Assessing the impact of EU biofuel support policies

Executive summary

A range of policies have been used to support the development of the liquid biofuels sector in the EU, including:

• use mandates,
• budgetary support
• and trade policies.

This study uses the FAPRI-EU partial equilibrium model to simulate the impact of removing these support policies on the biofuel and agricultural sectors.

Specifically, four main scenarios are analysed:

1. elimination of tax credits;
2. elimination of use-mandates;
3. elimination of import tariffs;
4. elimination of import tariffs and relaxation of sustainability criteria.

Within the simulations the elimination of tax credits (Scenario 1) has a limited impact of the EU biofuels market due to the scaling back of tax credits in recent years in favour of mandates.

The elimination of use mandates (Scenario 2) has a more marked impact, with significant declines in consumption of biofuels and hence biofuel prices. Biofuel production also falls and the fall in usage and prices leads to the EU switching from being a net importer of bioethanol to a net exporter. Predicting the reaction of the industry in response to the extreme nature of this scenario is not straightforward and the results need to be treated with care. The removal of mandates may precipitate the dismantling of capacity at a higher rate than shown in this study. In addition, there is considerable uncertainty concerning the response of biofuel consumption to lower prices since biofuels have so far not been competitive relative to fossil fuels in the EU. Thus, sensitivity scenarios with different assumptions concerning biofuels consumption are also considered. In terms of trade policies, the removal of import tariffs (Scenario 3) leads to an increased inflow of EU biofuel imports and lower biofuel prices. Biofuel prices fall further when both import tariffs and sustainability criteria are abolished (Scenario 4) due to the inflow of imports from cheaper markets.

The projected impact on feedstock prices is most marked under the elimination of the of the biofuels use mandate scenario (Scenario 2), with rapeseed experiencing the largest decline as the volume of rapeseed used in biodiesel production is relatively high. The impact on grain prices, however, is more modest due to the limited proportion of grains dedicated to ethanol; also the reduced demand for grain for biofuel is partially offset by increases in feed demand as a result of the reduction in by-product from bio fuel production entering the feed market.