected to result in a reduction

in world ethanol consumption o roughly 13 percent (average or 2013-2017). The reductions in use in the EU

and the U.S. are projected to be roughly 40 percent and 20 percent, respectively. The impacts on biodiesel

consumption are even more dramatic world usage alls by roughly 65 percent and by 85 percent and 55 per-

cent, respectively in the EU and the U.S. The change in policy is estimated to result in a 20 percent decline in

the world price o biodiesel, but since import taris or ethanol depress existing world prices or this product,

the international price increases by roughly 10 percent. As in other studies, the OECD analysis suggests that

a reduction in biouel use would lead to reduced global demand or grains and or vegetable oils. World prices

o wheat and coarse grains are projected to decline by 3-5 percent and vegetable oil by more than 15 percent.

The drop in oilseed production leads to higher prices or oilseed meal, hence the price o oilseeds only declines

by around 3 percent. Sugar prices rise slightly as Brazilian ethanol producers take advantage o higher prices

to switch some o their production into ethanol or export.

Changes in policy, in particular the increase in the mandated use o biouels under the DRE in the EU and

under EISA in the U.S. are projected to increase international prices or ethanol and biodiesel and to exert

additional upward pressure on international prices or crops. World biodiesel and ethanol prices are projectedto increase by an average o roughly 10 and 20 percent, respectively above those in the OECD baseline or

2013-17. Wheat, coarse grain and oilseed prices are 3-5 percent higher. The price o vegetable oils is aected

strongly by the increased use o biodiesel with average prices roughly 14 percent higher.

I all biouel policies are taken into account, including those implied by DRE and EISA, the OECD estimates that

their total eect on coarse grain prices ranges rom an increase o 10-17 percent and 6-9 percent or wheat

and oilseeds. The higher gure corresponds to a situation in which the production o second-generation bio-

uels competes (at least partially) with existing crops or land, particularly in the EU and U.S. Such competition

would exert additional upward pressure on crop prices.18

prices or ethanol and (by extension or corn) i the mandate is binding.17 The baseline does not take into account recent policy developments in Brazil (the 2008 blending mandate or biodiesel),

the EU (the 2009 DRE) and US (the 2007 EISA); assumes that petroleum prices will be in the range $90-104 per barrel;assumes that there will be continued high international prices or agricultural commodities due to demand growth or oodand other non-ood uses; and assumes that second generation biouels will not become commercially viable during theperiod considered.

18 Assumptions about uture petroleum prices are crucial or the analysis or uture trends in prices or agricultural commodi-ties in the OECD study. A sustained reduction in oil prices to $72 per barrel (similar to that observed recently) rom theroughly $100 assumed in the OECDs projections would lead to crop prices that are 6-12 percent lower than in theirbaseline.


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Biouels Policy and Market InstabilityMost o the empirical analysis o the impact o biouel policies on agricultural markets ocuses on price levels

or trends; relatively little attention has been paid to price variability. Arguably this is an important issue, particu-

larly given concerns about global ood security. McPhail and Babcock (2008) use a partial equilibrium analysis

o the corn market to determine the impact o EISA on the variance o corn prices in the presence o random

shits in acreage, yield, export demand, gasoline prices, and the rening capacity o the ethanol industry. Usingthe 2008/09 marketing year as a point o reerence, they calculate that without the EISA mandate (but with the

tax credit) the expected average price o corn would be roughly $5 and price variability would average 17.5

percent. The imposition o the mandate increases the expected price by roughly $0.35 and raises the variance

o prices to roughly 20 percent.

