use biofuels eu

8/14/2019 Use Biofuels EU

1/11

Energy Policy 34 (2006) 31843194

Stimulating the use of biofuels in the European Union:

Implications for climate change policy

Lisa Ryan, Frank Convery, Susana Ferreira

Department of Planning and Environmental Policy, University College Dublin, Richview, Dublin 14, Ireland

Available online 28 July 2005

Abstract

The substitution of fossil fuels with biofuels has been proposed in the European Union (EU) as part of a strategy to mitigategreenhouse gas emissions from road transport, increase security of energy supply and support development of rural communities. In

this paper, we focus on one of these purported benefits, the reduction in greenhouse gas emissions. The costs of subsidising the price

difference between European bioethanol and petrol, and biodiesel and diesel, per tonne of CO2 emissions saved are estimated.

Without including the benefits from increased security of energy supply and employment generation in rural areas, the current costs

of implementing European domestic biofuel targets are high compared with other available CO2 mitigation strategies. The policy

instrument of foregoing some or all of the excise duty and other taxes now applicable to transport fuels in EU15 on domestically

produced biofuels, as well as the potential to import low-cost alternatives, for example, from Brazil, are addressed in this context.

r 2005 Elsevier Ltd. All rights reserved.

Keywords: Biofuels; Greenhouse gas emissions; Transport policy

1. Introduction

Currently1 transportation fuels pose two important

challenges for the European Union (EU). First, under the

provisions of the Kyoto Protocol to the Climate Change

Convention, the EU has agreed to an absolute cap on

greenhouse gas emissions; while, at the same time

increased consumption of transportation fuels has resulted

in a trend of increasing greenhouse gas emissions from this

source.2 Second, the dependence upon oil imports from

the politically volatile Middle East generates concern over

price fluctuations and possible interruptions in supply.

Increasing the use of alternative fuels can addressboth these challenges, by providing an opportunity to

reduce greenhouse gases and other polluting emissions,

and by improving the security of energy supply.

Additionally, the development of biofuels may create

new employment opportunities, especially in declining

rural areas.

Given that legislative efforts in the EU to promote

biofuels (discussed later) are recent, the policy implications

of their use remain largely unexplored. Biofuels are

currently commercially uncompetitive with fossil fuels

(petrol and diesel) in Europe. However, can they become

competitive once their external benefits to society, namelythe CO2 emissions reduction, security of energy supply and

rural development are accounted for? This paper addresses

part of this question by focusing on the first external

benefit, the reduction in greenhouse gas emissions.

The commercial price of transport fuel in the

European market before taxes and duties is assumed

here for simplicity to be equivalent to its private

marginal costs. This number is compared with the

private marginal costs of supplying biofuels in order to

ARTICLE IN PRESS

www.elsevier.com/locate/enpol

0301-4215/$ - see front matter r 2005 Elsevier Ltd. All rights reserved.

doi:10.1016/j.enpol.2005.06.010

Corresponding author. Tel.: +3531 7162676;

fax: +3531 7162776.

E-mail address: [email protected] (L. Ryan).1The analysis in this study uses data from 1998 to 2004. The term

current is used to refer to these data. More specific dates are

provided in the relevant tables.2The European Commissions White Paper European transport

policy for 2010: time to decide, advanced the prospect of a rise of

50% in CO2 emissions from transport between 1990 and 2010 under

business as usual policies.
http://www.elsevier.com/locate/enpolhttp://www.elsevier.com/locate/enpol


2/11

derive a threshold value per tonne of CO2 reduction that

must be achieved if biofuels are to compete in price with

petrol and diesel in Europe. The gap between the

marginal costs of biofuels and traditional fuels moti-

vates the analysis of different instruments that would be

needed to encourage the uptake of biofuels: an excise

duty reduction, a subsidy to the production of biofuelsand/or relaxation of tariffs on imports from cheaper

non-EU producers.3 In addition, this threshold value, or

the cost of reducing a tonne of CO2 emissions using

biofuels, can be contrasted with the marginal costs of

achieving CO2 emission reductions elsewhere. It can be

compared, for example, with the cost of technical

measures in the transport sector to reduce greenhouse

gas emissions or with the price of buying allowances in

the CO2 emissions trading market.

The remainder of this paper is structured as follows:

Section 2 provides the policy and technical context

surrounding the adoption of biofuels in Europe. Section

3 computes the threshold value per tonne of CO2reduction that needs to be achieved for biofuels to be

competitive with conventional transport fuels in Europe.

Section 4 outlines the policy implications and Section 5

summarises our conclusions.

2. European policy and technical context

In accordance with the flexible mechanisms of the

Kyoto protocol, the EU has introduced a CO2 emissions

trading scheme that commenced on a pilot basis inJanuary 2005.4 Although not included in this pilot

phase, reducing the transport sectors emissions, and in

particular emissions from road transportation, is a

pressing issue as the latter currently represent 19% of

total EU CO2eq. emissions and are expected to increase

(European Environment Agency, 2004)5. The European

Commission foresees that three alternative transport

fuels, hydrogen, natural gas, and biofuels, will replace

transport fossil fuels, each by 5% by 2020 (Commission

of the European Communities, 2001).

Biofuels are an alternative motor vehicle fuel pro-

duced from biological material and are promoted as a

transitional step until more advanced technologies have

matured. Hydrogen and natural gas are seen as medium

rather than short-term solutions, due to infrastructural,

cost and technical challenges.

