should we take a closer look at biofuels subsidies

Should we take a closer look at biofuels subsidies?

biofuel subsidies
Climate and Energy

The fall harvest is upon us. Crisp air, pumpkin spice lattes, and flannel shirts are in full swing. But as the final crops are harvested before the winter frost, it’s an ideal time to reflect on an industry that consumes a significant portion of Canada’s corn, wheat, and soybeans—conventional biofuels.

Conventional biofuel production—which includes ethanol and biodiesel made from corn, wheat, and soybeans—has been supported by government policy for over two decades in Canada. Fuel blending mandates, tax credits and exemptions, interest-free loans, and research grants are a sample of the policies that directly support the industry. Over $1 billion in public money has been used to support the industry since 2006.

Transportation emissions are the second biggest source of GHG emissions in Canada, so fuel that comes from renewable sources such as corn, wheat, or soybeans was (and still is) seen as a good bet by Canadian governments. Biofuels also have a clear advantage: they can be used with the internal combustion engine at low blend ratios with gasoline and diesel, requiring only minor changes to the internal nuts and bolts of cars.

But after decades of taxpayer support and preferential treatment to a small segment of the energy sector, the question must be asked: do these subsidies make economic and environmental sense?

Noble objectives, murky results

When federal and provincial governments ramped up industry subsidies in the mid–2000s, the goal was to reduce GHGs from the transportation sector, diversify the energy sector, and provide economic opportunities for rural communities. Now, a decade later, it is reasonable to ask whether the subsidies have met those core objectives. Indeed, it is not only a fair question, it is a necessary question to ask if our aim is smart policy for our environment and economy. Biofuels subsidies—like all policies—should be evaluated objectively based on their performance against their original intention.

Take the GHG reduction goal for starters. Producing ethanol and biodiesel is an energy intensive business: from farm to pump, biofuel production relies on fossil fuels and fertilizers, and contains less energy (by volume) than gasoline or diesel. Estimates of the full life-cycle emissions of biofuels range from significant reductions to sizable increases, and are often dependent on site-specific characteristics. But even when favourable estimates of GHG reductions from ethanol and biodiesel are used, the cost of reducing one tonne of GHG through conventional biofuel subsidies in Canada is estimated at $200–$580 per tonne; another Canadian study suggests the cost could be as high as $3,300 per tonne. Under a typical policy with a GHG reducing goal, such as carbon pricing, prices in the area of $50/tonne are seen as effective in the short-term for bringing significant reductions.

How about using biofuels as a way to diversify Canada’s energy fuel portfolio? The federal government mandates that gasoline and diesel contain at least 5% ethanol and 2% biodiesel, while some provinces have mandates above federal requirements. Yet despite over two decades of significant government subsidies and market support, ethanol and biodiesel production capacity has capped out at approximately 80% and 75% of the amount required by the mandates, respectively. Canada imports the rest primarily from the U.S.

The effectiveness of using biofuel subsidies to support Canadian farmers is a bit murkier. On one hand, government subsidies help provide new market opportunities to farmers and biofuel producers. However, evidence suggests that biofuel subsidies may increase food prices, which in particular hurts livestock farmers who use grain and maize as animal feed, and hurts consumers. But most importantly, calories for human nourishment are now in direct competition for fuelling vehicles—a trade-off rooted in difficult ethical and moral questions.

Time for a rethink on conventional biofuel subsidies

All things considered, subsidies for conventional biofuels appear to be a costly and potentially ineffective way of achieving GHG reductions, energy diversification, and rural development. Evidence suggests that conventional biofuel subsidies distort energy and agricultural markets and can lead to a complex array of perverse outcomes. Moreover, biofuel subsidies also provide incentives for producers to focus on conventional biofuels, rather than directing focus on next-generation fuels such as wood waste, municipal solid waste, and algae that lead to lower GHG emissions and don’t compete for food.

Some of the existing government subsidies will expire in 2016 and 2017; however, significant market support policies, such as blending mandates for ethanol and biodiesel, are expected to remain in place for the foreseeable future. It’s anyone’s guess whether the industry will be profitable without the full gamut of subsidies.

Conventional biofuel subsidies raise some important questions. What is the role of government, if any, in supporting conventional biofuels? If existing subsidies are unnecessary or detrimental, what’s the best way to phase them out? If subsidies are necessary to get technologies off the ground, how can the government more affectively achieve its intended goals without picking specific winners? What role do markets have in advancing Canadian biofuel industries?

The complex web between conventional biofuels subsidies and their impact on the environment, economy, agriculture, and innovation, raises an opportunity for ecofiscal policy. While most ecofiscal policies put a price on previously unpriced pollution, environmentally inefficient or harmful subsidies is an ecofiscal issue. The phasing out or reform of subsidies that exacerbate pollution or that are fiscally wasteful can generate both economic and environmental benefits.

So if you’re looking to spice up your thanksgiving dinner conversation, let your corn-on-the-cob be your cue. Biofuel subsidies: should they stay or should they go?

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