More recent work has elaborated on the link between biouels policy and price variability. Yano et al. (2010a)

analyze the impact o the tax credit and the mandate or ethanol on domestic corn prices in the ace o ran-

dom fuctuations in petroleum prices and corn supply. They show that the blending mandate can be expect-

ed to reduce variation in corn prices due to fuctuations in petroleum prices, but will have the opposite eect

i the variation in corn supply is high. The elimination o the tax credit will reduce variation in corn prices, i

the source o instability is in the petroleum market, but will have the opposite eect i the source is in cornsupply. This is because the elimination o the tax credit makes it more likely that the mandate will be binding

(i.e., the use o ethanol will exactly equal the mandated level) rather than stimulating additional use o corn

or ethanol when supplies are short. Yano et al. (2009) examine changes in the U.S. tari on uel ethanol.

The possibility that ethanol can be obtained rom abroad exerts a stabilizing eect on corn prices, since it

reduces the impact o a binding ethanol mandate on the corn market. However, i fuctuations in petroleum

prices are the principal source o instability, lowering the tari on ethanol can add to the instability in corn

prices since it will accentuate variations in the use o corn to produce ethanol in response to changes in the

price o ethanol. Although the analysis perormed so ar on the impact o biouel policies on market variability

is limited, results indicate that existing policies are likely to accentuate the eects o the complex interaction

between energy and agricultural markets

in terms o both the level and the stabilityo international prices.

These studies all agree on one issue: bio-

uel mandates, tax concession and sup-

porting border measures intensiy the

linkage between markets or agricultural

products and energy. By creating additional demand, policy measures increase the price o eedstocks such

as corn and soybeans. Blending and consumption mandates appear to have particularly strong eects on

crop prices. Since the crops used to produce biouel are important sources o livestock eed, this also ex-

erts upward pressure on prices o meat o animal products. Biouel policies may also increase agricultural

price variability. Studies suggest that uture impact o biouel policies on agricultural markets will be cruciallydependent on both the level and stabil-

ity o petroleum prices. The interrelation-

ship between the markets or energy and

agricultural markets is complex and link-

ages between the two seem destined to

become increasingly signicant or global

ood security.

These studies all agree on one issue: biouelmandates, tax concession and supporting bordermeasures intensiy the linkage between markets oragricultural products and energy.

The interrelationship between the markets or ener-gy and agricultural markets is complex and linkagesbetween the two seem destined to become increas-ingly signicant or global ood security.


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4. WTO rules on Biouel Subsidies

The various aspects o WTO provisions that are o particular relevance to biouel policy are summarized in

Table 3. These include the articles o the General Agreement on Taris and Trade (GATT), the Agreement

on Technical Barriers to Trade (TBT Agreement), the Agreement on Subsidies and Countervailing Measures

(ASCM), and the Agreement on Agriculture (AoA). The application o these rules depends in part on the way

in which biouels are classied. Several o these aspects are currently under discussion in the Doha Round o

trade negotiations. The implications o a successul Doha Round are mentioned below.

General Agreement on Taris and Trade ArticlesSeveral provisions are embedded in the undamental articles o the GATT.19 The basic principle o non-discrimina-

tion among oreign suppliers provides a standard by which to judge blending mandates and taris on biomass and

biouels. However, with the prolieration o bilateral, regional and preerential trade agreements, the practical eect

o non-discrimination may be relatively small. Trade fows into (and through) countries with preerential access,

and hence application o the ull MFN tari may be the exception rather than the rule in the case o biouels. The

principle o national treatment requires comparable treatment o domestic and imported biouels when they reach

the domestic market. Most countries have crated their domestic tax and regulatory policies to conorm, at least

on the surace, to this GATT obligation.20 Biouels policies are likewise relatively source-neutral. But the temptation

could always arise to make compliance with domestic regulations just a little more costly or oreign rms.

Technical Barriers to Trade AgreementThe treatment o oreign biomass and biouels at the border (and on the domestic market) is also covered by

the TBT Agreement. A technical standard must be in conormity with the TBT Agreement: it should not dis-

criminate among oreign suppliers, it should not give more avorable treatment to domestic producers, and it

should not be more disruptive o trade than necessary or the achievement o the objective o the standard.

