Impacts of European Biofuel Policies on Agricultural Markets and Environment under Consideration of 2nd Generation Technologies and international Trade

Abstract

Even though recent discussions on food prices and indirect land use change point at potential conflicts associated with the production of biofuels the appraisal of biofuels as an effective instrument to slow down climate change and reduce energy dependency still prevails. The EU Renewable Energy Directive (EUROPEAN COMMISSION, 2009) underlines this trend by setting a target of 10% share of energy from renewable sources in the transport sector by 2020. As economic competitiveness of biofuel production is still not given in most European countries, support policies are essential to achieve this target. Second generation technologies have still not attained marketability, wherefore biofuel consumption will continue to significantly affect agricultural markets. Furthermore, biofuel trade receives more attention. Apart from Brazil the USA has evolved to one of the key biofuel producer in recent years replacing the EU as the dominant biodiesel exporter. Those developments in regions outside the EU have to be considered within the evolution of biofuel markets. The primary objective of this paper is to analyse in detail impacts of future biofuel developments on agricultural markets under several assumptions regarding the availability of 2nd generation technologies, the EU support policy framework and the EU trade policy regime. Therefore, we developed an extended version of the comparative static agricultural sector model CAPRI which covers global biofuel markets with a detailed focus on Europe. The results supplement already existing model-based impact assessments while focussing on EU Member State level and introducing global bilateral trade of biofuels based on the Armington approach. The results of our scenario analysis presented in this paper indicate that the European 2020 biofuel target will significantly affect global and European biofuel- as well as agricultural markets. Thereby, global biofuel trade will notably increase, especially flows of biodiesel from the USA and Argentina and of ethanol from Brazil into the EU will increase accentuating the net-importing position of the EU by 2020. On the agricultural markets, we can observe that additional demand caused by European biofuel production will be, on the one hand, partially compensated by substitution effects on the feed market and, on the other hand, mainly filled by increasing imports. Thus, effects on agricultural product prices will also be significant, while effects on EU agricultural production will only be marginal. This leads consequently to only marginal environmental impacts within Europe and confirm the assumption that notable environmental effects caused by EU biofuel production and consumption will mainly take place outside Europe, especially in those countries which are important producers of biofuel feedstock