April 2011

Biofuels in the global south: Opportunity or disaster?

Matthew Dornan, Australian National University

James Smith Biofuels and the Globalization of Risk: The Biggest Change in North-South Relationships Since Colonialism?, London, Zed Books, 2010 (170 pp). ISBN 9-78184813-572-7 (paperback) RRP $46.95.

The spike in world food prices in 2006–08 significantly affected world opinion on biofuels (that is, fuels made from biological material, such as plant matter). A broad array of actors, ranging from heads of government to NGOs, blamed high food prices primarily on the diversion of agricultural output to fuel production. Jean Ziegler, the former UN Special Rapporteur on food, famously called the use of agricultural output for fuel rather than food ‘a crime against humanity’, and called for a five year moratorium on biofuel production (Ferrett 2007). It is now widely accepted that biofuels did play a role in increased food prices, although there is disagreement about how much.

Biofuels had been criticised before, particularly on environmental grounds, and criticism has increased along with growth in the production of biofuels—which is, in part, attributable to the high oil price of recent years. Land clearing to grow crops for fuel production has been one area of concern. This causes both loss of ecosystems and contributes to climate change, with the destruction of forests releasing greenhouse gases (GHG) stored in plants into the atmosphere. It can take many years for biofuel production to repay this ‘carbon debt’ (Fargione et al. 2008). This issue is especially topical in Indonesia, where expansion of agriculture into peatlands also involves significant GHG emissions from peatland soil, which has a carbon content of approximately 60 per cent.

A related criticism of substituting biofuels for oil as an energy source is the limited GHG emission reductions that are often achieved. These limits are the result of the energy (usually oil) used to produce biofuels in the first place, which vary depending on the crop used for biofuel. Ethanol production from corn in the United States is considered to be particularly egregious in this regard, with various studies finding only minimal (about 3 per cent) or, in some cases, no GHG emission reductions from substituting US corn-based ethanol for oil. Oxfam has labelled this ‘another inconvenient truth’, due to continued US government promotion of corn-based ethanol production (Oxfam 2008). Sugar-based ethanol production in Brazil is regarded as better from an environmental standpoint (OECD 2008).

The limited potential for present-day biofuels to act as a true substitute for oil is also increasingly acknowledged. Lester Brown, founder of the Worldwatch Institute, estimates that if all US grain crops were converted to corn for biofuel production, only 16 per cent of the fuel needs of the US transport sector would be met (Brown 2007). Because using all agricultural crops for fuel rather than food production is impossible, there is limited scope for substituting biofuels for oil as an energy source. Biofuel production using current technologies is therefore clearly not the ‘silver bullet’ that will alleviate oil dependence, with all of its climate change and energy security implications.

Biofuels did play a role in increased
food prices.

James Smith takes up many of these arguments in Biofuels and the Globalization of Risk: The Biggest Change in North-South Relationships Since Colonialism? Smith is a strong opponent of biofuels, arguing that they represent a false promise as far as environmental benefits are concerned and pose significant risks to the global poor. His arguments against biofuels are not new. It is widely acknowledged that biofuels have increased food prices (Baffes & Haniotis 2010; Mitchell 2008), although as Smith points out, the extent to which they have done so remains controversial. The mixed environmental impacts of biofuels are also understood among a wide audience, as are the limits to biofuel production using current technologies. Where Biofuels and the Globalization of Risk is more interesting is in its analysis of why support for biofuels had been so strong despite a lack of demonstrable benefits, and what increasing production of biofuels in the Global South means for North-South relations and the poor in developing countries.

Smith attributes support for biofuels to ‘their scope and ability to appeal to so many interest groups’ (p. 92). This is a valid point. A range of actors have supported biofuels for completely different reasons: states have sought to improve energy security; the private sector has sought to generate profits (often as a result of subsidies); farmers in developed countries have sought to increase demand for existing crops while those in developing countries have sought to generate income from new markets; the development sector has seen their potential for economic development in rural areas in poor countries; environmentalists have sought to reduce GHG emissions; car manufacturer have sought to maintain demand for cars in the context of addressing climate change. The list of supporters and their motivations is long. It is this ‘sum of interests, rationalities and economic imperatives’ that explains support for biofuels to date, despite the limitations and criticisms of biofuels described above (p. 122).

