Regulatory Impact Analysis
Biofuels as an example
By Senior Adviser Johan Nitter-Hauge
Ministry of Finance, Norway
Finansdepartementet
Rationale for intervention
• Rationale for intervention Markets don´t always secure efficiency
Eg. externalities, information failure, public goods.
• Objectives defined to reflect outcomes (eg. crime reduction) rather than just outputs or inputs (eg. prosecutions, prison staff).
• Cost-benefit analysis – some examples: Transportation sector Climate Change Programme Supporting people programmes
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Climate Change Programme - biofuels
• According to the Kyoto protocol of 1997, Norway has commitments in relation to its Co2-emissions.
• The transportation sector is responsible for about one quarter of energy-related greenhouse gas emissions.
• Replacement of conventional hydrocarbon based fuels with fuels made from renewable bio-sources, e.g. rape seed or palm oil could be one way of reducing the emissions.
• Appraisal looked at a scenario where 2 % of the fuels consists of biofuels.
• The main biofuels today are ethanol and biodiesel. In Norway they are imported.
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Biofuels - benefits
• Biofuels have a ”lower carbon footprint” than conventional fuels. 100 % carbon savings assumed.
• 2 % biofuels content results in a reduction in total Co2 emitted in Norway of 160 000 tons per year.
• The social cost of Co2 is set at 25 euros per ton.
• Thus, the value of the annual benefit in Norway is 4 mill. euros.
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Biofuels - costs
Biofuels have a lower energy content than conventional fuels.
Resource costs of biofuels passed on to consumers.
Other (non-monetary) costs:
Crops that otherwise would become food might instead become fuel. Biofuel programmes could raise food prices. Higher crop prices could harm the poorest people.
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Costs of a 2 % biofuel scenario
BioethanolPrice at the pump (eurocents per litre)
Additional cost (eurocents per litre)
Total additional cost (mill. euros)
Total volume sold 2004
Conventional fuel
42,31 2139 mill. litres
Bioethanol2 % (E02)
42,38 0,06353 1,398
E02 energy-corrected
42,69 0,38 8,13
Biodiesel
Conventional diesel
49,30 1782 mill. litres
Biodiesel2 % (E02)
49,68 0,38 6,86
E02 energy-corrected
49,81 0,508 9,02
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Benefits and costs in summary• Reduced Co2 emitted: 4 mill. euros
• Total additional cost (8,13+9,02)mill. euros: 17,15 mill. euros
• Net benefit: - 13,15 mill. euros
Cost-efficiency:
• Reduced Co2-emissions: 160 000 tons
• Cost per ton of Co2 abated: 107 euros
• Social cost of Co2 per ton: 25 euros
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Sensitivity analysis
• A cost decrease of 30 % means that the cost per ton of Co2 abated could be 64 euros.
• According to the Stern report, the social cost of Co2 should be about 60 euros.
• An oil-price of 80 dollars per barrel makes biofuels competetive with conventional fuels.
Finansdepartementet
Conclusion - biofuels
• The measure does not pass a cost-benefit test with today´s prices of Co2.
• However, a measure should be included in a climate change programme even though it does not pass a cost -benefit test if it is anticipated that it will help to secure access to less costly carbon savings in the future.
• Thus, the greatest potential for reducing costs lies in the development of next generation technologies to utilize the cellulosic content of the plants.
Finansdepartementet
Biofuels – what did the government decide?
• There will be a biofuel obligation where the fuel sellers have to ensure that at least 2 % of the fuel they sell for road transport is biofuel by 2008.
• By 2009 at least 5 % of the fuel sold for road transport shall be biofuel.
• New regulations circulated for comments.
In addition: • Tax reliefs for biofuels and so-called flexi-fuel cars are
already in place.
Finansdepartementet
The Preservation of Climate