Biofuels are viewed as an essential element in thedevelopment of alternative fuel markets, and some

initiatives have already been introduced to promote

biofuels in the EU. Under the European Directive on the

promotion of the use of biofuels or other renewable

fuels for transport (European Parliament and Council,

2003), Member States are instructed to ensure that a

minimum proportion of biofuels and other renewable

fuels is placed on their markets, and reference values

for national targets are given as 2%, by 2005, and

5.75%, by 2010.6 Furthermore, Member States are

permitted to reduce excise duties on biofuels7 (Council

of the European Union, 2003). The Green Paper

Towards a European Strategy for Energy Supply

supports this initiative, and it also serves the reforms of

the Common Agricultural Policy to support rural

economies; by decoupling some subsidies from food

production, land is released for potential energy crop

production (Commission of the European Commu-

nities, 2003).

The EU directive lists 10 products that should be

considered as biofuels. Of these, there are two that have

been most frequently employed to date: (i) Biodiesel,

produced from plant oils, such as rape seed, soybean or

palm, or from organic waste material; which can be used

in a modified diesel engine or processed to be used in aconventional diesel engine; and (ii) bioalcohol, such as

methanol and ethanol, which can be produced from

cereal crops or sugar beets and can fuel modified petrol

engines.

These categories of biofuels have gained the most

attention in the EU as they are produced from materials

that are suitable for agricultural production in the EU,

or are widely available waste products. Currently, other

possibilities are either prohibitively expensive or energy

intensive in their production,8 due mainly to the small

scale of operation derived from the lack of market

development for these fuels. Economies of scale may

reduce these prices significantly in the future. For a

general overview on biofuel choices and their character-

istics see van Thuijl et al. (2003) or Fulton et al. (2004).

There are many challenges facing alternative fuels before

they can gain widespread acceptance in the transport

ARTICLE IN PRESS

3There are other schemes possible to promote biofuels, such as

carbon-based fuel taxes, investment incentives, biofuels obligation, ortender schemes. We are grateful to an anonymous reviewer for

pointing this out. In this paper we only deal with the three most

common schemes currently in place.4Directive 2003/87/EC of the European Parliament and of the

Council establishing a scheme for greenhouse gas emission allowances

trading within the Community and amending Council Directive 96/61/

EC. This text will apply to the existing 15 Member States, those

Accession States who joined in May 2004 and other countries (such as

Iceland, Norway and Switzerland) who choose to participate.5In the first pilot phase (20052007) trading is confined to CO2

emissions from power stations in excess of 20 MW (except incinera-

tors), oil refineries, smelters, manufacture of cement (4500tonnes/

day), ceramics including brick, glass, and pulp, paper and board

(420 tonnes/day). See footnote 2.

6Directive 2003/30/EC. Although these targets are indicative rather

than mandatory, failure to meet them requires Member States to

explain the discrepancy in their annual biofuels progress reports.7Directive 2003/96/EC.8In the medium term, technological advances in the thermochemical

processing of biomass could produce biodimethylether, synthetic fuels

and hydrogen, to take a few examples.

L. Ryan et al. / Energy Policy 34 (2006) 31843194 3185


3/11

fuels market. The existing petroleum infrastructure is

standardised and has extensive coverage, and the cost

and therefore selling price of biofuels is significantly

higher than that of mineral oil fuels.

3. Biofuels vs. conventional fuels: the value of reducing

CO2 emissions

Although the amount of biofuels produced in the EU

is growing, the quantities remain small compared to the

total volume of mineral-based transport fuels sold

approximately 0.3% of all EU petrol and diesel fuel in

2003 (Kavalov, 2004).

Production costs of biofuels vary and are dependent

on the prices of raw materials, the method of produc-

tion, the extent of refining undertaken, and the

supplementary utilisation of by-products and waste.

The European biofuels cost estimates utilised in thispaper, reported in Table 1a, come from Jungmeier et al.

(2005)9 who reviewed 73 academic, public and industry

studies to provide a comprehensive collection of cost

and CO2-equivalent (CO2eq.)10 emissions estimates for

biofuels. The costs are highly variable depending on the

various combinations of feedstock and country of

production. For this reason, Table 1a reports a range

of cost estimates including the lowest, the most likely

values (best estimates), and the highest values from

the studies. Overall, the best estimates in Table 1a are at

the upper end of values reported in other studies (see for

example den Uil et al. (2003), Edwards et al. (2004) or

Kavalov (2004)), while the full range of values falls

within the range of the literature. Although the best

estimates in Table 1a represent the most likely values, it

is evident that some producers in Europe are producing

with costs at the lower margin at this time. Jungmeier et

al. estimate the future costs (post-2010) as significantly

lower and these are represented in Table 1b. Note that

because both biodiesel and bioethanol contain less

energy per litre than the corresponding fossil fuel, the

total cost per litre in Tables 1a and b is given as a cost

per energy-equivalent litre.11

Table 1a shows that using current production

technology the cheapest bioethanol produced in Europe

comes from starch crops. Overall, however, the cheapest

bioethanol, comes from sugarcane in Brazil. Table 1a

also shows that biodiesel is cheapest when produced

from waste oils and fats.

To be profitable, biofuel prices must cover production

and distribution costs and be competitive in price with

ARTICLE IN PRESS

Table 1

Costs of biofuels

Biofuel Cost at filling station (h2004/1000 L)

Feedstock Low Best estimate High

(a) Costs of biofuels produced using current technology

Sugar crops 875 1265 1855Starch crops 809 1173 1572

Lignocellulosic crops 1148 1448 2435

Lignocellulosic residues 1052 1316 2232

Brazilian sugarcane 117 294 351

Biodiesel

Oil seeds 755 945 1092

Used oil/fat 354 454 545

(b) Costs of biofuels produced using future technology

Sugar crops 671 954 1432

Starch crops 653 963 1287



Brazilian sugarcane

Biodiesel

Oil seeds 753 888 1068


Notes:

1. Source of data is Jungmeier et al. (2005), who reviewed 73 studies

to provide a range of estimates for environmental performance and

economic costs for biofuels within the VIEWLS project. Data are

expressed in h2004.

