Biofuels' high production costs, combined with their allegedly greener properties in comparison to conventional fossil fuels, mean governments have tended to encourage producers to enter the market through the use of incentives, such as tax exemptions and subsidies.
With no internationally-agreed or even EU-wide criteria governing biofuel support regimes, countries have each set up their own schemes, creating a non-uniform market that hinders trade both worldwide and within the bloc.
What's more, incentives are often geared towards the promotion of domestic agricultural feedstocks and interests, rather than the promotion of biofuels with economic, energy-related or environmental advantages.
In France, for example, tax exemptions are available only for biofuels that are both produced and sold on the French market. Producers from other EU countries are thus excluded, leaving them at a competitive disadvantage.
The high tariffs that both the EU and the US have placed on ethanol, as well as certain tariff escalation schemes to encourage developing countries to export unprocessed feedstock rather than fully-converted biofuels, are another example of these protectionist tendencies.
Lack of global classification (WTO)
The lack of a clear classification for biofuels within the multilateral trading system is another key factor restricting global trade. Import standards vary from country to country and it is not even known whether agrofuels should be considered as an agricultural or industrial good.
Trade classification has important implications for countries' tariff reduction commitments as well as the national support schemes they can apply.
Thus far, fuels made from crops, such as ethanol, are classified as agricultural goods in the World Customs Organisation's Harmonised Coding System for commodities (known as 'HS'). This enables farmers to benefit from relatively high tariff protection for them. Biodiesel, on the other hand, is considered to be an industrial product.
At the same time, Brazil was pushing hard, under the now-stalled 'Doha Round' of multilateral trade negotiations, to get biofuels classified as an environmental good. This would have qualified it for an accelerated phase-out of tariffs. On the other hand, a joint EU-US proposal to fully eliminate tariffs on a list of 43 products identified as "environmentally friendly" by the World Bank, including solar panels and wind turbines, does not include biofuels (EurActiv 10/12/07).
One argument put forward by the EU and the US is that in the context of constantly changing technology, they must take into account the question of "relativity" of green products – the so-called "clean vs. cleaner" debate. What may seem environmentally-friendly now may not be perceived the same way in five years' time.
The concern is that if tariffs are fully eliminated on relatively green products such as ethanol, cleaner technologies that become available in the future, such as second-generation biofuels made from non-food, woody crops, will lose the possibility of enjoying additional trade advantages.
But Brazil and other bioethanol exporting developing nations, including Pakistan and Egypt, say the EU and US are merely being protectionist and attempting to put their own producers at an advantage.
The debate is linked to another key question that will need tackling: Whether different types of biofuels should be considered as "like products" or not, seeing as they present different benefits and flaws in terms of greenhouse gas reductions, energy efficiency and sustainability.
According to the principles of 'non-discrimination' and 'Most Favoured Nation' (MFN), WTO law demands that its members apply the same tariff rates to all imports of products that are close substitutes, regardless of their country of origin. This applies both to external tariffs and internal taxation policies. Countries that do not respect these principles are liable to legal action in the WTO.
Sustainability criteria: 'Green imperialism'?
The proliferation of different technical, environmental and social sustainability standards for biofuels production – without a system for mutual recognition – causes even more difficulties.
Purely technical specifications in the EU already illustrate how standards can operate as barriers. For example, by fixing maximum levels of iodine for vegetable oils used in biodiesel, based on the argument that these are more suitable for the cooler European climate, the EU is placing a de facto ban on biodiesel produced from palm and soya oils and largely favouring its main biofuel crop: rapeseed.
The introduction of additional environmental and social standards has the potential to create even bigger barriers if they are not developed globally, with the participation of both industrialised and developing countries.
But it will be difficult to reach an international consensus. Many developing nations view attempts to introduce sustainability criteria as a form of "green imperialism". Stakeholder interests are extremely diverse, ranging from purely commercial aims to rainforest protection, banning the use of genetically modified crops or preventing child labour. A compromise could thus in fact result in overly detailed rules which lead to compliance difficulties, or to standards so general that they become meaningless.
