RE: Worldwide Production of BIOFUELS Importance, Benefits and Challenges: a Threat For

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Brussels, 27th July 2007

O/REF: note N-100-2007-EN

RE: Worldwide Production of BIOFUELS – Importance, Benefits and Challenges: A Threat for the Feedstock for Food of the Future?

EXECUTIVE SUMMARY: A high-level international conference addressed the benefits and challenges that the international production of biofuels will bring about and how it can be properly managed at world level. Its relevance for the diversification of energy sources for energy security was highlighted as well as the potential benefits in growth and employment. At the same time they can significantly reduce greenhouse gas emission in transport.

Environmental concerns are high on the agenda and unsustainable, harmful production of biofuels needs to be avoided at all costs. Need to produce biofuels "subject to production being sustainable, second-generation biofuels becoming commercially available and the Fuel Quality Directive being amended accordingly to allow for adequate levels of blending. Second generation biofuels can be made from a wider range of raw materials such as straw, organic wastes and woody material. This will increase the security of supply benefits of the policy, as well as its environmental performance.

Trade with biofuels would increase, ensuring that Europe imports clean, cheap biofuels from third countries. There will not be and cannot be a Community preference.

A staggering problem is the space that the production of feedstock for biofuels will require. If we consider the most common biofuels widely available today, Brazil will need only 3% of its agricultural land to produce 10% of its entire fuel consumption. However, for the same quantity, the United States would need 30% of its agricultural land and the European Union 72%.

Food prices in markets like corn, oilseeds or grain would likely rise by 20 to 50% over the next decade. However, increased demand might also trigger increases in the prices of seemingly unrelated crops and products like peas or sweetcorn.

CONTENT

BACKGROUND 3

PART I: Europe’s energy mix and biofuels 4

PART II: Climate Change and Biofuels 5

PART III: International Dimension, Trade and Biofuls 6

PART IV: Environmental concern and biofuels 7

Part V: Costs of biofuels 7

Part VI: New Technology in Biofuels 8

Part VII: Biofuels and employment 8

ANNEX: Documents and Webstreaming- International Conference on Biofuels 2007 9

BACKGROUND

In the March European Council of this year, the Heads of State and Government of the Member States of the European Union agreed that 10% of its energy production should come from biofuels by 2020. At the same time around the world, efforts are being made to “jump on the wagon” and increase biofuels production.

THE INTERNATIONAL CONFERENCE ON BIOFUELS

An “International Conference on Biofuels” took place in Brussels on 5th and 6th July 2007. The conference included key note statements by the Commission President, José Manuel Barroso, Brazil’s President, Luiz Inacio Lula da Silva, and Portuguese Prime Minister, José Sócrates. Commissioners Piebalgs, Mandelson, Dimas and Michel and ministers from the EU, Africa, South America and Asia also participated, as well as business representatives and academics, representatives of NGOs and other lobby groups including UECBV.

The aim of the conference was to launch discussion on how to develop an international approach to bio-fuels to reap their potential benefits, while ensuring sustainable development, and avoiding the creation of new risks. This note sums up the key statements made by the different speakers in order to present the current state of reflection of key decision-makers in Europe and all over the world. This report also will sum up the main emerging from the different debates with a focus on international trade and impact of feedstock for food.

PART I: Europe’s energy mix and biofuels

Global Energy demand – Europe’s dependency on energy

Global energy demand is increasing - by around 60% by 2030, according to the International Energy Agency. These pressures are felt particularly keenly in the European Union, which is already the largest importer and second largest consumer of energy in the world. We are currently dependent on external sources for 50% of our energy needs. This could rise to 70% by 2030.

The EU’s 98% dependency on oil

Europe’s transport sector is unique in that it is almost wholly dependent on oil (98% of its fuel). Oil is the fossil fuel of which global supplies are lowest, and of which the EU has least. The EU is therefore currently importing more than 80% of its oil needs and this is set to increase. Oil prices remain high, fluctuating around $70 per barrel – more than double the price in 2003. In addition, oil reserves are held by a restricted number of countries, few of which are noted for their stability.

