Biofuel policies and the current food crisis

Policies to boost biofuel production and use—crop subsidies, mandates, and other measures—came under intense scrutiny during the food price spikes of 2007/08, 2010/11, and 2012/13. As prices of maize, grains, oilseeds, and other feedstocks rose in those crises—more than doubling in some cases—critics pointed to their increasing use in biofuel production as a major factor behind high global food prices.

Such policies, touted as the key to alternative energy development, played an important role in the growth of biofuel production, which more than doubled from 2006-2010. Under the US Renewable Fuel Standard (RFS), for example, corn used for ethanol grew from 54 million tonnes in the 2006/07 marketing year to 127 million tonnes in 2011/12, accounting for over 40 per cent of US corn production.

The "food versus fuel" debate faded as global supplies recovered after 2012 and agricultural commodity prices fell. In the meantime, global biofuel production continued to grow, increasing 44 per cent between 2011 and 2021. This increase was also largely due to mandates, given generally low prices for fossil fuels—the international price of oil declined from its 2011 peak and only peaked again in 2022 following Russia's invasion of Ukraine.

Now, the Russia-Ukraine war has resurrected the food versus fuel debate. As maize, wheat and vegetable oil prices spiked in the wake of Russia's February 2022 invasion, debates focused once again on biofuel policies—including blending mandates for biodiesel and ethanol that divert feedstocks like sugar, maize, and vegetable oils from food to industrial use. 

Recent growth in biofuel consumption and feedstock use

Global ethanol consumption exceeded 126 billion litres in 2021. Between 2006 and 2010, this figure grew by more than 16 per cent per year, driven by the rapid growth in the United States under RFS, which mandated blending requirements for US fuel producers. 

After 2010, however, this growth slowed considerably to 2 per cent per year. Currently, the US and Brazil account for about 43 per cent and 23 per cent, respectively, of total ethanol consumption. 

About 59 per cent of ethanol is produced from maize, 22 per cent from sugarcane, 2 per cent from molasses, 2 per cent from wheat, and the remainder from other grains, cassava, or sugar beets. Despite hopes for scaling up more advanced technologies based on cellulosic feedstock, these do not account for large shares of the total due to their production costs.

Biodiesel consumption has grown more steadily over the past 15 years at an annual rate of almost 15 per cent per year. In the late 2000s, the European Union accounted for about 75 per cent of total consumption, but in recent years, its share has fallen to about 36 per cent. 

The US, Brazil and Indonesia now account for almost 50 per cent of total biodiesel consumption. About 73 per cent of biodiesel is based on vegetable oils (14 per cent rapeseed oil, 24 per cent soybean oil, and 31 per cent palm oil) and used cooking oils (21 per cent).

Here we arrive at the crux of the food versus fuel debate: To the extent that production is diverted to biofuels, less production is available for food or feed purposes. 
Global biofuel production consumes a significant proportion of key source feedstocks. Almost 22 per cent of sugarcane production and 16 per cent of maize production is used for ethanol production. About 15 per cent of vegetable oil production (mostly palm oil, soybean oil and rapeseed (canola) oil) goes into biodiesel production. 

By contrast, wheat, other feed grains (such as sorghum) and sugar beets account for a relatively small share of total production (less than 2 per cent). 

It is important to note that the loss to potential food production is less than one-to-one, as by-products and co-products of biofuel production often are fed to animals (for example, distillers' dried grain solubles from corn-based ethanol production, or protein meals produced from oilseeds crushed for biofuel purposes).

The benefits and costs of biofuel policies

Governments have promoted biofuel policies for a range of reasons—including energy security, greenhouse gas (GHG) reductions, job creation, and agricultural price support. These policies have helped to make biofuels a significant and growing segment of the transportation fuel market. 

Biofuels presently represent about 25 per cent of Brazil's transportation fuels (primarily sugarcane-based ethanol). In Indonesia, biodiesel produced mostly from palm oil today accounts for almost 28 per cent of the total diesel supply. In contrast, in the US, maize-based ethanol currently accounts for less than 11 per cent of finished motor gasoline production and biodiesel use accounts for less than 5 per cent of distillate motor fuels. Crop-based biofuels represent today an estimated 4.5 per cent of the EU's transport energy mix.

The significant tradeoffs involved in biofuel policies are at the centre of the food versus fuel debate. While there are clear benefits to biofuel policies—they have increased supplies of transportation fuels and enhanced energy security—they also have significant costs that must be absorbed by governments (in various forms of support) or by consumers (in higher fuel costs).

This is particularly true for biodiesel, whose costs have typically far exceeded those of conventional diesel. In the US, for example, federal tax credits allow blenders of biodiesel (and renewable diesel) to claim a credit of $1 per gallon against their federal tax liability. 

The economic viability of ethanol production depends on the feedstock (sugarcane is far cheaper than grains such as wheat) or other factors (in the US, ethanol is used as a low-cost octane enhancer that improves engine performance).