2. Current technology refers to technology of production utilised

until 2010. Future technology refers to technology after 2010.

3. Costs include production, transportation, conversion anddistribution.

4. Biodiesel costs estimated per litre of energy-equivalent diesel. We

assume the energy density of petrol to be 34.3 MJ/l (Nommensen,

2005).

5. Bioethanol costs estimated per energy-equivalent litre of petrol. We

assume energy density of petroleum diesel to be 39.4 MJ/l

(Nommensen, 2005).

9

This project was undertaken as work package 2 of the VIEWLSproject (Clear Views on Clean Fuels), which was funded as EC Project

NNE5-2001-00619 from February 1, 2003January 31, 2005. More

details on the project and the consortium involved can be found at

www.VIEWLS.org.10The emissions of CO2 and other greenhouse gases (N2O, CH4,

HFC, PFC, SF6) are combined and represented as with CO2eq.

emissions units by multiplying the different emissions (in metric tons)

by the global warming potentials of the individual greenhouse gases

and summing together.11Bioethanol contains 67% as much energy per litre compared with

petrol and biodiesel contains 87% as much energy per litre compared

with diesel (Fulton et al., 2004). The energy-equivalent cost is the

relevant variable since the targets contained in the EU biofuels

directive are given on an energy basis. In addition, if consumers

(footnote continued)

substitute a biofuel for a fossil fuel, the difference in energy content

will most likely translate into increased fuel consumption and therefore

this real cost must be taken into account when comparing fossil fuel

and biofuel prices. For this study, we consider it appropriate to convert

the biofuel costs from an energy basis to energy-equivalent litres, since

we would like to compare the prices of fuels at the filling station and

the effect of excise duty rebate on prices (per litre).

L. Ryan et al. / Energy Policy 34 (2006) 318431943186
http://www.viewls.org/http://www.viewls.org/


4/11

conventional transport fuels. The European Oil Bulletin

contains data on the final price paid by consumers in the

EU for petrol and diesel and on the excise duties and

value added tax (VAT) charged in all EU countries.

In Table 2 we compare the average pre-tax fossil fuel

price12 (i.e. the price before excise duty and VAT), that

would be the value assigned to biofuels on the market,

for the period JulyDecember 2004 with the actual costs

of biodiesel (produced from EU15 oilseeds and waste

oil) and bioethanol (produced from EU15 wheat and

sugar beet, and the cheapest Brazilian sugarcane) from

Table 1a. Table 2 provides thus a rough comparison of

the costs of biofuels with those of mineral fuels.

A couple of considerations must be taken into

account when using the pre-tax price of fossil fuels as

proxy for their costs: the pre-tax fossil fuel prices do not

subtract profit margins, and they are derived from

erratic and very high fossil fuel prices. Both factors tend

to drive up the fossil fuel cost estimates and thus could

bias the cost difference with biofuels in the last column

of Table 2 downwards. Nevertheless, it appears that the

prices are not decreasing. Fig. 1 presents the historicalpre-tax petrol and diesel nominal prices, which have

increased in EU15 since 1999. Additionally, a projected

increasing fossil fuel demand in emerging economies

such as India and China is likely to translate into

pressure for even higher fossil fuel prices than those used

to compute the numbers in Table 2.

Table 2 applies to current conditions, and thus it also

ignores the evolution of the costs of biofuels and fossil

fuels in the medium and long term. Some studies predict

that the costs of cellulosic ethanol will drop considerably

to equal the pre-tax price of petrol after 2010 ( Depart-

ment of Transport (UK), 2003; Fulton et al., 2004). These

findings are consistent with the numbers in Table 1b.According to Table 2, however, current biofuels are

not cost competitive with conventional fossil fuels in

Europe unless the biofuels are imported from Brazil. The

natural question is whether they become competitive

once the external benefits to society are accounted for,

namely the reduction of CO2 emissions, security of

energy supply and rural development. For example,

recent estimates have put the number of jobs in rural

areas that could be generated by achievement of the EU

biofuel targets at 212,000 and 354,000 in 2010 and 2020,

respectively, under current policies (Whitely et al., 2004),

corresponding to approximately 1.52.5% of the EU15

unemployment in 2005, 14.7 million (Eurostat, 2005). It

is not clear, however, how rural employment generation

can be translated to rural development and how many of

these jobs would not be removed from food-producing

activities. The focus of this paper, is on the benefit to

society related to climate change, namely the reduction

of greenhouse gas emissions from transport.

The estimation of greenhouse gas and energy balances

of biofuels is complex. The full fuel cycle and not just

the direct emissions during combustion must be

considered for comparison with fossil fuels. While the

combustion of biofuels is considered to be CO2-neutral

(IPCC, 1996), their production requires inputs that maydistort the positive energy and greenhouse gas balance.13

The final accounting is country-specific and is a function

of the raw material cultivated, the associated agricultur-

al yield, and the utilisation of by- and co-products, for

example as fuel in the production process, and as animal

feedstuffs (Henke et al., 2003; Shapouri et al., 2002). If

by-products have an economic value they bear a part of

the energy and emission burden.

Table 3 presents a range of estimates of the CO2eq.

emissions savings (or total greenhouse gas emissions

weighted in terms of their global warming potentials), as

a result of utilising biofuels over the corresponding fossil

fuel. The CO2eq. emissions include cultivation, produc-

tion, distribution and vehicle emissions for biofuels. For

consistency with the cost data in Tables 1a and 2, the

CO2eq. emissions data are also from the Jungmeier et al.