Biofuels and the Globalization of Risk goes on to look at what biofuels mean for North-South relationships. Smith’s central argument is that the increasing tendency for developed countries to import biofuels produced in developing countries involves the transfer of risk from the Global North to the Global South, and especially to the poor within the South. The North uses biofuels imported from the South to address the risk of global warming and energy insecurity (unsuccessfully, Smith would argue). In doing so, the Global South is exposed to new risks, including environmental risks associated with biofuel production (for example, forest clearing); food price risks; and new market risks, such as the possibility that first generation biofuel technologies will be superseded by next generation biofuels that do not require agricultural output from developing countries.

Many of Smith’s arguments are valid, and he uses several examples to highlight how risks are being transferred to the poor in the Global South. Some of his arguments are, however, exaggerated. Smith’s claim that the exportation of biofuels represents the biggest change in North-South relationships since colonialism is an overstatement. In 2009, biofuels provided just 3 per cent of the world’s road transportation fuel (and approximately 1.32 per cent of total demand for oil) (International Energy Agency 2010). Biofuel exports from developing countries are miniscule when compared to exports of other agricultural products or fossil fuels. The impact of biofuels on food prices, arguably the most significant negative impact that biofuel production has had on the world’s poor, is also uncertain. As Smith notes, the current ‘best guess’ is that biofuels were responsible for between 3–75 per cent of the increase in food prices leading up to the 2008 price spike. The 75 per cent figure is attributed to the World Bank’s Mitchell report, published in 2008. That figure, which was substantially higher than most other estimates at the time, has since been discredited by another World Bank report (Baffes & Haniotis 2010).

A range of actors have supported biofuels for completely different reasons.

The increase in food prices relative to general prices in the last two decades is also the result of other factors. One is the rising incomes of people in developing countries, such as China, where increased consumption of animal products diverts land away from cereal production (with more land required for meat production than cereal production to feed the same number of people) (von Braun 2007; Alston et al. 2009; Pardey & Alston 2010; Runge et al. 2003). Another is financial speculation in food commodities which a World Bank report has recently argued was primarily responsible for the 2008 price spike (Baffes & Haniotis 2010). Finally, slowing increases in productivity mean that agricultural output is expanding more slowly than in previous decades (Alston et al. 2009; Pardey & Alston 2010).

It is also worth placing the latest food price spikes in perspective. Although prices rose significantly in 2008 and are now rising again with recovery from the global financial crisis, in real terms the prices of all major cereals are lower than in the 1970s. Indeed, the story of global food prices has been one of long-term decline over many decades. Between 1975–76 and 2000–01, world food prices declined by 53 per cent in real US dollar terms (Baffes & Haniotis 2010). As a result, the prices of all major cereals (rice, maize, wheat and soybeans) when adjusted for inflation are now less than 40 per cent of their value in 1924, although there has been substantial short-term year to year volatility within these trends (see Alston et al. 2009 for a detailed analysis). Substantial declines in price occurred during the 1970s and 1980s, when technological innovations associated with the Green Revolution were transferred around the world.

The societal impact of technology is another theme of Biofuels and the Globalization of Risk. Smith argues that blind faith in the inevitability of technological progress is being used as an excuse to continue ‘overconsumption’ in the developed world. From this perspective, next generation biofuels currently under development are simply a means by which people in the Global North can continue driving to work in a carbon-constrained world. Although a gross simplification, this argument does point to an important fact about responses to climate change. To date, responses to climate change have been overly focused on technological solutions such as renewable energy technologies, while often ignoring simple (and cheaper) lifestyle changes that could address the same concerns. Energy efficiency is the most obvious example. In many cases, energy efficiency measures have a ‘negative cost’, meaning they are financially beneficial (think savings on heating achieved by installing insulation). Similarly, Smith points out that the Global North could achieve a 30 per cent reduction in oil consumption through implementing a range of energy efficiency measures on automobiles (such as improved minimum pollution and fuel efficiency standards). This measure would far surpass the emission reductions that could be achieved using present-day biofuel technologies.