In addition, some of the benefits of biofuels have been questioned. Proponents point to biofuels' reduced GHG emissions compared to conventional (i.e., petroleum-based) fuels. Mandates such as the EU's Renewable Energy Directive (RED II) or California's Low Carbon Fuel Standard are aimed, in part, at meeting GHG reduction targets through the use of approved biofuels. 

But the degree to which biofuels reduce GHG emissions is controversial. Recent research concludes that the carbon intensity of maize-based ethanol in the US is no less than gasoline and likely "at least 24 per cent higher." Moreover, when indirect land use change (ILUC) is considered (for example, through deforestation) GHG emissions for palm- and soy-based biodiesel may also be quite large. 

For example, under the RED II and new regulations aimed at curbing deforestation, future use of palm-oil-based biodiesel may be constrained due to ILUC concerns.

Another controversial factor behind biofuel policies is the direct benefits they bring to producers through increased farm prices and income, and more generally from increased biofuel use, which leads to higher feedstock prices. This is key to their political support; the broader economic or social benefits are less clear.

A less controversial benefit has been increased employment, often in rural areas, given the worldwide expansion of biofuel production. The International Renewable Energy Agency (IRENA) estimates worldwide biofuel employment in 2021 at 2.4 million. The vast majority of jobs are in planting and harvesting feedstock; fuel processing employs relatively few people, but typically pays higher wages.

Economic distortions and food prices

In the absence of government mandates, most biofuels would only be competitive when prices of conventional energy sources spike. This is an underlying factor in the tension between the production of feedstocks for biofuel production versus food. 

When food prices rise, mandates hinder a market-stabilising response that would divert supplies from fuel to food use. Thus, the effect of biofuel policies is to divert grain and oilseeds from food and feed use to biofuel production, contributing to higher food prices, which are then borne by consumers, as witnessed during the price spikes in 2007/08, 2010/11 and 2012/13.

In addition, when biofuel mandates increase domestic food prices, countries may be tempted to head off further price increases by imposing export restrictions, which only serve to further increase global market prices. 

For example, the combination of rising vegetable oil prices and rising palm oil exports led Indonesia to implement a ban on such exports in April 2022 in order to keep domestic prices low. At the same time, the country maintained a 30 per cent blending requirement for biodiesel. Fortunately, the ban was short-lived, lasting only three weeks, and prices have fallen significantly since then.

Off-ramps for biofuel mandates?

Given the popularity of biofuel policies, can they be altered or improved in ways that address the food versus fuel (versus carbon) debate? One option is to introduce so-called "off-ramps" for biofuel mandates. Triggers could be built in to suspend mandates when food prices are high, or stocks-to-use measures low, but could be rescinded when global supplies recover and prices fall.

We saw such flexibility in 2022 when EU member states responded to the decrease of sunflower oil imports from Ukraine by reducing biofuel production from traditional feedstocks. The aim was to slow down the substitution of rapeseed for biodiesel production in order to avoid further driving up skyrocketing vegetable oil prices. Similarly, Brazil reduced its mandate to blend diesel with 13 per cent to 10 per cent of biodiesel in 2022.

In a situation where high energy prices persist (or when some biofuels are price competitive, such as U.S. ethanol's use as an octane enhancer vis-à-vis other alternative petroleum-based fuels, at least in the short run) such off-ramps may provide only limited relief. Some have advocated that governments shut down biofuel production in such cases—but that may be difficult to enforce without compensating affected parties.

Conclusions

Despite the recurring food versus fuel debate and criticism expressed during previous price spikes, biofuel policies have grown in popularity. That growth will likely continue. 

The International Energy Agency projects that from 2022-2027 biofuel demand will increase by 20 per cent and could increase by more if the use of sustainable aviation fuels and other uses expands more rapidly than anticipated. 

Yet given ongoing concerns about food versus fuel due to the Russia-Ukraine war, it's more important than ever to verify the actual contribution biofuels make to climate change mitigation efforts, and to examine whether support to farmers should be channeled in alternative ways. Developing greater flexibility when markets are tight and prices high is also crucial; biofuel policies should include provisions to relax mandates when warranted.

Finally, an important avenue out of the food versus fuel predicament may be the development of waste products and crop residues as potential feedstocks for biofuels. Such feedstocks would promote GHG reduction, reduce waste, create jobs and create a new source of income for farmers and other producers, without competing for food use. 

Used cooking oil, for example, is already an important feedstock for biofuel production. However, while conversion for many such feedstocks is technically feasible, they remain costly relative to food crops. More research should be aimed at increasing commercialisation of wastes and crop residues.

Joseph Glauber is a senior research fellow with IFPRI's markets, trade, and institutions division. Charlotte Hebebrand is IFPRI's director of communications and public affairs. Opinions are the authors'