(2005) review.14 Since there were not enough CO2emissions data available for biodiesel produced from

ARTICLE IN PRESS

Table 2

Cost comparison of biofuels with petroleum fossil fuels

Biofuel Cost at filling station (h2004/1000 l)

Feedstock Biofuel Fossil fuel Difference

Bioethanol

Sugar crops 1265 366 899Starch crops 1173 366 807



Brazilian sugarcane 294 366 72

Biodiesel

Oil seeds 945 386 559


Notes:

1. Best estimate value of current costs from Table 1a used for cost of

biofuel.

2. Price of fossil fuel is petrol price for bioethanol and diesel price for

biodiesel. The values are 6-month averages for EU15 for July-

December, 2004. Available from EU Oil Bulletin at http://euro-

pa.eu.int/comm/energy/oil/bulletin/2005_en.htm (accessed April2005).

3. Costs of biofuels and fossil fuels are before excise duties and VAT.

12EU Oil Bulletin provides weekly and monthly average prices for

transport fuels in EU15 and EU25. The data used is the 6-month

average for petrol and diesel prices in EU15 from JuneDecember

2004. It is available at http://europa.eu.int/comm/energy/oil/bulletin/

2004_en.htm.

13For example nitrate fertilisers, which cause the emission of N2O

gas.14As mentioned above, the VIEWLS study reviewed 73 studies and

provided a range of emission values, which include all stages of the life

cycle of both biofuels and fossil fuels (Jungmeier et al., 2005).

http://europa.eu.int/comm/energy/oil/bulletin/2005_en.htmhttp://europa.eu.int/comm/energy/oil/bulletin/2005_en.htmhttp://europa.eu.int/comm/energy/oil/bulletin/2004_en.htmhttp://europa.eu.int/comm/energy/oil/bulletin/2004_en.htmhttp://europa.eu.int/comm/energy/oil/bulletin/2004_en.htmhttp://europa.eu.int/comm/energy/oil/bulletin/2004_en.htmhttp://europa.eu.int/comm/energy/oil/bulletin/2005_en.htmhttp://europa.eu.int/comm/energy/oil/bulletin/2005_en.htm


5/11

waste oils and fats, this feedstock is not included in

Table 3 and subsequent tables.

The wide range of values presented in Table 3 is a

result of differences in calculation methods, production

yields and the use of co- and by-products in the

production chain in the studies collected by Jungmeier

et al. (2005). The first three values in Column 2 represent

the range of CO2 g/km savings for bioethanol pro-

duced from sugar, starch crops, lignocellulosic crops

and residues, and Brazilian sugarcane, and biodiesel

ARTICLE IN PRESS

0

50

100

150

200

250

300

350

400

450

500

1999s011998s02 2000s01 2001s01 2002s01 2003s01 2004s01 18/03/2005

Petrol

Diesel

/1000litres

Fig. 1. Historical nominal petrol and diesel prices. Notes: (1) Prices are EU15 6-month averages. (2) To provide an indication of the continuing trend,

the spot prices for 14/3/05 and 18/4/05 are given. Source: EUROSTAT, 2005 and EU Oil Bulletin.

Table 3

Overview of CO2eq. emissions savings from biofuels, compared with reference fossil fuel vehicle

Biofuel CO2 eq. emissions savings

Feedstock g/km t/1000 L

Low Best estimate High Low Best estimate High

Bioethanol

Sugar crops 50 90 169 0.7 1.2 2.2

Starch crops 50 30 70 0.0 0.4 0.9

Lignocellulosic crops 181 183 184 2.6 2.5 2.4

Lignocellulosic residues 190 191 192 2.7 2.6 2.5

Brazilian sugarcane 169 212 254 2.4 2.9 3.3

Biodiesel

Oil seeds 30 82 115 0.5 1.3 1.8

Notes:

1. All biofuels and reference vehicle CO2eq. emissions values from VIEWLS project (Jungmeier et al. 2005).

2. Assume reference petrol vehicle consumes 2.5MJ/km and produces 230g/km CO2eq. emissions.

3. Assume reference diesel vehicle consumes 2.1MJ/km and produces 180g/km CO2eq. emissions.

4. Brazil estimates exclude transport to Europe and import tariffs.

5. All CO2eq. emissions represent full life-cycle emissions, i.e. well-to-wheel.



6/11

produced from oilseed compared with a standard

petrol or diesel vehicle.15 As before, due to the wide

range of estimates published, the low, high and best

estimates of values from the literature are presented. The

best estimates do not represent average values, but

rather values that have a realistic use of co- and by-

product credits. The values in the last three columns ofTable 3 convert the estimates of the reductions in

CO2eq. emissions from g/km to the quantity of CO2eq.

emissions that would be saved by substituting 1000 litres

of diesel and petrol with the energy equivalent biofuel

litres. For example: 1.2 tonnes of CO2eq. emissions

saved per 1000 litres of petrol substituted with energy-

equivalent bioethanol from sugar crops (90 g/km)/

(0.073 L/km) 1000.

According to Table 3, both biodiesel and bioethanol

have a positive energy balance. Use of European

bioethanol yields a CO2 emissions savings of 1383%

compared with operation of a standard petrol vehicle,

given above. Table 3 also shows that bioethanol

produced from Brazilian sugarcane has a better well-

to-wheels energy balance than bioethanol produced

from starch and sugar crops in the EU. This is due to

the high productivity of sugarcane crops in Brazil and

the use of by-products (the remains of the crushed cane

after the sugar is extracted) to provide energy to nearly

all processing plants. In fact, many biofuel processing

plants in Brazil are net exporters of electricity resulting

in fossil fuel requirements near zero (Fulton et al., 2004).

For biodiesel, the CO2eq. emissions savings range

between 3683% compared with conventional diesel.

