Food or fuel? What European farmers can contribute to Europe's transport energy requirements and the Doha Round
Introduction
Two of the most momentous policy issues of modern times are climate change and globalization. Europe has shown consistent and remarkably unified leadership in the first context, yet the same cannot be said of its role in the latest round of WTO negotiations. The EU's path-breaking initiatives for carbon trading and affirmation of commitments beyond the Kyoto Protocol have given essential impetus to global greenhouse gas mitigation, and the European private sector has responded with alacrity to emerging green technologies and investment opportunities. In contrast, the EU (along with some other OECD economies) has consistently resisted the agricultural reforms necessary to facilitate competition in global food markets.
Because of seemingly intractable deadlocks over farm support policies, this round has been robbed of important momentum and progress in other European sectors (manufacturing and services) has been retarded. Agricultural trade protection inflates the exchange rate with respect to most trading partners, undermining EU export competitiveness across the board. While Europe is not the only obstacle to concluding the round, we believe a new perspective can reconcile the needs of EU farmers and those who gain from expanded international trade.
This paper poses a challenge to European farmers and policy makers to advance the EU's trade agenda by expanding production of biofuels. The farm support agenda has always been premised on the importance of agriculture to European society, until now defined primarily in terms of food security. The advent of biofuel offers a dramatic new contribution from agriculture, greater domestic energy self-sufficiency. Biofuels represent the remarkable option of substitution between two leading commodities, food and energy, within a single sector. Both are essential to Europe, one is in excess supply and the other largely imported and increasingly scarce. Until now, Europe has leaned toward self-sufficiency in the first commodity, while becoming ever more import dependent on the second. A one-sided approach like this is rarely optimal, yet agricultural support strongly biased the European food-energy portfolio in this direction because food was the primary source of farm livelihoods. Now that farmers can use their resources to earn income as energy producers, the EU has a wider range of food-energy portfolio choices.
Using detailed data on current EU production of potential biofuel feedstocks, our results indicate that Europe's existing crop potential could displace over 27% of its transportation fuel imports if all eligible feedstocks were converted to ethanol and biodiesel. This is far in excess of current EU targets for renewable transport fuels, and the same strategy would necessitate significant food imports (without, it should be emphasized, a corresponding loss of EU farm livelihoods). Whether such trade substitution is beneficial of course depends upon other factors, including relative world prices and more complex institutional issues. On the other hand, if biofuel production were confined only to surplus production of eligible feedstocks, over 6% of oil imports would be displaced. To balance food and energy security interests, the optimum mix of imported and domestic food and energy probably lies somewhere in between. An essential feature of the biofuel option, however, is that these decisions can be made in a way that offsets revenue losses for domestic agricultural interests.
We also estimate that 33% of aggregate farm balance sheets would be revenue-neutral given current biofuel prices and existing farm support levels. An essential difference in this case, however, is that producer support for biofuel is not recognized as a trade distorting measure, enabling the removal of a significant portion of EU agriculture Doha negotiations. Ultimately, in the face of rising energy prices, there may be significant scope for unwinding support levels in these crop categories ($25.6 billion in 2004, about one-third of producer income) and redirecting the fiscal savings to other priorities.
Section 2 of the paper provides an overview of existing EU biofuel production and transportation energy demand. This is followed in Section 3 by a country and crop-specific overview current EU production of eligible feedstocks. Section 4 presents empirical estimates of opportunities for biofuel to displace imported oil in the transport sector. Section 5 evaluates the implications of these policy scenarios for Europe's position in the Doha Round, while Section 6 reviews additional global impacts that should be considered as result of this policy. Concluding remarks are offered in Section 7.
Section snippets
Current EU biofuel production and transportation energy demand
Demand for biofuels, fuels produced from biomass materials that can substitute for petroleum fuels, has increased rapidly in recent years as result of sustained high oil prices. The most common biofuels are ethanol and biodiesel, which can substitute for gasoline and diesel fuel, respectively. Ethanol can be produced from any biological material that contains sugar or substances that can be converted into sugar while biodiesel can be manufactured from any oil-bearing feedstock. Given current
European production of potential biofuel feedstocks
Although the EU biofuel sector is only just emerging, a substantial amount of European agriculture is already dedicated to crops that are eligible as biofuel feed stocks. Specifically, for our analysis we consider wheat, barley, corn, potatoes, and sugarbeet as potential ethanol feedstocks and rapeseed, sunflower seed and soybeans as eligible biodiesel feedstocks.3
Opportunities to increase biofuel production and mitigate energy import dependence
Given the substantial existing production eligible for biofuel conversion, it is reasonable to ask how much Europe could increase biofuel production and reduce its current dependence on fossil fuels. Conversion of existing agriculture to biofuel raises issues of food security, but these have a compelling analogy in energy security. Food may be a more elemental human need, but energy is essential to modern society. Biofuel offers EU farmers an opportunity to defend basic living standards in both
European biofuel and the Doha Round
The analysis in the previous sections demonstrates the EU's large capacity to increase biofuel production above today's levels holding existing agricultural production constant. In addition to offering energy and environmental benefits, such a strategy also presents the EU an opportunity to advance the current Doha Round of WTO mediated trade negotiations in which agriculture support policies have been a stumbling block. Within this category, farm support in higher income countries is seen as
Potential global impacts
There are additional global impacts to be considered when evaluating the policy analyzed in this paper. This section discusses a few of the salient issues. Recently, for example, concern has arisen about the impact of increased biofuel production on food security. Echoing this, the most recent OECD/FAO Agricultural Outlook warned of sustained high food prices throughout the next decade as growing shares of food supplies are diverted to or displaced by biofuel production (OECD/FAO, 2007). These
Conclusions
In this paper, we examine how biofuels might enable agriculture to contribute to European society, while mitigating two important multilateral risks, trade rivalry and climate change. Biofuels give farmers a new source of income while they help reduce external energy dependence. European farm support is also an impediment to global trade negotiations, and we believe a new food–fuel perspective can help overcome this by reconciling the needs of EU farmers and other stakeholders in Europe and
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