It is clear from the studies reviewed that incentives and taxes profoundly affect the shape of the current bioenergy industry. Regulation and government support clearly underpins the Brazilian “Proalcool” program (Appendix 2) and has been instrumental in both the way it has developed and in ensuring its ongoing viability. As another example, the UK’s Non-Fossil Fuel Obligation (NFFO) for electricity supply has clearly assisted with the development of renewable fuels in Britain. While the NFFO was originally set up with the aim of protecting the nuclear industry during the UK’s electricity industry privatization process, the ongoing support it now provides for renewables is now seen as one of the major benefits of this program (Jackson & Löfsedt, 1998). This section discusses some of the key market failure motivations behind government intervention in the energy sector, focusing specifically on uncertainty, strategic national concerns, and externalities.
On the basis of the studies reviewed thus far, it is clear that there are a number of wood energy technologies that should be regarded as technically proven. However, there are also a number of technologies that require further research before they can be regarded as proven for industrial or full-scale commercial application. In addition, a number of the modern “energy technologies” create (or can be adapted to create) a number of other products (e.g., chemicals) either as a primary output or as a by-product of the process. In some techno-economic analyses of such ‘energy systems’, the energy produced is clearly a by-product of a process that is intended to produce some other high value product – and this fact can make a great deal of difference to the “economics” of the process. In any joint production process there is always likely to be some debate about what should be appropriate allocation of total costs between the various outputs.
It is also clear that further research and development work on most technologies, even those that are already claimed to be commercial, holds some promise of reducing the cost of energy supplied by these systems. However, it is also apparent that on a purely national or resource cost basis, wood energy systems are in general more expensive (and in some cases very much more expensive) than their fossil fuel equivalents. It would also appear that for many if not all systems this is likely to remain the case. Where this is not the case (and there are a number of examples where wood energy systems are already more than cost competitive with other energy forms on a pure resource cost basis) this is due to some specific-site or manufacturing process factor.
While commercial viability of systems is often critically dependent on specific factors, it is often the case that these specific site advantages are also coupled with a significant level of financial support (e.g., for a range of renewable energy sources). In fact, in many cases the level of support provided is sufficient to ensure commercial viability for systems that clearly do not enjoy any specific site advantages.
The documentation associated with a number of the programs which were looked at as part of this study has typically at some stage made reference to national concerns about dependency on foreign energy sources (e.g., Appendix 1). The initial impetus for many current energy programs can, in virtually all cases, be traced back to some concern about national security arising from this dependency.
Energy security and - insofar as it might be possible - self-sufficiency have always lain at the heart of the [EU] Member States’ energy policies. This goal was embodied in the ECSC and EURATOM treaties, and was intended to provide the cornerstone of European harmony as conceived by the Union’s founding fathers. (Anon, 2000)
Even within current programs the ability to produce ‘home grown’ energy and the feeling of security that this imparts is seen as a major plus for bioenergy and for ensuring ongoing public support for it - both as taxpayer funded research - McCloy and O’Conner, (1998) citing a 1997 DOE publication state that in the USA DOE funding for biomass transportation fuel programs has, in recent years, averaged some US$23 million per annum - and for the incentives given to biofuels production (see for example Renewable Fuels Association, 1999).
The desire for security and self-sufficiency is unlikely to disappear in the next 20 years. In fact, based on projected world energy supply patterns (IEA, 2000) the desire for home control of energy supply may well increase during this time. If the pattern of the latest IEA reference scenario is followed, many nations are likely to see their energy dependency increase. According to the Reference Scenario (IEA, 2000), OPEC’s share of world oil supply over the period to 2020 is likely to increase while supplies from North America and Europe decline. European officials are already concerned that the area’s energy dependency is too great, so an increasing dependency is not likely to be favorably regarded, particularly if this growing dependency is seen to be dependency on a cartel made up of a relatively small number of suppliers.