There is a sense that Smith is at best ambivalent and at worst sceptical towards technological progress when making these good points. This includes technological progress that has demonstrated real benefits to society. He is dismissive, for example, of the Green Revolution, describing it in the following way: ‘The Green Revolution … spoke to a belief that technological progress could usurp the power of agro-ecologies and of markets. Experience shows that while aggregate yields were raised, local consumption often was not’ (p. 59). Smith’s argument here centres on inequality and an assumption that research in the Global North is of little benefit to the poor in the Global South. It is true that low prices resulting from the Green Revolution had an adverse impact on agricultural producers in developing countries. Poor farmers were also less able to reap the benefits of technology from the Green Revolution due to lack of access to capital and (often) land. Adverse environmental impacts were often also significant. However, there were very significant benefits at the same time, which Smith fails to acknowledge adequately. One such benefit was that the supply of food grew at a faster rate than did demand for food. As a result, the Malthusian predictions of mass starvation made by Paul Ehrlich and others in the late 1960s did not occur, despite strong population growth and rising per capita incomes (and food consumption). In 2002, agricultural output in the United States was 5.3 times its output in 1910, while inputs (including land) were just 1.4 times their 1910 level (Pardey & Alston 2010). This is an impressive achievement mirrored in other countries and should not be disregarded. The price of food has fallen significantly as a result, avoiding hunger among many of the world’s poor.

Malthusian predictions of mass starvation made in the late 1960s did not occur.

For similar reasons, present-day agricultural research should not simply be labelled as ‘big business’ and assumed to be of no benefit to the poor, an argument which Smith seems to make when describing the billions of dollars spent each year on agricultural research. There is no question that agricultural research is big business, with about 59 per cent of agricultural research being privately funded. It is also enormously beneficial research with large public good benefits (or benefits that can be appropriated by the general public in the long-term) (Pardey & Alston 2010). This is clearly demonstrated by the rapid growth in agricultural yields per hectare achieved in both the North and South over the last 50 years, as well as by the fall in the percentage of people in the developing world that are undernourished (from 33 per cent in 1969–71 to an estimated 16 per cent in 2010) (Food and Agriculture Organization 2010).

Smith is similarly too eager to criticise next generation biofuels (often called second and third generation biofuels). Next generation biofuels, unlike present day biofuels, do not compete with food crops and instead rely on the use of waste (for second generation biofuels) or technologies currently under development, such as production of biofuels from algae (for third generation biofuels). Smith argues that next generation biofuels are: a) not proven (which is especially true for third generation biofuels); and b) represent a risk to the poor as they may make the purchase of first generation biofuels from developing countries redundant. Neither of these arguments justifies outright rejection of second and third generation biofuels, which seems to be Smith’s position. The first criticism suggests that societies should be wary about depending or relying on the development of next generation biofuels, as how they develop in the future remains to be seen. It seems clear, nevertheless, that further research into next generation biofuels should continue, given the impending decline of oil production and the scarcity of other technological alternatives. The second criticism on the risk borne by producers suggests first generation biofuels should be treated with caution; there are risks and these need to be factored into the investment and policy decisions of developing countries (there is a good discussion by Smith on the difficulties in actually achieving this in states with low capacity).

Smith also too readily dismisses the other side of the coin when discussing the transfer of risk to developing countries; namely, the opportunities that biofuels present for certain groups in the Global South. These opportunities are based on the production of biofuels using crops found in tropical climates, including sugar, cassava and jatropha, which have a ‘comparative advantage’ over crops grown in the North due to their high energy content. This higher energy content means that it is cheaper, all things being equal, to produce biofuel from sugar or jatropha in the Global South than from corn or rapeseed in the United States and Europe. Biofuel consumption in developed countries therefore offers rural farmers in developing countries an economic opportunity—albeit one that suffers as a result of subsidies for biofuels in the Global North.

