INTRO
 Real oil prices had fluctuated around the $20-$30/barrel band for more than 15 years. Since 2003, the price of oil has doubled in the long run having peaks up to $160/barell. Of course the reasons for these fluctuations are not only the day-to-day depletions of the oil reserves, but the political situation as well (The Iraq conflict and the instability in the region). Changing the fuel mix in transport is important because the European Union's transport system is almost entirely dependent on oil. Most of this oil is imported, much of it from politically unstable parts of the world. The unstable situation in the Middle East and the dispute over Iran’s nuclear weapons may trigger even more significant increase in prices in the incoming period. In such circumstances and when about 98% of the fuels used are fossil fuels (petrol and diesel), one might expect the price of these fuels to go exorbitantly high. Hence, even from an economic point of view, countries have to reduce their dependence on fossil fuels.
This is one of the reasons why the EU started setting targets of bio-fuels percentage used as compared to the total use of fuels. The targets are as follows:
- 2005- 2% (of the total amount of fuels used)
- 2006- 2.75%
- 2007- 3.50%
- 2008- 4.25%
- 2009- 5.00%
- 2010- 5.75%
* Member States can choose their own fuel mix of biofuels and strategies to meet the targets. (Kyriakos Maniatis, DG TREN). Because targets are non-binding, legal action can be taken against failure to set the appropriate indicative targets, but not against failure to meet them once they have been set.
In 2001, the EU market share of biofuels as compared to the total use of fuels was only 0.3%! After setting the targets, many Member States are investing all their efforts in complying with them, however, the 2005 target of 2.00% use of bio-fuels was only achieved by Germany (3.8%) and Sweden (2.2%). In its 2007 January report, the Commission acknowledged that the ambitious targets for 2010 have not been achieved.
The EU has had several reminders of the disruptable nature of its energy supplies - for example, the effects of Hurricane Katrina on oil supplies in August/September 2005 and the temporary shortfall in gas supply via Ukraine in January 2006. Meanwhile, biofuels have proved themselves a credible alternative to oil. In most Member States, the diesel that motorists buy already includes biodiesel in low blends; major oil companies have announced biofuel investment programmes worth hundreds of millions of euros; and vehicle manufacturers have begun marketing cars capable of running on high bioethanol blends. Therefore, all alternative fuels have to be taken into consideration.
COSTS
The extra cost of using alternative fuels depends on the cost of oil, the share of imports and the competitiveness of agricultural markets. With an oil price of $48/barrel, as in the Commission’s baseline, the extra direct cost of reaching a 14% market share for biofuels (compared to the cost of conventional fuels) is estimated at €11.5-€17.2 bn in 2020. With an oil price of $70/barrel this would fall to €5.2-€11.4 bn. However, even using the most modern technologies, the cost of EU-produced biofuels will make it difficult for them to compete with fossil fuels, at least in the short to medium term. According to the EU Strategy for Biofuel COM(2006) 34, with the technologies currently available, EU-produced biodiesel breaks even at oil prices around €60 per barrel, while bioethanol becomes competitive with oil prices of about €90 per barrel.
Second-generation biofuels are not yet commercially available (they are expected to be commercialized between 2010 and 2015) and are likely to be more expensive than first-generation. Their costs are expected to fall by 2020. In that year, both first generation and second-generation biofuels can be expected to be in the market.
Extra production costs
At low oil prices levels (25$ a barrel), biofuels are not competitive (DG Energy and Transport- Kyriakos Maniatis DG TREN)
0.5€/litre of Biofuel
0.2-0.25€/litre of Fossil fuel
It takes 1.1 litre of biofuel to replace 1 litre of diesel.
CO2 Avoidance
Fossil diesel emits 3.2kg CO2/litre
Savings from biodiesel 2-2.5kg CO2/litre
Cost of CO2 avoidance: 0.1-0.15€/ kg CO2
However, the usage of second-generation bio-fuels (CNG, Hydrogen) will significantly reduce the CO2 Avoidance costs.
EMPLOYMENT
The estimates of the Directorate General for Transport and Environment are that a biofuel contribution of 1% of total fossil consumption would create 45,000-75,000 new jobs in rural areas. Achieving a 14% share of biofuel by 2020, if primarily through domestic production, would lead to employment in the EU being up to 144 000 higher, and EU GDP being up to 0.23% higher than they would otherwise have been.
PROTECTIONISM
The EU maintains significant import protection on some types of biofuels, notably ethanol which has a tariff protection level of around 45% ad valorem. Import duties on other biofuels - biodiesel and vegetable oils - are much lower (between 0 and 5%). It is at this stage unclear whether any worldwide liberalization will take place in the near future that would reduce this protection, due to the uncertainties surrounding the World Trade Organization Doha Round. The ACP (Africa, Caribbean and Pacific) and the least developed countries as well as countries benefiting from the EU's Generalized System of Preferences schemes have unlimited duty-free access to the European market already (This makes Pakistan the biggest ethanol exporter to the EU).
TAX EXEMPTIONS
One universal instrument for supporting biofuels has been the use of tax expenditures—when the government collects less tax than from other goods with similar characteristics—which can take the form of tax exemptions, allowances, credits, deferrals, or relief. There are both equity concerns and practical difficulties for using tax exemptions to support biofuels in developing countries. Gasoline taxes are often a significant source of tax revenue in developing countries and are also progressive in that gasoline consumption is greatest among high-income groups. The provision of tax exemptions to ethanol results in a loss of tax revenue from gasoline, revenue that could have been used for other social programs. Once enacted, tax expenditures usually come under little scrutiny and are rarely repealed. While the use of tax expenditures has been a political reality in assisting biofuel industries around the world, it is preferable, from a good governance perspective, to have public support for biofuels subject to normal budgetary scrutiny so that public expenditures on biofuels are weighed against other social priorities. Diesel fuel, in contrast, is either taxed at very low levels or is subsidized in many developing countries. In these circumstances, tax exemptions cannot be used to support biodiesel and alternative means of support would need to be found.
CONCLUSIONS
Oil prices have the largest effect on the economics of biofuel production.
If world oil prices remain high for a prolonged period of time, biofuel programs have a better chance of becoming financially viable without sustained government support in a larger number of countries. Sustained prices above $50 per barrel are predicted by a number of analysts over the next few years. However, if oil prices fall to US$35 per barrel in the next five years, as some analysts forecast (IMF 2005, Oil and Gas Journal 2005), this would pose a challenge to the financial viability of biofuel production without government support in many areas of the world.
A regulated market-based approach that encourages the development of the EU’s domestic biofuel industry in a balance with imports would bring an average cost of € 6 billion per year in order to meet the indicative target of the Biofuels Directive.
A key factor in the deployment of biofuels is cost competitiveness or cost effectiveness. This does not only refer to the production of biofuel itself, but also other associated costs, such as investments in new vehicles or alternative logistic systems. Cost reductions will be achieved by using advanced technology, through an economy-of-scale effect and a better integration into the fuel supply chain.
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