In a Green Paper on the question of security of energy supply (Anon, 2000) the European Commission reached the conclusion that over the next 20 to 30 years, if there is no significant governmental intervention:
• the European Union will become increasingly dependent on external energy sources;
• the EU has only limited scope to influence external energy supply conditions, so reducing this dependency will necessitate demand side EU intervention to promoting energy saving; and
• the European Union is not presently in a position to respond to the challenge of climate change and to meet its commitments, most notably its commitments under the Kyoto Protocol.
With these conclusions in mind the Commission called for debate on the future strategy structured around a number of questions including:
1. whether the EU can accept an increase in its dependence on external energy sources without compromising its security of supply and (possibly) European competitiveness;
1. whether the time might not have arisen when it would be appropriate to review the various energy tax and state assistance policies of the member states with the view to replacing them with a more consistent and coherent set; and
1. whether stockpiling of oil reserves should be increased and the concept extended to energy sources such as gas and/or coal. (Note EU member countries already keep an oil stockpile equivalent to some 90 days of demand).
When it came to address the issue of renewable energy sources, the Commission simply stated that “development of some renewable energy sources calls for major efforts in terms of Research and Technological Development, investment aid and operational aid” and asked for debate as to whether “co-financing of this aid include a contribution from sectors which received substantial initial development aid and which are now highly profitable (gas, oil, nuclear)?” (Anon, 2000).
The fact that this last question was even posed would suggest that it is highly probable that, at least within the EU, assistance to renewables will (because of their strategic value) continue. This proposition is reinforced by a further set of questions in the Green Paper which ask if “an ambitious program to promote biofuels and other substitute fuels geared to 20 percent of total fuel consumption by 2020 [should] continue to be implemented via national initiatives, or [whether] … co-ordinated decisions [are] required on taxation, distribution and prospects for agricultural production?” (Anon, ibid.).
The Commission is clearly of the view (p 48) that biomass could significantly reinforce sustainable security of supply because it is a widespread and versatile resource that can be used just as easily for heating as for electricity. This is despite the fact that the Commission also acknowledges that there are high production costs associated with this material. In fact the Commission after acknowledging this goes on to state that “it is important to ensure the continuing and growing presence of biofuels and other alternative fuels in the fuel market” (Anon, 2000, p 49).
The Green Paper acknowledges that, as of 1998, biofuel consumption in the EU amounted to only some 0.15 percent of the fuel consumption of mineral oil. The major reason for the lack of penetration by biofuels is price, and in particular price relative to that of fossil fuels. The price differential with fossil fuel… currently varying from 1.5 (biodiesel) to 4 for products before tax. The Commission already has a target that by 2010 the share of renewable energy in the EU energy mix will double. However, an increase of this magnitude can only be achieved (according to the Commission) if:
• Member States should make a firm commitment to achieving the ambitious and realistic objective of the [EU 1997] White Paper for 2010, namely, 7 percent of biofuels and a target of 20 percent for 2020 for all fuel substitutes;
• The gap between the prices of biofuels and competing products [is bridged]…by measures which, initially, could be of a fiscal nature;
• Oil companies…undertake to organize large-scale distribution by way of voluntary agreements rather than Community regulations; [and]
• Research in this [the bioenergy] sector should be intensified, with a view, notably, to explore new solutions linked to the utilization of alternative energy sources, such as hydrogen (which, together with methanol, is the fuel used in fuel cells and which can be produced from several sources of primary energy, including renewable sources). (Anon, 2000, p 49).
It appears that in Europe at least, the ongoing role of incentives, taxes and government funded or directed research in shaping the direction of bioenergy research and in determining the types of fuels that will be produced is secure. For the US this study has revealed there is already considerable financial support for biofuels, from support of the production (growing) of the feedstock material through to funding of research into processes and the provision of regulation and financial incentives, which make commercial production of some fuels, notably fuel ethanol, financially viable. This support for biofuels currently enjoys widespread political acceptance (Kintisch, 2001) and is likely to be maintained, at least for the next 5 to 10 years (Berg, 2000). So, as in Europe, incentives are likely to continue to have a significant impact on the US biofuels industry.