Smith dismisses these opportunities, subsidies aside, on the grounds that the rural poor are: a) unlikely to have the capital to move into production of biofuels; b) often do not own their land and may subsequently lose access to land if landowners move into biofuel production; and c) are normally net purchasers of food, meaning they will suffer from higher food prices as a result of biofuel production. Central to such arguments are the ideas that rural development increases inequality and that export-oriented agriculture exposes rural populations to price volatility. However, these problems are not confined to biofuel production. The same problems beset any economic development in rural areas that involves movement from subsistence agriculture to commercial agricultural production.

Smith’s critique of biofuels offers little in the way of answers.

It is worth noting here that the link between economic growth and increased inequality (formalised by the Kuznets curve), which Smith implicitly accepts, is not supported by the statistical evidence. Indeed, there is a growing consensus that the impact on inequality of economic growth is ambiguous; inequality has fallen about as much as it has risen as a result of economic growth (both in countries and in urban or rural regions) (Ferreira and Ravallion 2008; Ravallion 2009). The claim that smallholder rural farmers are unlikely to produce biofuels is also not completely accurate. In Indonesia for example, smallholders are heavily involved in palm oil production for commercial income. Fuglie (2010) describes how smallholder farmers have diversified crop production away from rice and into a range of agricultural products. This has occurred as a result of farmers achieving food security in recent decades (in part as a result of the incorporation of Green Revolution technologies and techniques into farming). Fuglie (2010) also notes that, in Indonesia, wealthy landowners have been the first to produce new crops, but have been followed shortly afterwards by smallholders. This is producing substantial economic benefits for rural populations in Indonesia, both rich and poor, albeit with significant negative environmental impacts.

The alternative that biofuels present to developing countries in a context of diminishing oil supplies is another issue Smith does not discuss in Biofuels and the Globalization of Risk. He touches upon some of these benefits at a local level, but not at a national level. There are potentially significant energy security benefits to be had by developing countries in consuming biofuels domestically, as this results in reduced exposure to oil price volatility. This will become more important in the coming years, with the International Energy Agency (2010) forecasting high oil prices and increasing oil price volatility in future decades as peak oil is reached. Admittedly, there are some challenges in the promotion of biofuel consumption. Food security is potentially one problem. Another is oil price volatility, which periodically makes biofuels more expensive than fossil fuels—a point Smith makes. These problems can however be overcome, as shown by Brazil’s successful establishment over several decades of sugar-based ethanol production (and consumption). The challenges presented by biofuel production highlight the importance of ensuring that government support for biofuels is well thought through. The existence of challenges should not mean that biofuel production is not considered at all.

James Smith’s Biofuels and the Globalization of Risk provides a good introduction to the negative environmental impacts of biofuels and the risks they pose in the Global South. It does not adequately consider the opportunities that biofuels present for certain groups in the Global South or offer credible alternatives to address climate change. Smith’s critique of biofuels offers plenty of criticism but little in the way of answers. First generation biofuels are clearly not a complete solution to climate change. The environmental impacts of first generation biofuels are often more deleterious than beneficial, and they have limited potential to minimise gross global fossil fuel consumption. Smith makes these arguments convincingly. Where he is less convincing is in his dismissal of the opportunities that biofuels present for rural populations in developing countries. These opportunities are real, although the corresponding risks they entail do need to be managed carefully to protect vulnerable populations and environments. Smith is also mistaken to equate first generation biofuels with next generation biofuels. Next generation biofuels potentially (although not certainly) offer an important means of addressing climate change in the future. Further scientific research on biofuel development should therefore be welcomed, as should corresponding research on the environmental, economic and social impacts of these new technologies.

REFERENCES

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Matthew Dornan is a PhD Candidate at the Australian National University. His research focuses on the economics and institutional arrangements for renewable energy in small island developing states in the South Pacific.