One way o viewing a mandate is to regard it as a technical standard. Thus the mandatory blending o biouels

with gasoline may not be materially dierent rom a rule that cars must meet a target or uel eciency.21 More

controversial would be a standard that identied biouels on the basis o their eedstock, or even the method

o production o that eedstock. Such sustainability standards are being introduced as a way o ensuring that

biouels are an improvement over ossil uels in terms o emissions o greenhouse gasses and other pollutants.

The operation o such standards could well impose costs on overseas suppliers and in eect discriminate in

avor o domestic industries.

Biouel SubsidiesThe treatment o subsidies in the GATT has

a complex political and legal history, and

this is refected in the somewhat convo-

luted provisions in WTO agreements. Sub-

sidies are not in themselves necessarily in-

consistent with the articles o these agreements, but they are closely circumscribed with regard to their eect

on other producers. The main part o WTO provisions that deals with subsidies is the ASCM, negotiated in the

19 GATT (94), agreed as part o the Uruguay Round, replaced the original GATT (47) with only minor changes.

20 The combination o such policies with high taris in the U.S. case provides an overwhelming margin o preerence ordomestically-produced ethanol over imports, unless world ethanol prices are relatively high.

21 The US Reormulated Gasoline regulations were ound to discriminate against imported petroleum in a WTO casebrought by Venezuela.

The treatment o subsidies in the GATT has a complexpolitical and legal history, and this is refected in thesomewhat convoluted provisions in WTO agreements.


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Uruguay Round. For agricultural products there are urther disciplines in the AoA. By contrast, biouel subsi-

dies are relatively new on the scene and their place in the WTO rulebook is untested and subject to debate.

The biouel subsidies discussed in earlier

sections o this paper will clearly need to

be in compliance with both the ASCM and

the AoA (when appropriate) in order to

avoid challenges rom other WTO mem-

bers. But the matching o subsidy policy

with the appropriate WTO discipline is not always easy. The rst question that needs to be answered is,

what type o product is the biouel in question? Is ethanol an agricultural or an industrial product? (Howse

et al., 2006). The AoA (Annex 1) indicates that the Agreement covers HS Chapters 1 to 24 less sh and sh

products, plus some other products. There is no specic entry or ethanol used or uel under the harmo-

nized system. However, ethanol is traded

under HS 2207, which includes both un-

denatured (HS 220710) and denatured

ethyl alcohol (HS 220720). Biodiesel is

regarded as an industrial product (since it

is produced through a chemical process

called trans-esterication) and since 2005

has been classied under HS code 382490 (which includes products, preparations and residual products o

the chemical or allied industries not elsewhere specied).22 Consequently there would seem to be aprima

acie case that support benetting the production o ethanol would aect a product covered by the AoA,

whereas biodiesel support would not. Even i ethanol were not considered to be a basic agricultural prod-

uct, the AoA would cover support that benets producers o corn, sugar and oilseeds. And producers o

biomass or biodiesel are still selling an agricultural product: there are many such cases o industrial uses o

agricultural products and this has not excluded taris and subsidies or these products rom being subject

to the provisions o the AoA.

The second question is who gets the benet o the subsidy? Producers o biomass such as corn may re-

ceive a subsidy but pass the benet on to the producers o ethanol through lower eedstock prices. In this

case the corn price will be lower. Such downstream subsidies are common, and are covered by the ASCM.

But a subsidy may also go to the ethanol producer who could pass it on to the biomass producer through

a higher price or corn. In this case the subsidy could be covered by the AoA, as described below. Or the

subsidy (as in the U.S. tax credit) could be given to the blender. The ethanol producer may benet rom

the increased price o ethanol, and this may indeed also increase the corn price (as appeared to happen in

2008). An economic model with appropriate parameters would demonstrate these downstream impacts, but

whether a WTO panel would eel able to sort out the ultimate recipient o the subsidy is less clear.23

Complicating the issue somewhat is the related question o whether the benets o the ethanol subsidy

accrue to domestic producers or to all producers o the eedstock. The higher demand or corn in the U.S.