With data on the commercial price (p) net of exciseduties and taxes, private marginal costs of supplying

biofuels (MCPriv) from Table 2, and on the tonnes of

CO2 emissions saved by the introduction of biofuels

from Table 3, we can derive a threshold value per tonne

of CO2eq. emissions reduction that needs to be achieved

if biofuels are to compete with conventional transport

fuels in Europe. This threshold value represents the cost

to society of reducing a tonne of CO2eq. emissions using

biofuels and is therefore denoted MCSoc.

MCSoc MCPriv p

tCO2reduced(1)

The results of this calculation are presented in Fig. 2.

The columns in the figure represent the low, best

estimate and high values16 for the threshold value

calculations. The results are sensitive to the value of

the denominator. For example, the high value or worst

case CO2eq. emissions mitigation cost using bioethanol

produced from starch is extremely high, since its

production chain emits rather than saves CO2eq.

emissions (see column one, Table 3). If the value of

the CO2eq. emissions savings (denominator) is set to

near zero (rather than left as a negative value), MC soc

rises to a high value, which is not fully shown in Fig. 2.These threshold values, or the costs per tonne of CO2emissions mitigated for European biofuels, are esti-

mated between h2292085 (excluding the estimate for

bioethanol with positive CO2eq. emissions). However, it

is less than zero for bioethanol produced in Brazil from

sugarcane. These values also represent the cost of the

direct subsidy required to equalise the price difference

between fossil fuels and biofuels at the filling station.

4. Policy implications

Society has a number of choices to reduce the amount

of greenhouse gasses released in the atmosphere includ-

ing switching to less carbon intensive fuels, reducing

energy consumption, or carbon sequestration.

According to Fig. 2, for EU biofuels to be economic-

ally efficient as a measure to reduce CO2eq. Emissions

based on current costs and pricesthe marginal benefit

of reduction of CO2eq. emissions would need to be at

least h229/tonne. This would stimulate the use of

bioethanol from wheat and would encourage the

development of better performing biofuels. To evaluate

the magnitude of the numbers in Fig. 2, an estimate of

the marginal benefit of CO2eq. emissions abatement isneeded. The European CO2 emissions trading scheme

provides some direction, as the price per tonne of CO2emerging from this market will inform participants to

what extent they should abate or purchase allowances if

necessary.17

When comparing the cost of CO2 reductions by

utilising biofuels with the prices from the European CO2emissions market, it must be noted that current prices

represent a conservative estimate of the value of the

benefits to society of CO2 abatement. Member States

have given the participant sectors very generous alloca-

tions, and the participant sectors are likely to have lower

abatement costs than the non-participants. Both these

factors tend to reduce the price of the allowances traded

in the market (Convery and Redmond, 2004). Since the

basis for these calculations is a wide range of studies

(Jungmeier et al., 2005), the CO2eq. emissions mitiga-

tion costs for biofuels estimated in this paper are within

ARTICLE IN PRESS

15Based on a vehicle with the following energy/fuel usage: Petrol:

2.5MJ/km or 0.073L/km; Diesel: 2.1 MJ/km or 0.053 L/km.16Low CO2 mitigation costs are estimated from (low biofuel

costfossil fuel price)/high CO2 emissions savings; high CO2 mitiga-

tion costs are estimated from (high biofuel costfossil fuel price)/low

CO2 emissions savings; best estimate costs utilise best estimate values

for the biofuel costs and CO2 emissions savings.

17Trading started in January 2005, and since November 2003 a

futures market for CO2 emissions was in operation. Although the EU

emissions trading scheme includes only CO2 emissions rather than

CO2eq. emissions, the price is not likely to change greatly for CO 2eq.

emissions, since CO2 emissions make up the largest share of

greenhouse gas emissions.



7/11

the range in the literature. Nevertheless, the estimated

threshold cost of biofuels is significantly higher than thetraded price of CO2 emissions of around h17/tonne CO2.

(See Fig. 3).18

Moreover, the threshold cost is at the higher end

compared with the costs of CO2 emissions mitigation

overall in the transport sector. Blok et al. (2001)

estimated that the cost of technical measures to reduce

greenhouse gas emissions in the transport sector would

range between h73350/tCO2.

4.1. Costs of excise duty rebate

Given the cost differential with fossil fuels, govern-ment intervention is needed in order to promote the

market introduction of biofuels. There are several

possible ways to do this. Currently the most widely

used method of subsidy in Europe is the rebate of excise

duties. The recent EU Directive on the taxation of

energy products and electricity, permits partial or total

exemptions in the taxation of biofuels (Council of the

European Union, 2003). Many countries have already

introduced an excise duty rebate on biofuels and othersare considering doing so.

Table 4 compares the cost difference between a fossil

fuel and the corresponding biofuel, from Section 3, with

the excise duty applied to mineral fuels in each EU15

country. This table shows that at these fossil fuel prices

(JulyDecember 2004), the cost difference between

European bioethanol and petrol is higher than the

excise duty applied to petrol in all EU15 countries, and a

remission of excise duty would be insufficient to equalise

the prices between fossil and biofuels. For diesel fuels,

the cost difference between biodiesel and diesel utilised

for private consumption is also greater than the excise

duties applied to diesel in all EU15 countries. This

demonstrates that further intervention would be needed

in all countries to promote biofuels in the EU transport

fuels market. However, this is obviously subject to the

level of oil prices. As fossil fuel prices rise, the level of

subsidy required to compensate the cost difference

between biofuels and fossil fuels is reduced. The rebate

of excise duty of transport fuels constitutes an exemp-

tion to Community State Aid Rules19 and is permitted

under certain conditions when the tax reduction given

ARTICLE IN PRESS

2200

2000

1800

1600

1400

1200

1000

800

600

400

200

0

-200

/tCO2eq.mitigated

Sugar crops Starch crops Lignocellulosic crops Lignocellulosicresidues Brazilian sugar cane Biodiesel/oil seeds

High

Best estimate

Low

Fig. 2. Range of estimates for threshold values (biofuel mitigation costs), h/tCO2eq. emissions Notes: (1) Data from Jungmeier et al. (2005). (2)

Threshold value calculation price difference between biofuel and fossil fuel on energy-equivalent basis divided by tonnes of CO 2eq./1000l saved

through use of biofuel.