A new energy policy for Europe: The role of biofuels in Europe’s Energy mix

The Action Plan for launching a "new energy policy for Europe" presented in 2007 identifies security of energy supply as one of the key objectives of Europe’s energy policy. For renewable energy in general, the EU now proposes a binding European target of a 20% share in 2020 – three times higher than its contribution today. For biofuels, the EU proposes a 10% share of the transport market in 2020. But this time this target will no longer be indicative – it, too, will be binding. For biofuels, it will mean nearly a sevenfold increase in consumption. This shows that biofuels are an inevitable part of the future energy mix in Europe. They are the only large-scale option available to diversify fuel sources in the transport sector.

The action plan of the EU includes a strong push for second-generation biofuels and for an effective sustainability scheme. The initial ideas are:

·  A set minimum sustainability standards for biofuels;

·  Only biofuels that meet these standards will count towards the 10% target;

·  Only these biofuels will be eligible for tax exemptions; only they will count towards biofuel obligations.

These rules will apply equally to domestically produced biofuels and to imports.

PART II: Climate Change and Biofuels

According to the Intergovernmental Panel on Climate Change, the global temperature rose by 0.7°C in the 20th century. Recent IPCC estimates tell us that, without action on climate change, temperatures could rise by as much as 4.7°C by the end of this century.

China and greenhouse gases

In June 2007, the booming Chinese economy overtook the United States as the largest emitter of greenhouse gasses – which is years earlier than expected. China shows that the demographic and economic growth of the developing world means that there is a double challenge to tackle: expand the global supply of energy for a growing global population with higher standards of living, while reducing global greenhouse gas emissions. This is one of the greatest challenges of our time.

Global dimension on climate change

The example of China shows, that it would be meaningless, for example, to try and reduce greenhouse gas emissions in one country and to have another country do nothing in this regard. Climate change is a global problem, and there will not be any purely national solutions. Every decision we make in tackling climate change will have a global dimension.

The EU transport sector and the Fuels Quality Directive

Greenhouse gas emissions in transport are growing fast. The transport sector is responsible for nearly one third of CO2 emissions in the EU, and those emissions are growing faster than in any other sector. On present trends, transport will account for more than 60% of the EU's increase in carbon dioxide emissions between 2005 and 2020; it is essential for these trends to be reversed.

At EU level, there are just two policies with the capacity to reduce CO2 emissions in the transport sector: vehicle efficiency improvements and biofuels.

The Commission recently proposed the Fuels Quality Directive, a legislation that would require transport fuel suppliers to gradually reduce the life-cycle greenhouse gas emissions of the fuel that enters the EU market. This system would encourage the use of biofuels that have the least impact on the environment (see below).

Doubts of the benefits of Biofuels in reducing carbon dioxide production

EU Environment Commissioner Stavros Dimas points out that biofuels are not necessarily advantageous in terms of carbon dioxide production if the full life-cycle approach from well to wheel production to consumption is considered. Emissions from tractors and from transportation of raw materials and biofuels to and from refineries are taken into the calculations. Moreover, biofuels could cause an increase of the quantity of volatile organic compounds (VOCs), which are very dangerous for human health.

Expanded deforestation is another very serious risk. This will have negative effects on bio-diversity, will increase desertification, will cause people displacement and will enhance the risks of floods. Rain forests are converted into crop fields which have an estimated value of 200 to 500 USD per hectare. This same hectare has a value of approximately 10.000 USD as carbon dioxide storage – far more than the most productive tea or palm plantation if one ton of carbon dioxide is traded at about 20 USD. As a recent World Bank report put it "Farmers are destroying a 10,000 USD asset to create one worth 200 USD".

Diversity of biofuels and consequences

All biofuels are not equal. Different biofuels show big variations in carbon impact across their whole lifespan depending on what they are made of and how they are farmed and transported.

PART III: International Dimension, Trade and Biofuls

The biofuels market is rising rapidly. And, as demand grows, a framework must be established in order to create a global market of sustainable biofuels.

