The Global Subsidies Initiative (GSI) has published a report revealing that China provided a total of RMB 780 million (US$ 115 million, roughly US$ 0.40 per litre) in biofuel subsidies in 2006. Total support is expected to reach approximately RMB 8 billion (US$ 1.2 billion) by 2020, according to official sources. This is likely to be a significant underestimate, as it does not include support to feedstocks, such as the RMB 3000 (US$ 437) per hectare per year available from 2007 for farmers growing feedstock on marginal land.

“Biofuels – At What Cost? Government support for ethanol and biodiesel in China”, is the latest in a series of country studies on subsidies for biofuels by the GSI, the publishers of this newsletter.

A domestic biofuels industry seemed an attractive option to Beijing as a means of improving energy supply for China’s soaring transport needs, reducing air pollution and building a “new socialist countryside” by creating alternative markets for grain and opportunities in China’s poor rural areas.

However, the government quickly recognised the inherent conflict between biofuels and food production. It now finds itself in the awkward position of seeking to discourage the use of staple crops for biofuels production, yet at the same time paying production subsidies predominantly to ethanol producers using maize and wheat as feedstocks. The construction of new maize-based ethanol plants has been halted. Policies have been developed to encourage the production of biofuels from non-grain feedstocks grown on 35 to 75 million hectares of marginal land that might be suitable for these crops.

The impacts of converting “marginal lands” to feedstock production will depend on local circumstances. Benefits could include higher farm incomes and rehabilitation of degraded land. However, in some areas yields might be too low to make growing of feedstock profitable, and government subsidies would be wasted on such land. Negative impacts could also arise if existing land users are displaced or natural ecosystems are disrupted. Subsidies for growing biofuel feedstocks on marginal land are higher than subsidies for setting aside such land for environmental purposes, encouraging cultivation of conservation areas.

Even under the most optimistic scenarios for Chinese biofuel production, soaring private vehicle ownership means domestic production of biofuels would have a negligible effect in reducing China’s oil consumption or increasing energy security.

The net benefits for pollution reduction also appear to be limited and the potential for negative unintended consequences is high, including for vulnerable rural communities. The report therefore recommends that the Chinese Government re-evaluates it biofuel policies, particularly to ensure that biofuels genuinely do not compete with food or undermine the government’s social or environmental objectives.

More generally, China should hasten the liberalization of transport fuel prices. China’s current price caps serve to undermine the government’s energy-efficiency goals. If improving energy security and reducing urban pollution are genuine priorities, then allowing domestic fuel prices to rise to those established in international markets would be the most effective step that China could take to curb demand, particularly if such action is accompanied by policies to improve vehicle efficiency and slow growth in car ownership.

“Biofuels – At What Cost? Government support for ethanol and biodiesel in China” is available from the GSI website by clicking here.