18The European Union Allowance (EUA) price development graph

is based on daily price information obtained from Point Carbons daily

allowance market newsletter Carbon Market Dailywww.PointCar-

bon.com. We are grateful to Luke Redmond for compiling it for us. 19Article 87(3)(c) of the EC Treaty.

http://www.pointcarbon.com/http://www.pointcarbon.com/http://www.pointcarbon.com/http://www.pointcarbon.com/


8/11

by a Member State is not higher than the cost difference

between the biofuel and fossil fuels. In this case the price

difference between fossil fuels and biofuels before excise

duty and VAT is substantially higher than the excise

duty in all countries.

Table 5 presents the revenue foregone in EU15 as a

result of eliminating excise duties per tonne of CO2eq.

emissions saved. It is calculated as the value of excise

duty foregone per 1000 l of energy-equivalent biofuel

sold (EU15 average), divided by the best estimate of

tonnes of CO2 emissions saved per energy-equivalent

litre of biofuel from Table 3.

The values in Table 5 are lower than the best estimates

of the costs of the financial support required to the prod

ARTICLE IN PRESS

Fig. 3. Carbon prices December 2004July 2005. Source: Point Carbon 11/7/2005 (www.pointcarbon.com).

Table 4

Comparison of price difference between biofuel and fossil fuel with excise duty applied in EU15 Member States

Member states Bioethanol and petrol cost difference h/1000 l Biodiesel and diesel

Sugar Starch

crops

Lignocellulosic

crops

Lignocellulosic

residues

Brazilian

sugarcane

Petrol excise

duty

Oil seeds Diesel excise

duty

Belgium 911 819 1094 962 60 574 551 340

Denmark 907 815 1090 958 64 541 573 367

Germany 928 836 1111 979 43 654 575 470

Greece 872 781 1055 923 98 296 537 245Spain 891 800 1074 942 79 396 554 402

France 953 862 1136 1004 17 589 587 417

Ireland 885 793 1068 936 86 443 546 368

Italy 862 770 1045 913 109 564 533 413

Luxembourg 888 797 1071 939 82 442 554 265

Netherlands 865 773 1048 916 106 665 542 265

Austria 879 788 1062 930 91 425 548 310

Portugal 888 796 1071 939 83 523 566 308

Finland 910 818 1093 961 61 597 578 347

Sweden 908 816 1091 959 63 547 554 402

United Kingdom 931 839 1113 982 40 675 588 675

EU15 average 896 805 1079 947 74 529 557 373

Notes:

1. Fossil fuel prices are 6-month averages for EU15 for July-December, 2004.Available from EU Oil Bulletin at: http://europa.eu.int/comm/energy/oil/index_en.htm.

2. Biofuel prices from best estimates in Table 1a.

3. Excise duty from EU Oil Bulletin, 31 March 2005.

http://www.pointcarbon.com/http://europa.eu.int/comm/energy/oil/index_en.htmhttp://europa.eu.int/comm/energy/oil/index_en.htmhttp://www.pointcarbon.com/


9/11

uction and distribution cost difference between Eur-

opean biofuels and fossil fuels, illustrated in Fig. 2. This

is clear since the difference between biofuel and fossil fuel

costs on average is currently higher than the excise duty.

Even if the costs of either an excise duty rebate or

subsidising the cost difference were comparable, the

rebate of excise duty may be preferred due to the ease of

implementation. The transaction costs can be low, since

the rate of subsidy is fixed at the excise duty rebate and

hence once a fuel meets the criteria of the definition of a

biofuel, the supplier is automatically awarded an

exemption from excise duty. With a scheme comprising

compensation of the cost difference of fossil fuels and

biofuels, in order to ensure that the price of the biofuelmatches that of the corresponding fossil fuel, the amount

awarded must continuously change and may be subject

to renegotiation. However, direct subsidy ensures that

the price of a biofuel matches that of the corresponding

fossil fuel. An excise duty rebate is not tied to prevailing

oil or biofuels costs; therefore the implicit subsidy given

is not a function of the current price differential.

Reducing excise duty on fuels would affect an

important source of government revenue. Revenue from

transport fuel excise duty in 2002 for the 15 Member

States in the EU reached h178 billion (ACEA, 2004).

Energy and transport taxes in 2002 made up 2.6% of

total GDP and 6.3% of total taxation in EU15

(Commission of the European Communities, 2004). In

addition, although on average the costs of remitting

excise duties are comparable with the cost difference

between biofuels and fossil fuels, for many countries, the

rebate of excise duty may not be sufficient to make all

biofuels competitive with mineral fuels.

4.2. Tariffs and world prices

So far we have focused primarily on biofuels

produced in EU15. Do the results change if the

accession of 10 new Member States20 to the EU in

2004 is considered? Kavalov et al. (2003) estimate the

potential contribution of the new Member States at 1%

of the enlarged EU fuels market. With optimal

technology, the potential rate of substitution could be

2% of diesel consumption and 3% of petrol consump-

tion. This production is sufficient to meet the newMember States requirements under the EU biofuels

Directive, but it can only be a small supplement to EU15

biofuel production. In addition, the biofuels production

costs in accession countries appear to be similar to those

in EU15, as lower factor costs are offset by lower yields.

