Many countries in the developing world are concerned about the impact of high oil prices on their economic growth. This is the case not only in Asia, but also in Latin America, where subsidies are often used to lower the consumer price of petroleum products, at heavy cost to public budgets. In Ecuador, for example, almost a third of the central government's annual budget is spent subsidizing fossil fuels.

Indeed, the millions, and even billions of dollars that countries in the developing world spend on fossil-fuel subsidies has become not only an environmental problem, but also a fiscal problem, threatening economic stability and future development. As a result, debate over changing energy patterns has intensified in Latin America. Governments are in search of a strategy that will promote development and take into account an increasing demand for fuel, driven in part by China´s rapid growth.

Several Latin American countries, starting with Brazil, have decided to encourage local development of biofuels. Spurred by this government support, production of biofuels is growing rapidly in Latin America. Yet the cost-effectiveness of these subsidies to biofuels, when measured against their effect on lowering green house gas emissions, is questionable. There is also growing concern over the impact of biofuels on food security and environmental degradation.

Promoting biofuels while also maintaining policies that keep down the prices of fossil fuels is doubly costly. Clearly, subsidizing the consumer price of petroleum-based fuels makes it difficult for biofuels to compete in domestic markets. But fossil fuels subsidies - and not only those in the developing world - are highly distortive in other ways as well. When fossil fuels are subsidized, incentives to improve fuel efficiency are reduced, and environmental costs, such as the contributions fossil fuels make to global warming, are externalized. Yet few governments in Latin America seem prepared to phase out their subsidies to fossil fuels.

One consequence of the distorted domestic markets for transport fuels in Latin American is that biofuel producers are setting their sights on foreign markets - chiefly in Europe and North America. But import tariffs on ethanol and subsidies that support domestic biofuel producers in these regions mean that Latin American exporters face difficulties selling in foreign markets as well. To a large extent, therefore, access to developed country markets hinges on the continuance of special arrangements, such as the United States' Caribbean Basin Initiative, which sets a tariff-free quota for ethanol, and the EU's trade preferences to ACP countries, rather than on market fundamentals.

Biofuels need to be based on efficient production and land re-conversion within the current agricultural frontier, with a very strict territorial ordainment in place, in order to be environmentally sustainable. But it is doubtful whether biofuels would be economically viable even with those conditions in place, so long as and both petroleum and biofuels remain highly subsidized.

María Amparo Albán is an Associate Professor at Catholic University of Quito, where she has taught international trade and sustainable development for the last ten years. Her work focuses on the integration of environment and social components in policy making in the context of globalization and development, particularly related to trade negotiations in developing countries. She has worked for the Ministry of Trade in Ecuador and is currently consulting.