Biofuel, Biokraftstoff, Biocarburants: Bad News in Any Language

This is Part 1 of a three part series comparing biofuel mandates in the United States and the European Union. Part 2 will be published tomorrow. 

Biofuel mandates are harmful for a whole host of reasons, not the least of which is that they raise food prices. In the U.S., for instance, the Renewable Fuel Standard (RFS) makes corn, America’s most abundant crop, more expensive by requiring refiners to blend increasing amounts of corn-based ethanol (and other biofuels) into gasoline.

The European Union also mandates rising biofuel volumes in gasoline. Unsurprisingly, they also have higher food prices as a result. Indeed, a new study by the European Commission Joint Research Centre (JRC) finds that EU biofuel policies make vegetable oils nearly 50 percent more expensive in Europe and 15 percent higher worldwide.

U.S. and EU biofuel policies are similar and provide for useful comparisons. Unfortunately, America and Europe have both experienced the negative effects of energy central planning, including higher food prices, increasingly unattainable mandates, and the unintended consequence of fuels that produce more pollution, not less. Part 1 of this three part series examines higher food prices in the U.S. and EU as a result of biofuel mandates.

Biofuel Subsidies Raise Food Prices

America and Europe offer similar subsidies for biofuels. For example, both subsidize biofuel production in the form of regulatory mandates. Enacted in 2008, the Renewable Energy Directive (RED) requires 20 percent of the EU’s energy use and 10 percent of the EU’s transportation fuels to come from renewable energy sources by 2020. Similarly, the U.S. RFS requires oil refiners to blend 36 billion gallons of biofuel into gasoline by 2022. EU’s RED, like America’s RFS, gives biofuel producers guaranteed market share in the form of repeat customers.

RED compels fuel suppliers and refiners to purchase biofuels regardless of whether it makes economic sense. This distorts the EU’s economy in particular and the global economy in general, resulting in higher food prices and diminished well-being. EU’s Joint Research Committee (JRC) explains that global vegetable oil prices are “strongly driven” by their use as food. When more vegetable oils are used for fuel, less are available for food. The result, JRC finds, is 48 percent higher prices for vegetable oils in the EU and 15 percent higher prices globally.

The spread between EU and global prices illustrates how government mandates distort markets. As JRC explains, RED hits EU food prices especially hard because while the EU uses more than half of its vegetable oils for biofuels, the rest of the world uses just 17 percent of vegetable oils for biofuel production. The more feedstock (such as vegetable oil) we divert from food to fuel through inefficient government mandates, the more expensive that feedstock becomes. In other words, the bigger the mandate, the more it hurts.

The EU biofuel mandate should serve as a cautionary tale for the U.S. Passed by Congress in 2005 and expanded in 2007, the RFS requires blending greater and greater amounts of biofuel into gasoline, most of which is corn-based ethanol. Corn is the most abundant crop in America, but about 40 percent of the U.S. corn crop is now used to make ethanol. Not surprisingly, burning large amounts of your country’s largest crop to produce fuel makes food more expensive.

For instance, as IER explained recently, corn prices averaged less than $2.50 a bushel before the RFS became law. In 2008, due largely to government-engineered demand for ethanol, corn prices surged to about $7 a bushel. While the recession lowered these prices, they rebounded furiously to over $8 a bushel in 2012. Even with a record crop driving down corn prices this year, corn costs about $4.25 a bushel, which is still 70 percent higher than before Congress passed the RFS.

The RFS has a disastrous effect on sectors of the economy that depend on affordable corn. Feedlot owners, who use corn to fatten animals for slaughter, are being squeezed by rising feed costs. As the following chart from The Wall Street Journal shows, about 2,000 of the nation’s 77,120 feedlots shuttered operations in 2012, up 20 percent over the previous year. Over the last decade, the number of feedlot owners has fallen by 20 percent, with the biggest impact on small operators with fewer than 1,000 cattle. U.S. feedlots have lost money for a record 27 straight months, as the cost for feedlots to fatten their animals has soared from less than $80 per 100 pounds of weight added in 2010 to nearly $120 in June, 2013, an increase of about 50 percent.

Source: The Wall Street Journal

Any way you slice it, government biofuel mandates increase food costs. In Europe, where much of the biofuel supply is produced with vegetable oils, the price of vegetable oils is twice as expensive as it would be without the mandate. In America, where corn-based ethanol rules the roost, rising corn prices are devastating feedlots that rely on affordable corn.

Conclusion

Europeans are finally reversing course. The European Parliament voted recently to slash the biofuel mandate by 40 percent amid concerns about rising food prices and environmental damages. With Europe finally awakening to the deleterious effects of government biofuel mandates, how long will it take us?

IER Policy Associate Alex Fitzsimmons authored this post.