Potential sources of cheaper biofuels are found in

non-EU countries from South America and Asia. The

bioethanol market in Brazil has been established since

the launch of a biomass programme in the 1970s (the

Proalcool programme). The Brazilian government has

supported this programme with vehicle technology

subsidies and fuel tax reductions. Currently it is

mandatory to blend petrol up to 2025% with

anhydrous bioethanol. This rule has provided a stable

market for bioethanol producers in Brazil over the last

30 years and created a low risk environment for

investors. As a result, Brazil has a significant cost

advantage in the production of bioethanol compared

with the EU, mainly due to large-scale commercial

production (reaching 13.7 billion litres in 1997 (Fulton et

al., 2004)) and favourable conditions for the cultivation

of sugarcane. This has led to cheap bioethanol and high

capacities available for export.

From Table 2 it can be seen that if bioethanol imports

from Brazil are used, the net costs per tonne of CO2emissions reduction in the EU fall dramatically, to the

point where it is competitive in private cost terms with

petrol and diesel. Note however, that this conclusion

holds at current prices, i.e. it relies on a sufficient

Brazilian export capacity and assumes no import tariffs.

Tariffs of approximately h0.10.2/l 21 exist on imported

bioethanol to the EU. The EU Council Regulation22 on

laying down specific measures concerning the market in

ethyl alcohol of agricultural origin, introduced a

monitoring system from January 2004 affecting bioetha-

nol imports. An export and import license scheme was

introduced and the Commission has the power to

administer tariff quotas resulting from international

agreements concluded in accordance with the Treaty

from other legislative acts of the Council. The

International Energy Agency has called for the lowering

ARTICLE IN PRESS

Table 5

Cost or revenue foregone as a result of an excise duty rebate (h/

tCO2eq.)

Biofuel Feedstock h/tCO2eq.

Bioethanol

Sugar crops 429

Starch crops 1286Lignocellulosic crops 211

Lignocellulosic residues 202

Brazilian sugarcane 182

Biodiesel

Oil seeds 279

Notes:

1. Average excise duty for petrol and diesel in EU15, 31/03/2005.

Available at http://europa.eu.int/comm/energy/oil/bulletin/2005_en.htm.

CO2eq. emissions savings from best estimates in Table 3.

20Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania,

Malta, Poland, Slovenia, Slovakia.21The tariff on bioethanol depends on whether it is denatured

(h0.102/l) or undenatured (h0.192/l). Germany requires bioethanol to

be undenatured but other Member States do not. Information on

tariffs is available on http://europa.ey.int/comm/taxation_customs/

dds/en/tarhome.htm.22Council Regulation no. 670/2003.

http://europa.eu.int/comm/energy/oil/bulletin/2005_en.htmhttp://europa.ey.int/comm/taxation_customs/dds/en/tarhome.htmhttp://europa.ey.int/comm/taxation_customs/dds/en/tarhome.htmhttp://europa.ey.int/comm/taxation_customs/dds/en/tarhome.htmhttp://europa.ey.int/comm/taxation_customs/dds/en/tarhome.htmhttp://europa.eu.int/comm/energy/oil/bulletin/2005_en.htm


10/11

of tariffs on biofuels (Fulton et al., 2004), and it appears

that the EU is negotiating with Latin American

countries to reduce tariffs for the import of bioethanol

into the EU.23

5. Conclusions

The substitution of fossil fuels with biofuels has been

proposed in the EU as part of a strategy to mitigate

greenhouse gas emissions from road transport, increase

security of energy supply and support development of

rural communities. This paper focused on one of these

purported benefits, the reduction in greenhouse gas

emissions, and examined whether implementing this

measure is economically efficient. The current cost of

subsidising the price difference between European

biofuels and fossil fuels per tonne of CO2 emissions

saved is calculated to be h2292000. This is the

threshold value that must be assigned to one tonne of

CO2 emissions, in order for the biofuels policy measure

to be economically efficient; it is high compared with

other available CO2 mitigation strategies, both within

the transport sector and (especially) outside. CO2allowances in the EU are being traded at around h17/

tonne. The marginal abatement costs of CO2 emissions

for the road transport sector are in the range of

h73350/tCO2 (Blok et al., 2001). The cost of subsidising

biofuels falls within the upper end of this range. It seems

then that supporting biofuels is currently not efficient

without including the economic benefits from additional

employment generated or the resulting incrementalsecurity of energy supply. Even in this case, it is likely

that these strategic and social objectives could be met by

alternative means that are less expensive. The use of

biofuels is currently cost efficient only when the

bioethanol is imported from Brazil, assuming that the

Brazilian supply is perfectly elastic and import tariffs are

sufficiently low.

If the production of European biofuels for transport

is to be encouraged, exemption from excise duties is the

instrument that incurs the least transactions costs, as no

separate administrative or collection system needs to be

established. However, for most European countries,total exemption from the prevailing excise duties would

not suffice to make production viable. Moreover, given

the pressure that most EU countries are under to reduce

budget deficits and taxes simultaneously, it seems

unlikely that the stimulation of biofuels will be seen as

a priority. These conclusions are valid at current costs

and prices (oil prices at approximately $50 bbl).

However, anecdotal evidence shows that a number of

entrepreneurs are producing biofuels at the lower

margin of the costs specified here profitably, once an

excise duty rebate is given. For example, the production

of biodiesel in Germany reached 1.04 million tonnes in

2004 and 170,000 tonnes of bioethanol were produced in

Spain in 2003. It is likely that growth in the volume of

the business will engender both economies of scale and

innovation that will reduce costs substantially (Jungme-

ier et al., 2005). However, under current conditions, itseems that it will take time, large scale, innovation and

higher fossil fuel prices before European biofuels will be

able to compete on a cost-effectiveness basis with

imports from Brazil or alternative abatement options.