In addition to questions of national energy security and the role of biofuels in helping meet objectives in this area, the last 15 years has seen a rising public and governmental concern about the natural environment and the effects that human induced changes may be having on it. The Framework Convention on Climate Change, which was adopted at the Rio Earth Summit on Environment and Development in 1992, is intended to address some of these concerns by seeking to stabilize the concentration of greenhouse gases in the atmosphere. This is part of an effort to prevent anthropomorphic disturbances of the global climate system and the Kyoto Protocol, adopted at the third Conference of the Parties (COP 3) in 1997, was a major step along the road to establishing legally binding emission reduction commitments for Annex 1 countries.
There may now be some doubt about whether the emission cuts agreed to by the parties of the Kyoto Protocol will in fact ever actually happen. As of January 2001 only 22 of 84 original signatory countries had ratified it. In November 2000 the COP 6 meeting in The Hague failed to reach agreement over sink enhancement and emissions reductions. However, it seems likely that even if Kyoto doesn’t quite work out as originally intended, some form of global limitations to greenhouse gas emissions will eventually be agreed.
Analysis thus far has deliberately ignored possible impact of any such agreement on the economics of biofuels. Using fossil fuels such as oil, coal and natural gas, releases greenhouse gases (mainly as carbon dioxide - CO2) to the earth’s atmosphere. The use of these fuels is seen as contributing to greenhouse problems. Biofuels, on the other hand, are regarded as simply recycling carbon that is already on the earth’s surface and is constantly in exchange between the atmosphere and earth. Because of this biofuels, even if they are chemically identical to fossil fuels, are regarded carbon-neutral, and their use (as a replacement for fossil fuels) as one way of meeting national commitments to reducing greenhouse gas emissions.
This report has deliberately not addressed the question of the possible long-term implications of increasing atmospheric concentrations of greenhouse gases, notably carbon dioxide and methane, as a result of a rising fossil fuel usage. Nor has it addressed the question of the (economic) cost of any climate change projected as arising from the use of fossil fuels at the levels projected by the IEA Scenario. However, if there are costs of climate change (and most would be aware of the IPCC11 and its projections of human induced climate change), it follows that fuels, which do not carry the risks of adding to the problem, should have a positive ‘value’ assigned to them compared to fuels that do. This value should take into account the costs associated with continued use of the (fossil) fuels that do add to global warming. An obvious question that therefore arises is whether increased use of biofuels could be justified simply on the basis of being (at most) cost efficient (in direct cost terms), given that negative environmental externalities may be more than sufficient to tip the balance in favor of bioenergy.
There are certainly a number of authors who think this is the case (e.g. Krause et al, 2000). However, while the importance of taxes and government support in shaping the future of bioenergy is widely acknowledged, it is very difficult to estimate the size of the subsidies warranted to achieve the desired goals. In addition (in relation to woodfuels), such analysis may not necessarily favor the production of biofuels as opposed to other mitigation methods to achieve environmental goals. The EU paper does suggest though “one way which could be explored [to provide this support] is that profitable energies such as oil, gas and nuclear could finance the development of renewable energies, which, unlike traditional energy sources, have not benefited from substantial support” (Anon, 2000).
A way of looking at the EU suggestion is as a proposal for a set of carbon taxes. Over the years a number of studies have attempted to model the economic response to a ‘carbon tax’ on fossil fuels and to put a value on carbon sufficient to ensure compliance with some specified goal as to greenhouse gas emissions. Table 5 provides a summary of the economic value of carbon as estimated by a number of different studies from the 1990s.
Table 5: Alternatives to pricing carbon emission control.
Method of pricing CO2
Unit value $/t Carbon (2001 dollar terms)
(cited in Niskanen et al, 1996)
Cost of damages in global
Frankhauser (1992, cf. Pearce and Brown (1994)
Marginal cost of abatement
0.50 - 4.50
Falk and Mendelson (1993)
Eight various methods
0.50 – 283
Price and Willis (1993), Price (1994)
Marginal cost of limiting C emissions
18.50 - 89.50
Andersson and Williams (1994)
Direct subjective estimation of nine experts
Sedjo et al. (1995)
Adapted from Niskanen et al (1996)
As might be expected, the range of values is quite wide, but it is perhaps worth noting that the bulk of figures in fact fall into the US$20 to US$50/tonne range. High costs are generally associated with rules that limit or forbid carbon trading between nations and instead require each area to comply with a specified target for that area. A series of papers in the Energy Journal (1999) examining the economic costs of the Kyoto Protocol also highlight the impact of different compliance rules. In one of the papers, in this special issue, MacCracken et al., (1999) concludes that for the US by 2010 carbon’s marginal costs could be as low as US$26/tonne or as high as US$250/tonne. The low cost is associated with a global system of emission mitigation and a global trade in emission permits. The high cost – $US250 per tonne – assumes the US is required to meet all its emission limitations entirely through domestic actions.
