In its January 10 Biofuels Progress Report, the European Commission proposed that biofuels should be required to account for 10 percent of all transport fuel usage by 2020. The measure relies on two key assumptions. First, the Commission believes Europe’s dependence on imported oil should be reduced. Second, biofuels would cut greenhouse gas emissions, thereby giving the E.U. a leadership role in the fight against global warming.

In 2003, the E.U. established voluntary targets that would give biofuels a 2 percent market share by 2005 and a 5.75 percent market share by 2010. The 2005 target was never reached and nor will the other be, despite sizable increases in biofuels consumption over the past few years (see Table 1). In fact, their market share grew from 0.3 percent in 2001 to 1.0 percent in 2005, mostly thanks to tax breaks, production subsidies, and mandates in a few member countries.

Table 1: Progress in the use of biofuels
in the Member States, 2003-2005
(Source: Biofuels Progress Report, 2007)

But some of those gains are illusory. In France biofuels were supposed to have a 2 percent market share, but fuel suppliers could pay a fee to get around the requirement. The actual French share was less than 1 percent. Only Germany (3.75 percent) and Sweden (2.23 percent) exceeded the 2 percent target. Germany relies mostly on biodiesel and Sweden, on ethanol. Biofuels are tax-exempt in both countries and there are no limits on qualifying amounts. Further, both countries are making use of biofuel imports.

Despite failures to meet national targets, European production of biofuels in 2004 grew by 26.6 percent over 2003 levels. Even though 11 countries produce biofuels, Germany produces more than half of the E.U.’s biodiesel and Spain produces more than half of its ethanol. France is a large producer too (Table 2). With the exceptions of Italy (significant amounts of biodiesel), and Sweden and Poland (ethanol), other countries play a minor role. According to the E.U. Commission, Germany’s leading position may be explained “by very favourable legislation that permits a total tax exemption for biofuels, whether they be pure or mixed with fossil fuels.” But those tax exemptions are not in place in France, which has seen its biofuel production fall every year since 2001.

Table 2: Production of biofuels in EU25 for
2004 (Source: E.U. Commission, 2005)

The E.U.’s fixation on biofuels began in 2001 when the Commission declared that biofuels “offer an ideal alternative [to fossil fuels] since, when based on E.U. grown crops, they are practically 100 percent indigenous and CO2 neutral since their carbon content is captured from the atmosphere.” The same report declared that biofuels were essential in order to diversify Europe’s energy sources. Further, it said that they would help “with the Kyoto commitments for industrialised countries to initiate their reduction programmes over the coming decade.”

Throughout the E.U., biofuels’ competitiveness is strictly dependent on high oil prices. If oil prices decline or even stabilize at their current level, biofuels investments might prove less attractive, even considering subsidies (current and future) and other incentives (Table 3). Different transportation fuels’ market price estimates don’t account for the tax burden, partly because fuel taxes vary widely across Europe. However, these figures suggest that domestic biofuels in the E.U. will only succeed if they are accompanied by sizable tax breaks and/or production subsidies.

Table 3: Prices of different energy sources for
road transport, using oil prices of $48/barrel
and $70/barrel (Source: E.U. Commission’s
Energy Strategic Review, 2007)
note: toe = ton of ethanol

The bottom line is that it will be costly to achieve the 14 percent goal. According to the Commission, with an oil price of $48 per barrel, “the extra direct cost of reaching a 14 percent market share for biofuels (compared to conventional fuels) is estimated at 11.5 to 17.2 billion euros in 2020.” If oil stays at about $70 per barrel, that cost would fall to some 5.2 to 11.4 billion euros. Moreover, critics as well as the E.U. Commission’s Directorate General for Environment point out that a sharp increase in the biofuels market share may cause adverse environmental impacts, due to the resultant increase in pressure on marginal land and possible negative effects on biodiversity.

All of these factors demonstrate that the E.U.’s policies on biofuels have failed to meet their own goals, both economically and environmentally. So, why is such a policy being pushed by the Commission? One reason may be that biofuels fit the ideological mindset of extremist environmentalism, which is widespread within the E.U.’s bureaucracy. Another is that the biofuels hysteria provides a politically correct argument for the farm lobby’s attempts to defend its privileges. It should be noted that countries such as Germany and France are the strongest supporters of the Common Agricultural Policy, one of the most important parts of the E.U.’s budget. In 2005, when British prime minister and then-E.U. president Tony Blair proposed a revision to the CAP, the French and the Germans waged political war. Other major agriculture producers, such as Italy and Spain, are also big supporters of the CAP.

That biofuels are part of the farmers’ strategy to keep their subsidies gains credence if you consider that according to the aforementioned price estimates, imported biofuels – particularly from Brazil – could compete with traditional fuels (hence, they could be sold profitably without incentives). And tropical ethanol is more environmentally friendly than its domestically produced counterpart. Its production allows greenhouse gas emissions savings of around 90 percent. Alas, imported ethanol duties are as high as 45 percent, making imported biofuels uneconomical in the E.U. And no Commission members nor environmentalists are calling for a subsidy rollback – of course, neither are the farmers.

If biofuels are going to deliver environmental benefits, they should be produced in the most economical and sustainable ways. But the E.U.’s biofuels production methods barely meet either condition. If biofuels usage is simply a protectionist strategy to support European farmers, then the Commission should set aside its Green rhetoric and tell consumers the truth. E.U. citizens have a right to know what’s really behind the aggressive campaign to promote biofuels there.

Carlo Stagnaro is environmental director of the Instituto Bruno Leoni, an Italian think-tank that promotes free market policies.