22 Until 2005, biodiesel was traded under HS 2207, the same classication as is used or ethanol (Swinbank, 2009b). Theshit has implications both or subsidy rules and or tari negotiations, as elaborated by Motaal (2008).

23 O course there could be both a subsidy to the corn producer and a tax credit to the blender. So the net impact on the cornprice may be uncertain. The ethanol producer could gain rom both the higher price or etanol and the lower price orcorn. A recent paper by de Gorter and Just (2010) attempts to quantiy some o these eects.

Biouel subsidies are relatively new on the scene and

their place in the WTO rulebook is untested andsubject to debate.

The rst question that needs to be answered is, what

type o product is the biouel in question? Is ethanolan agricultural or an industrial product?


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may raise the price o corn on world markets. The Argentinean corn producer (or example) may reap some

o the benets. This makes ethanol subsidies and tax credits dierent rom those in many other sectors,

where competing producers will be disad-

vantaged: the negative impact o subsi-

dies that raise the price o corn may all

on consumers rather than producers, as

ood costs rise throughout the world. Sim-

ilarly, the Brazilian ethanol program has a

tendency to raise world sugar prices, to

the advantage o competing producers o

sugar but at the cost o consumers.

The biouel mandates pose an even thornier

problem or the identication o a subsidy.24

As such, a mandate coners no benet on

the party subject to its provisions. Indeed

the mandate itsel is costly to the rms that have to abide by it. A national mandate, i it is eective, has to be

administered through quantitative targets or individual rms.25 No government unds need be involved, though

in practice the rms concerned may be encouraged to ulll the mandate by the oer o subsidies or tax credits.

In such cases, it is the subsidy itsel that would be disciplined by the WTO: the act that the subsidy might be

deemed necessary to achieve willing compliance should not shelter it rom scrutiny under subsidy rules.26 The

economic analysis o a mandate backed by a subsidy has been mentioned above: in general only one o the two

instruments will be eective at any particular time. The legal issue may be somewhat dierent. Would the subsidy

be treated as i no mandate exists? Would the mandate be deemed to be the binding instrument or would a WTO

panel treat the two as a part o the same policy and look at the instruments together? (Harmer, 2009).

I one considers a mandate to be a technical standard, there could still be a subsidy involved. Complying with

a technical standard has a cost in most cases, but sometimes a subsidy or tax concession is granted to deraythis cost. This would argue that the mandate itsel is not a subsidy but that it is associated with a subsidy to

encourage the realization o the mandate. One would expect that both the mandate and the subsidy would

have to conorm to the appropriate part o the WTO rules.

The Agreement on Subsidies and Countervailing MeasuresThe ASCM gives a legal denition o the term subsidy. According to that Agreement, a subsidy must have

three basic elements:27

it must entail a nancial contribution;

it must be made by a government or a public body within the territory of a Member; and

it must confer a benet.

24 One should distinguish between mandates that are political statements o intent and those that have been translated intoregulations governing blending requirements. A political obligation would not generally translate into an actionable sub-sidy, unless it could be demonstrated that specic actions had been taken to translate intent into outcome.

25 In the case o the RFS in the U.S., Renewable Identication Numbers (RINs) are the tracking instrument to ensureblender compliance (Thompson et al., 2009).

26 Many, i not all, subsidies are designed to elicit some desired response: the trade rules seek to ensure that this response isnot at the expense o trading partners.

27 Agreement on Subsidies and Countervailing Measures, Article 1.

The higher demand or corn in the U.S. may raise

the price o corn on world markets. The Argentin-ean corn producer (or example) may reap someo the benets. This makes ethanol subsidies andtax credits dierent rom those in many other sec-tors, where competing producers will be disadvan-taged: the negative impact o subsidies that raisethe price o corn may all on consumers rather thanproducers, as ood costs rise throughout the world.