There is obviously a great deal of uncertainty about what compliance regime will eventually apply, but the impact on fuel costs of a carbon tax being set at particular levels can be estimated. Based on the carbon dioxide emission factors for petroleum products (Baines, 1993, p 35), a carbon tax of US$10/tonne would add a cost of some US6.3 cents to a liter of petroleum-based fuels, US$6.20/tonne of coal (US$0.25/GJ), and some US15 cents to the price of a GJ of natural gas.
Given the price differential between biofuels and fossil fuel can vary from 1.5 (biodiesel) to 4 for products before tax (Anon, 2000), the pre tax cost of gas and coal (Anon, 2000; IEA, 2000) and the fact that producing woody biomass feedstock is typically going to cost at least some US$25 to US$60 per OD tonne, or US$1.30 to US$3.12/GJ, a carbon tax of US$10 per tonne would not in general tip the cost balance from favoring fossil fuels to favoring woodfuels. For a switch from oil based transport fuels to biofuels the carbon tax would need to be at least US$55/tonne and perhaps as much as US$100/tonne.
Some estimations of carbon ‘values’ given in Table 5 are high enough to produce taxes of this order. However, many of the estimates are clearly nothing like as large as that required to make production of some biofuels economically desirable. These figures must raise a doubt as to whether a carbon taxation regime that was simply designed to account for the negative greenhouse externalities of fossil fuels would indeed be sufficient to ensure viability of any/all bio-based fuels. The fuel most at risk of being displaced by such a taxation regime appears to be coal. However, that fuel is already being replaced by natural gas. From the viewpoint of the economic rationalist, carbon taxes could simply accelerate that substitution and do little to develop a biofuels market. On the basis of these figures alone, it is by no means certain that the future will in fact belong to biofuels, let alone wood based biofuels.
This should not be a surprise. Over the years economists have rightly become skeptical of the assertions that a full accounting for externalities would more than justify an (apparently) inefficient use of resources. Too often when such assertions are finally put to the test and externalities are actually identified and quantified, they are revealed as being of insufficient worth to justify the use that it was claimed they would justify. It is also worth remembering that the externalities associated with the use of any resource can be both positive and negative. Although growing and processing forests for energy may well be a way of countering global warming (and justify either positive support for fuels from this source, or taxes on fossil fuels) the worker accident, injury and death rates associated with such forestry may, if conventional forestry is any pointer, be significantly higher than worker accident, injury and death rates in the natural gas or open cast coal mining industries. If there is the possibility of significant negative externalities, a resource analysis of energy forestry will need to consider more than just the climate change impacts of wood energy systems.
Pearce (1995) and Jackson & Löfsedt (1998) provide estimates of the externalities associated with electricity generation. Typically the costs associated with generation from conventional sources are considerably higher than those associated with renewable technologies. Jackson & Löfsedt (ibid.) ascribe this to “reflecting the general advantages which renewables offer in environmental and social terms” but the result could also reflect a lack of data and experience with the renewable energy systems. The material presented by Jackson & Löfsedt suggests that internalizing the externalities of electricity generation would result in something approaching a doubling of the cost of electricity to consumers.
In summary, it is clear that incentives, taxes and government funded/ directed research has to date had a major role in shaping the modern bioenergy direction. It also appears likely that these self-same forces will continue to both shape and determine the role for wood and other biofuels for some time to come.
11 See the website of the Intergovernmental Panel on Climate Change www.ipcc.org