Sustainable production of biofuels in the developing world

Developing countries which have spare agricultural capacity and a genuine comparative advantage in production stand to gain from biofuel expansion. They also have the climate and land profile that suits energy-rich biofuels. “But globally, as in Europe, the development of such a market must be tempered by environmental reality. Europeans won't pay a premium for biofuels if the ethanol in their car is produced unsustainably by systematically burning fields after harvests. Or if it comes at the expense of rainforests. We can't allow the switch to biofuels to become an environmentally unsustainable stampede in the developing world. Again, such a policy would be self-defeating» EU Trade Commissioner Peter Mandelson said.

Global sustainability

Sustainability must be at the core of the development of biofuels internationally. An international certification system would be important for the promotion of sustainable land use and combating deforestation.

Imports of biofuels: No community preference

It is unlikely that our 10% target for biofuels in the EU's energy mix could be met without wider sourcing from imports. According to EU Trade Commissioner Peter Mandelson: “We should certainly not contemplate favouring EU production of biofuels with a weak carbon performance if we can import cheaper, cleaner, biofuels”.

PART IV: Environmental concern and biofuels

Biofuels have an important role to play not only in addressing climate change, but also in achieving a sustainable and secure energy supply. However, according to EU Environment Commissioner Stavros Dimas, it takes a lot of energy both to grow corn and to convert it into biofuels. Cultivating a crop also demands large quantities of fertilisers and pesticides, which have in themselves environmental and energy costs. EU Trade Commissioner Peter Mandelson considers that the fundamental benchmark in biofuel policy must be an environmental one. According to him, the EU should always aim for the greenest biofuels whether produced within the EU or imported. He argued: "Biofuel policy is not ultimately an industrial policy or an agricultural policy - it is an environmental policy, driven above all by the greenest outcomes. Most biofuels deliver solid greenhouse gas savings – but there exist inefficient production techniques that do not. The use of these production techniques must be avoided”. EU Energy Commissioner Andris Piebalgs said that “Most biofuels will be produced on land that has been cultivated for generations. But some will come from land that is newly brought into cultivation. Here, there is a risk of causing big greenhouse gas losses through the release of carbon stored in the soil and in plants. There is also a risk of disturbing biodiversity and disrupting natural habitats. These risks, too, need to be avoided».

Water

Biofuel productions might put substantial pressure on water supplies, thus risking negative effects on already scarce resources in many developing and developed countries. Concentration on the cultivation of one crop only could cause serious impoverishment of the soil and therefore increase the risks of desertification.

Sustainability and second generation bio-fuels

EU Environment Commissioner Stavros Dimas points out to the need to produce biofuels "subject to production being sustainable, second-generation biofuels becoming commercially available and the Fuel Quality Directive being amended accordingly to allow for adequate levels of blending". The use of environmentally, socially and economically harmful biofuels must be discouraged. According to EU Energy Commissioner Andris Piebalgs, “We must aim at the earliest possible entry into the market of second-generation" biofuels. These can be made from a wider range of raw materials such as straw, organic wastes and woody material. This will increase the security of supply benefits of the policy, as well as its environmental performance”.

Part V: Costs of biofuels

Costs of Biofuels

According to EU Environment Commissioner Stavros Dimas, biofuels are also very expensive. With the price of oil at 56 dollars, the production of a litre of petrol has a price of an average of 30 euro cents. In order to produce a litre of ethanol with the same energy power 37 cents are needed in Brazil, 45 in the United States and 75 in Europe. It is therefore clear that biofuels produced in this way could be economically viable and sustainable only if subsidies are provided.

Fuel vs. Food: A major issue in developing countries

Moreover, the cultivation of food related feedstock, for biofuels takes over land that is currently used for food production. President Bush announced a US push for greater biofuel production on a Tuesday in January 2007. The following Monday there were riots in Mexico City over the subsequent rise in the price of corn flour for tortillas, the main source of calories for 50 million Mexicans that live in poverty. The same problem will have to be confronted by other developing countries already facing hunger.