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However, even i a measure qualies as a subsidy under the ASCM, it is not subject to the ull disciplines o that

Agreement unless it can be demonstrated to be aspecifc subsidy.28 Specic subsidies are urther divided into

two categories: those that are prohibited and those that are allowed, subject to constraints. Two types o sub-

sidies are prohibited: export incentive subsidies that are contingent on export perormance, and local content

subsidies granted or use o domestic inputs over imported goods. Other subsidies are deemed actionable

in that they are potentially subject to challenge. The ASCM provides a clear process through which actionable

subsidies are identied. A Member can initiate remedial measures i it can prove that non-prohibited actionable

subsidies cause serious prejudice to its interests. Serious prejudice may arise when one or more o the ollow-

ing apply: imports into the market o the subsidizing country are displaced; exports to third country markets

as a result o the subsidy are displaced; there is signicant price suppression as a result o the subsidy; and

there is an increase in world market share by the subsidizing country.29

In addition to a challenge based on serious prejudice, a subsidy can also be countervailed i it causes injury

to domestic producers. European biodiesel makers have or instance attempted to show that U.S. producers

were causing them harm through subsidized splash and dash trade (see ootnote 9). The European Com-

mission responded with both anti-dumping duties and countervailing duties: the U.S. has subsequently modi-

ed its policy to make biodiesel produced and subsequently consumed outside the U.S. ineligible or the tax

credit even though the blending was done in the U.S. Material injury to an industry could also trigger other

saeguard actions under Article XIX. Less likely, though still plausible, is the possibility o challenge under the

nullication or impairment conditions (Article XXIII); a country could argue that ethanol subsidies were unex-

pected at the time when tari schedules were agreed and that benets accruing to it to it directly or indirectly

under WTO agreements are being nullied or impaired.

The Agricultural AgreementThe treatment o ethanol subsidies and blending mandates under the AoA is more complex. The criteria or the

notication o measures that benet agricultural producers are dierent rom that or subsidies in the ASCM.

Indeed, the AoA disciplines support rather than subsidies. The denition o support is cast airly wide. Article

6:1 o the AoA indicates that domestic support commitments apply to all domestic support measures in avoro agricultural producers other than support provided under programs that qualiy as exempt rom reduc-

tion under Annex 2 (the green box). Within Article 6, other categories o support are exempt rom reduction,

including direct payments under production-limiting programs (blue box). This leaves market price support,

non-exempt direct payments (i.e. those not eligible or the blue and green boxes) and any other subsidy not

exempted rom the reduction commitment. The level o support is quantied in the Aggregate Measurement

o Support (AMS). The AMS is compared with each countrys commitment on the nal bound total AMS agreed

in the Uruguay Round.

The denition o the AMS is given in Article 1a o the AoA, and limits support to that which benets produc-

ers o basic agricultural products. A basic agricultural product in relation to domestic support commitments

is urther dened as the product as close as practicable to the point o rst sale as specied in a MembersSchedule and related supporting material (Article 1b). Details o the calculations o the AMS are given in An-

nex 3 o the AoA. This raises the issue o whether ethanol is considered to be a basic agricultural product. I

28 ASCM, Article 2. The denition o a specic subsidy is discussed in Howse et al., 2006. Specicity could be an issue iboth agricultural and non-agricultural eedstocks can be used to produce ethanol. This may become more common iprocesses or the production o cellulosic ethanol are developed and adopted. At the very least, the price-enhancing eectso policies to promote ethanol production would be diluted.

29 ASCM, Article 6:3.


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so, support or its production (by mandating its use in blended uel) should arguably be included in the AMS.

The notication by the EU o support or ethyl alcohol rom agricultural origins as part o domestic support

would seem to be consistent with this interpretation. And the act that the U.S. has notied ethanol subsidies

as alling under the ASCM does not seem to exclude them rom inclusion as support or agricultural producers.

