Biofuels and WTO: Legal and Policy Issues by Dr Melaku Geboye Desta CEPMLP, University of Dundee World Trade Forum Berne, 21 September 2007 1
Structure Background: what are biofuels? Drivers: The environment Energy security Rural development Constraints: Arable land and other resources Food security Legal Issues: Classification: agricultural or otherwise? Compatibility of national measures: examples Concluding Remarks 2
Background Biofuels: liquid fuels made from biomass Ethanol (gasoline), and biodiesel (diesel): major ones Old ideas back on the global agenda Government policies to promote production and use of biofuels: blending targets (mandatory or indicative) Production and/or consumption incentives Protection from foreign competition WTO-related legal issues 3
Biofuels & their feedstocks Ethanol: sugarcane, corn and other starchy plants Largest producers of feedstocks also largest producers of ethanol US (corn); Brazil (sugar) Biodiesel: plant oils, e.g. rapeseed, palm oil, etc. and animal fat More expensive feedstocks = less global production Always dependent on govt support But, why support? 4
Drivers: Energy supply security Uneven spread of oil around the world and consequent import dependence Global warming: Near monopoly of fossil fuels on the transport sector Rural development interests A means of supporting the agriculture sector Why bother about drivers? Provide a framework to analyse the responses Motives may affect legality of measures 5
Energy security as driver? Often mentioned as key factor Resources and markets far apart int l l trade an only means History of mistrust between producers and consumers rising oil prices Search for alternative fuel sources Biofuels: let s s grow our fuel! Negative correlation between oil prices and support for alternative sources Brazil: almost only survivor of low world oil prices But: many impose duties on biofuel imports 6
Energy security ct d IEA s WEO 2006: biofuels will account 4-7% 4 of road transport fuels by 2030 World Bank (2007): biofuels are likely to play only a small role in volumetric terms in replacing petroleum fuels in transportation on a global basis in the foreseeable future. Given projected growth in demand for transportation fuels, this level of substitution will not reduce overall petroleum fuel consumption below current levels but, rather, will moderate the growth in demand for those fuels. p. 77. 7
Global warming as driver? Also often mentioned as a factor Complex relations between energy security and global warming: What you do to address one can easily damage the other Attraction of biofuels: Renewable, & Carbon neutral: provided no fossil fuels used in process, etc.: life-cycle analysis But: many impose duties on importation of cleaner biofuels 8
IPCC verdict on ethanol s environmental role Ethanol from sugar cane, as produced in Brazil, provides significant reductions in GHG emissions compared to gasoline and diesel fuel on a well-to-wheels basis. These large reductions result from the relatively energy efficient nature of sugar cane production, the use of bagasse as process energy and the highly advanced state of Brazilian sugar farming and processing. In contrast, the GHG benefits of ethanol made from corn are minor. Lifecycle estimates range from a net loss to gains of about 30%, relative to gasoline made from conventional oil. Farrell et al. (2006) evaluates the many studies and concludes that on aver age the reductions are probably about 13% compared to gasoline from conventional oil. The corn ethanol benefits are minimal because corn farming and processing are energy intensive. IPCC WG III draft report, May 2007, Chapter 5, pp. 28-29 9
IPCC Verdict ct d Biofuels might play an important role in addressing GHG emissions in the transport sector, depending on their production pathway In the years to come, some biofuels may become economically competitive, as the result of increased biomass yields, developments of plants that are better suited to energy production, improved cellulosic conversion processes and even entirely new energy crops and conversion processes. In most cases, it will require entirely new businesses and industries. The example of ethanol in Brazil is a model. The question is the extent to which this model can be replicated elsewhere with other energy crops and production processes. Id. 10
Rural dev t concerns as driver? Sometimes mentioned but given low profile Nearly all current biofuel feedstocks food/feed crops Competition for same crops Insatiable demand for agricultural products: farmers paradise; consumers agony Agriculture and subsidies New and politically good reason to keep doing old things? Is the environment agenda hijacked or was it never around from the outset? 11