Acknowledgements

We would like to thank Pearse Buckley of Sustainable

Energy Ireland for invaluable comments and material in

relation to this work, and an anonymous reviewer for

very useful comments to an earlier version of this paper.We are grateful for the support of the Irish Research

Council for Humanities and Social Sciences for this

work. The usual disclaimer applies.

References

ACEA, 2004. Tax Guide 2004, Brussels.

Blok, K., de Jager, D., Hendriks, C., 2001. Economic Evaluation of

Sectoral Emission Reduction Objectives for Climate Change.

Summary Report for Policymakers. ECOFYS Energy and Envir-

onment, AEA Technology, National Technical University of

Athens. http://europa.eu.int/comm/environment/enveco/climate_-

change/sectoral_objectives.htm .Commission of the European Communities, 2001. Communication

from the Commission on alternative fuels for road transportation

and on a set of measures to promote the use of biofuels, COM

(2001) 547.

Commission of the European Communities, 2003. Proposal for a

Council Regulation establishing common rules for direct support

schemes under the common agricultural policy and support

schemes for producers of certain crops. COM (2003) 23 final.

Commission of the European Communities, 2004. Structures of the

Taxation systems in the European UnionData 19952002. 2004

Edition. Directorate General Taxation and Customs Union.

Convery, F.J., Redmond, L., 2004. Allocating allowances in trans-

frontier emissions tradinga note on the European Union

emissions trading scheme (EUETS). In: Spanish Portuguese

Association of Environmental and Natural Resource Economists(AERNA), Vigo, Spain, 1819 June 2004.

Council of the European Union, 2003. Restructuring the community

framework for the taxation of energy products and electricity.

Official Journal of the European Union, Council Directive 2003/

96/2003.

Den Uil, H., Baker, R.R., Deurwaarder, E.P., Elbersen, H.W.,

Weissmann, M., 2003. Conventional biotransportation fuels.

NOVEM Report-2AVE-03.10.

Department of Transport (UK), 2003. International resource costs of

biodiesel and bioethanol. AEA Technology.

Edwards, R., Griesemann, J.-C., Larive , J.-F., Mahieu, V., 2004. Well-

to-wheels analysis of future automotive fuels and powertrains

in the European context. EUCAR-JRC-CONCAWE Report,

Version 1b.

ARTICLE IN PRESS

23Personal communication DG TREN 11/2004.

http://europa.eu.int/comm/environment/enveco/climate_change/sectoral_objectives.htmhttp://europa.eu.int/comm/environment/enveco/climate_change/sectoral_objectives.htmhttp://europa.eu.int/comm/environment/enveco/climate_change/sectoral_objectives.htmhttp://europa.eu.int/comm/environment/enveco/climate_change/sectoral_objectives.htm


11/11

European Environment Agency, 2004. Annual European Community

greenhouse gas inventory 19902002 and inventory report 2004.

Submission to the UNFCCC Secretariat. EEA Technical Report 2/

2004.

European Parliament and Council, 2003. On the Promotion of the Use

of Biofuels or other Renewable Fuels for Transport (Directive

2003/30/EC).

Eurostat, 2005. Labour market statistics. Harmonised unemployment-Total. Brussels. Available at http://epp.eurostat.cec.eu.int/.

Fulton, L., Howes, T., Hardy, J., 2004. Biofuels for Transport:

An International Perspective. International Energy Agency,

Paris.

Henke, J.M., Klepper, G., Schmitz, N., 2003. Tax exemption

for biofuels in Germany: is bio-ethanol really an option for

climate policy? In: International Energy Workshop jointly orga-

nised by the Energy Modelling Forum (EMF), International

Energy Agency (IEA) and International Institute for Applied

Systems Analysis (IIASA) at IIASA, Laxenburg, Austria, 2426

June 2003.

IPCC (Intergovernmental Panel on Climate Change), 1996. Revised

1996 IPCC Guidelines for National Greenhouse Gas Inventories.

National Greenhouse Gas Inventories Programme.

Jungmeier, G., Koenighofer, K., Varela, M., Lago, C., 2005.Economic and Environmental Performance of Biofuels. Work

Package 2, VIEWLS Project. Clear Views on Clean Fuels: Data,

Potential, Scenarios, Markets and Trade of Biofuels, EC Project

NNE5-2001-00619.

Kavalov, B., 2004. Biofuels potential in the EU. Report for the

Institute for Perspective Technological Studies. European Commis-

sion Joint Research Centre. Report EUR 21012 EN.

Kavalov, B., Jensen, P., Papageorgiou, D., Schwensen, C., Olsson,

J.P., 2003. Biofuel production potential of EU-Candidate coun-tries. Final Report. Institute for Perspective Technological Studies.

Report EUR 20835.

Nommensen, A., 2005. List of common conversion factors (Engineer-

ing conversion factors) IOR Energy. Available at http://www.ior.-

com.au/ecflist.html.

Shapouri, H., Duffield, J., Wang, M., 2002. The energy balance of corn

ethanol: an update. United States Department of Agriculture.

Office of Energy Policy and New Uses. Agricultural Economic

Report Number 813.

Van Thuijl, E., Roos, C.J., Beurskens, L.W.M., 2003. An overview of

biofuel technologiew, markets and policies in Europe. Energy

Centre of Netherlands, ECN-C-03-008.

Whitely, M., Zervos, A., Timmer, M., Butera, F., 2004. Meeting the

targets and putting renewables to work. Overview Report for

MITRE Project, ALTENER Programme. Directorate General forEnergy and Transport.

ARTICLE IN PRESS

http://epp.eurostat.cec.eu.int/http://www.ior.com.au/ecflist.htmlhttp://www.ior.com.au/ecflist.htmlhttp://www.ior.com.au/ecflist.htmlhttp://www.ior.com.au/ecflist.htmlhttp://epp.eurostat.cec.eu.int/

use biofuels eu

Documents