Determining the support or biomass associated with particular biouels policies seems to be easible, at least

in principle. Certain direct support provided to U.S. producers or use o agricultural products in the produc-

tion o bioenergy and biodiesel have already been notied to the WTO or 2002-2005 under the other product-

specic category o support.30 Beyond this, it might be argued that the blending requirement or ethanol, com-

bined with protection rom imported ethanol, serves to increase the domestic demand or ethanol eedstocks

and hence their price. This provides support in avor o producers o basic agricultural products such as corn

and sugar.31

The issue would be how to assess the magnitude o the subsidy or a particular basic product due to the act

that the subsidy accrues to the processor (blender) rather than directly to agricultural producers. Some part o

the transer is presumably retained by the

processor, but the same issue applies to

existing price support policies that are im-

plemented through processors (e.g., U.S.

dairy and sugar policies). I processors

have the ability to substitute among agri-

culturally derived eedstocks, a non-prod-

uct-specic estimate could be obtained. I

measures used to promote domestic production o ethanol are judged to all under the AoA, it would appear

on the surace that they should be treated as amber box support (neither quantity constrained nor unrelated

to production or price) and included in a countrys estimate o its current total AMS.

However, inclusion o the benet that biomass producers get rom biouel subsidies and mandates in the AMSposes some diculties. Annex 3 describes the calculations or price supports, non-exempt direct payments,

and other non-exempt measures. To calculate the market price support, one calculates the dierence between

an administered price and a xed reerence price. No such administered price exists in the U.S. and the EU

or biomass or biouel.32 But there are also, in most cases (the payments or cellulosic biomass in the U.S.

are the notable exception), no direct payments to the producer o the biomass. Under the heading o other

30 The program concerned is the Bioenergy Program administered by the Commodity Credit Corporation o the US Depart-ment o Agriculture. This involved corn and sorghum (entire period) and wheat (2002-03 only) or bioenergy and livestockand soybeans or biodiesel. Note that this notication appears to accept a broad denition o biouels as agricultural products.

31 I the price o petroleum is suciently high, it is possible that a blending or consumption mandate or biouel would not

be binding, i.e., blenders would voluntarily use an amount o ethanol above the mandated quantity on economic grounds(Yano et al. 2010a). In that case, the mandate would not technically provide any support to domestic producers o corn.However, there are cases in which other support measures are non-operative (e.g., government support purchases ordairy products in the U.S.), because prices are suciently high. Nevertheless, the market price support provided in suchinstances is calculated and notied to the WTO. The economic logic in the dairy product case is that typically taris areproviding price support rather than government purchases, but that argument breaks down in both the ethanol and dairyproduct cases i world prices are suciently high to make the tari redundant.

32 Provision is made or cases (usually ruits and vegetables) where the calculation o the gap between the administered priceand a reerence price is not practicable. This is called the equivalent measurement o support and dened in Annex 4 othe AoA. This requires the calculation to be based on an applied administered price again appearing to exclude providedby increasing demand.

The issue would be how to assess the magnitude othe subsidy or a particular basic product due to theact that the subsidy accrues to the processor (blend-er) rather than directly to agricultural producers.


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measures, the examples given (Paragraph 13 o Annex 4) are o a cost-reducing nature. Again, it is not clear

how one would justiy including price-stimulating ethanol programs as cost-reducing to biomass producers.

So it would appear that the broad coverage o Article 6 is eectively narrowed by the specics o Annex 3.

It is natural to think o ethanol subsidies as beneting particular products. But under the AoA there is a place

or non-product-specic support. So i it cannot be shown that the support is specic to a particular basic

agricultural product (or example, due to the possibility o using various eedstocks to produce ethanol), it

would still all under the heading o non-product-specic support and as such also should be included in the

calculation o the current AMS where appropriate (Josling and Blandord, 2009).

Is it possible that subsidies to ethanol eedstocks could be classied in the green box, and thus not be subject

to discip

biofuels subs web final-important

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