Global Warming and food security IPCC projections: tropical crop production to decrease for even small local temperature increases (1-2 C), which would increase the risk of hunger Stern Review: agricultural production and access to food in many parts of Africa could be severely compromised by climate variability and change. This would further adversely affect food security and exacerbate malnutrition in the continent. In some countries, yields from rain-fed agriculture could be reduced by up to 50% by 2020. Doing nothing not an option 12
Biofuels and Food security Biofuels mean higher prices for agricultural commodities NFIDCs capable of financing their imports: rising import bills and BOP implications NFIDCs incapable of financing their imports: Food aid: availability inversely related with world market price of food Developing countries: between a rock and a hard place Hence the OECD s s latest question: is the cure worse than the disease? 13
Legal Issues Classification: Determines type of discipline applying to some govt measures Legality of national measures, e.g.: Subsidies Fuel mandates 14
Classification Ethanol: an agricultural product (HS( code 2207) ) but without reference to its use as fuel Sub-classification only between undenatured (HS 2207 10) and denatured alcohol (HS 2207 20) But then: ethanol produced for use as motor vehicle fuel is denatured specifically so that it can only be used as fuel. EPA, RFS Regulation 2007 Biodiesel: Technically classified as a non- agricultural (chemical) product: HS 3824.90 Feedstocks under HS 1506-18 18 (soybean oil, rapeseed, etc.) 15
Biofuel subsidies Biofuels & subsidies: inseparable Brazilian ethanol a possible exception under certain conditions (e.g. price of oil, sugar) Types of subsidies: some more controversial than others: E.g.: Local content subsidies (World Bank 2007, p. 74): the provincial government of Manitoba in Canada provides a reduction in the gasoline tax of C$0.025 per liter for gasohol containing a 10 percent blend of ethanol produced and sold in Manitoba, and exempts biodiesel produced in the province from both the retail sales tax and the automotive fuel tax... the Louisiana State Legislature in June 2006 passed a bill that requires 2 percent by volume of the total gasoline sold in the state to be ethanol from domestically grown feedstock or other biomass once a certain domestic ethanol production target is reached If correct: Article 3.1(b) of SCM Agreement: Prohibited and no agriculture exceptions 16
More complicated cases E.g. US: minimum 4.02 bill gallons of renewable fuel consumption now; 7.5 bill by 2012 Fact: causes rising feedstock prices on the market Legal issues: Would this be a subsidy in itself? What is the financial contribution aspect, if any? Can we apply the concept of any form of income or price support in the sense of Article XVI of GATT 1994? Who is the recipient? Is a benefit conferred on the recipient? 17
Tax credits US again: The Biodiesel Blenders Tax Credit programs and the Commodity Credit Commission Bio-energy Program, both subsidize producers and offset production costs. This credit provides about one dollar per gallon in the form of a federal excise tax credit to biodiesel blenders from virgin vegetable oil feedstocks and 50 cents per gallon to biodiesel produced from recycled grease and animal fats. EPA 2007 EPA already calls this a subsidy Blender is direct recipient and beneficiary Feedstock prices on the market will normally rise Legal Issue: Are feedstock producers also receiving a subsidy? Given that govt did not forego revenue from the farmer, can we apply the concept of any form of income or price support in the sense of Article XVI of GATT 1994? 18
Biofuel Subsidies and classification If agricultural: Most will be amber box domestic support Likely to survive challenge under SCM Agreement as actionable subsidies Applies to the 34 or so WTO members only Many unlikely to satisfy the green box requirements: General requirement: all measures for which exemption is claimed shall conform to the following basic criteria: (a) the support in question shall be provided p through a publicly-funded government programme (including government revenue foregone) not involving transfers from consumers; ; and, (b) the support in question shall not have the effect of providing price support to producers; ; plus policy-specific criteria and conditions as set out below. Annex 2, par. 1 Policy-specific requirement: Payments under environmental programmes: (a) Eligibility for such payments shall be determined d as part of a clearly-defined government environmental or conservation programme and be dependent on the fulfilment of specific conditions ons under the government programme, including conditions related to production methods or inputs. (b) The amount of payment shall be limited to the extra costs or loss of income involved in complying with the government programme. Annex 2, para. 12 19
Conclusion Developing countries often have the comparative advantage Subsidies once again being used to deny them any chance Environmental objectives better served by allowing the cheapest producers to supply the product 20