IISD GSI report finds biofuel subsidies are an inefficient policy for combating climate change

WINNIPEG, April 29, 2009 – Canadian government subsidies for biofuels have introduced market distortions that make it difficult for other more cost effective and sustainable energy alternatives to enter the market, according to a report by the International Institute for Sustainable Development's Geneva-based Global Subsidies Initiative (GSI).

Biofuels - At what cost? Government support for ethanol and biodiesel in Canada (PDF - 3.4 mb) is the latest in a series of reports addressing subsidies for biofuels in Australia, Canada, China, the European Union, Indonesia, Malaysia, Switzerland and the United States. The report provides the most comprehensive quantification to date of the amount of public money being spent to support ethanol and biodiesel, as well as analysis on whether it presents good value for Canadian taxpayers.

"Public subsidies for biofuels have been justified on their environmental merits, as well as the economic boost they provide to rural economies," said IISD associate Stephan Barg. "However, our research shows that these policies are an extremely expensive and inefficient way to conserve fossil fuels and reduce GHG emissions."

The comprehensive study found a growing array of subsidy programs at the federal, provincial, and even municipal levels that support nearly every stage of the biofuels supply chain, from research and development, business planning, through construction of plants, production of biofuels, marketing and purchase of vehicles capable of using the fuels.

In the three-year period ended 2008, total transfers to biofuels approached $1 billion, with an average of around $300 million per year. The subsidies accounted for 20 to 70 per cent of the retail market prices for the biofuels.

While transfer payments are levelling off, ethanol from corn (maize), the most common product in Canada, requires subsidies of between $0.50 and $0.70 a litre to replace an equivalent litre of fossil energy-enough to purchase the displaced fuels with the subsidy alone.

"Subsidizing biofuel production is clearly an expensive way to reduce greenhouse gas emissions. To remove one tonne of greenhouse gases from the atmosphere via corn- or wheat-based ethanol costs between $200 and $400. By comparison, one tonne of CO2 reductions cost $4.25 on the Chicago Climate Exchange or $33.85 on the European Climate Exchange," Barg said.

"Therefore, the Canadian government could remove up to 100 times more carbon from the atmosphere simply by purchasing emission reductions on the market. The numbers are similar for biodiesel, with subsidies costing between 6 and 137 times more to reduce a tonne of CO2 then purchasing carbon offsets."

The report was written by Tara Laan, Todd Alexander Litman, Ron Steenblik