According to Bain & Company, the global biofuels industry experienced rapid growth over the past decade, but the slowdown over the last three years raises concerns.
In Brazil, changes in government support have pushed some producers to the point of bankruptcy, constraining investment in future growth. In the US and Europe, the combination of an economic slowdown and the lack of commercially viable second generation technologies at scale raises doubts about the industry’s ability to meet ambitious advanced advanced biofuels and GHG reduction targets without imposing too heavy a burden on consumers and food supply.
Fernando Martins and Juan Carlos Gray, authors ‘Biofuels: From boom to bust?’, suggests that five critical lessons can be taken from this:
Biofuels still need government support
Biofuels are still more expensive than fossil fuels, so government support for the industry remains necessary across markets, though each region may take a slightly different approach to combining tax subsidies, investment incentives, and volume or blend mandates. Even in Brazil, which produces the most efficient first generation ethanol, the industry suffered when the government pulled back tax credits.
But governments could improve the ways that they support biofuels. Many have been overly ambitious, and they could do more through smaller and more focused programs. Focusing subsidized investment in specific areas of the transport sector – for example, making city buses, car fleets and taxis run on biofuels – could do more than taking on the entire economy, Martins and Gray suggest.
Mandates work better than subsidies alone
In the US, the RFS revolutionized involvement in the industry in the mid to late 2000s. The EU followed with directives on blend targets. Based on their success, most countries today use mandates in one form or another, based on volumes or blends, to encourage industry growth.
In some case, however, mandates may be unnecessary or even lead to market distortions. Bain & Company highlight that Thailand was able to boost production and consumption without mandates. Governments should carefully weigh the costs and benefits of policy options before implementing them to promote sector growth.
Consider policy impacts on market dynamics
According to Bain & Company, some policies intended to boost biofuels growth have led to unintended negative consequences on international markets, such as the EU’s biofuels promotion policies that failed to consider the impact on trade markets. A loophole allowed producers to import large volumes of biodiesel, mix it with low volumes of domestically produced biodiesel and still have a mixture considered European enough to be eligible for subsidies. That created a large biodiesel trade market, in which Argentina and Indonesia played their cost advantages to export to Europe.
The EU has closed this loophole only recently by introducing a punitive tariff on imports from Argentina and Indonesia, and Argentina has filed a trade dispute before the World Trade Organization.
Matins and Gray insist that governments need to consider the potential effects of policy changes on overall market dynamics, otherwise they can create distortions that are difficult to resolve. To avoid these problems, they should examine international trade implications of any policy, taking into consideration the complex links within the market.
Policy stability is paramount
As the biofuels industry is extremely sensitive to policy changes, stability may be more important to growth that the actual choice of instruments. For example, in Germany the removal of tax subsidies created excess production capacity and pushed some producers into insolvency. Meanwhile, in the US, many private sector producers are reluctant to invest in commercializing and scaling cellulosic biofuels without assurance that government is going to stick with its advanced biofuels targets leading up to and after 2022.
Second generation biofuels will continue to face challenges
Second generation biofuels are not developing as quickly as expected. While the technology may already exist, none of the key markets have scaled advanced biofuels production (and more specifically cellulosic ethanol production) to anywhere near target levels.
Furthermore, Bain & Company explains that although second generation biofuels will not in theory compete with consumers for feestock, they will continue to face many of the same challenges as first generation biofuels, including access to land, rising labour costs and logistical difficulties.
Biofuels will continue to face these challenges until third generation technologies (such as oil production from algae) reach full scale, argue Martins and Gray. This could be decades away.
The closing remarks of the Bain & Company report places heavy emphasis on the fact that biofuels is a business like any other. The fundamentals of competition, costs and scalability will determine whether the biofuels industry can compete against other transport fuels when subsidies are withdrawn. In order to survive in the long term, the industry must stand on its own.
Adapted from a report by Emma McAleavey.
Read the article online at: https://www.hydrocarbonengineering.com/gas-processing/20102014/the-biofuels-industry-in-crisis-1435/