In August 2008, the 'Roundtable on Sustainable Biofuels' - an international initiative bringing together farmers, companies, NGOs, experts, governments and inter-governmental agencies - nevertheless presented its 'version zero sustainability standards' - the first attempt at reaching an international standard for biofuel production. The proposed standards include the respect of international treaties on labour conditions and human rights, the need for "significant" lifecycle greenhouse gas emission reductions compared to fossil fuels, the respect of local communities and land rights, the need to guarantee food security, and the minimisation of soil degradation, water depletion, air pollution and biodiversity loss.
Following a seven-month stakeholder feedback, a draft for a revised and more detailed 'version one' of the standards is now being discussed within the organisation. But the roundtable has no plans to establish a stringent certification system at this time due to implementation costs and the difficulty of proving the source of blended biofuels.
In the meantime, the EU has been seeking to establish its own criteria amid strong internal divisions. On the one hand, the Commission proposed, in its draft Renewables Directive of 23 January 2008, a ban on biofuels planted in protected areas, forests, wetlands and "highly biodiverse" grasslands as well as an obligation for biofuels to deliver life-cycle CO2 savings of at least 35% compared to fossil fuels.
But MEPs insisted on tougher conditions. In September 2008, the Parliament's industry and energy (ITRE) committee backed a report demanding that biofuels offer at least 45% carbon emission savings compared to fossil fuels – a figure that would rise to 60% in 2015. They also insisted on additional social and environmental criteria to protect natural resources, guarantee the respect of human rights and adequate working conditions in biofuel plants, and to take account of CO2 released during feedstock cultivation and land-use changes.
In an attempt to garner a compromise between the 27 member states on the issue, a special ad hoc working group was set up at the end of February 2008, with the aim of drafting "core criteria" for biofuels (EurActiv 01/04/08). After months of infighting, EU ambassadors appeared to have reached a consensus, centering on a two-phased approach, initially requiring a 35% CO2 saving, which would then be scaled up to "at least 50%" in 2017 (EurActiv 01/09/08).
The approach was confirmed in December 2008 when EU leaders adopted the final text for the new Renewables Directive (EurActiv 05/12/08). It stipulates that biofuels and bioliquids taken into account in the 10% target must not be produced from raw materials from land with "high biodiversity value", land that has a high carbon stock, or peatlands.
The final life-cycle CO2 reduction requirement decided by the EU is crucial to the biofuel industry. Indeed, typically, biodiesel made from European-grown rapeseed results in a greenhouse gas saving of 44% while the typical figure for ethanol made from EU sugar beet is 48%. According to EU figures, palm oil biodiesel produced in countries like Malaysia and Indonesia typically offers much lower savings, ranging from 32-38%.
It nevertheless remains unclear whether the EU's sustainability criteria will be allowed by the World Trade Organisation, which is generally opposed to attempts to develop mandatory certification systems. Even voluntary schemes are only allowed under conditions of free competition and provided that no measures are taken to inhibit trade in non-certified goods. What's more, while certain environmental standards may be deemed acceptable, social issues, labour standards or human rights criteria are inadmissible under WTO rules.
Potential for trade spats
If WTO members fail to address these issues proactively, it is likely they will be addressed in a piecemeal fashion through litigation. Signals that the next WTO trade dispute could be about biofuels are already emerging.
In June 2008, the Commission launched an investigation into US biodiesel imports after its biodiesel producers filed a complaint regarding hefty subsidies and dumping of the product on the EU market at unfairly low prices (EurActiv 17/10/07). As a result, the EU imposed in March 2009 provisional duties on biodiesel imported from the US, which were extended to five years in July.
And Brazil has already hinted that it would be ready to challenge the legitimacy of any excessive sustainability criteria imposed by the EU on its trading partners at the WTO, and indeed insists that Brazilian biofuels respect environmental, social, and labour-related criteria.