Biofuels and Development: the Third Dividend

The search for viable alternative fuel sources has intensified across the globe. Both policymakers and consumers are increasingly concerned with high crude oil prices, the environmental impacts of fossil fuels, and geopolitical issues. Biofuels may provide part of the solution.

“Energy security” is a principal factor behind the pursuit for alternative fuel. Past oil price hikes are generally related to geopolitical events in oil-producing countries. Any accidental or intentional price shock or supply disruption can bring drastic consequences in the world’s leading economies, most of which are highly dependent on oil imports. For these reasons, switching, or at least diversifying, to energy sources beyond oil is a central priority for many governments.

The term “energy security” can be interpreted in a few different ways. One such definition corresponds to “self-sufficiency.” However, a closed, energy self-sufficient economy may impede security in modern integrated economies, as it stifles some of the basic functions of a market economy. With autarky, domestic and global markets would not be able to take advantage of price fluctuations to discourage waste or act as a shock-absorber. Research and development of alternative applied technologies would also be more constrained by national borders.

The conflict between “self-sufficiency” and “energy security” is best illustrated with the case of corn-based ethanol in the United States. The bulk of the increased demand for ethanol in the United States has been satisfied through domestic production. But increases in both planted area and yields have not fulfilled the huge additional demand, and, as a result, corn prices have risen from $2.30 a bushel in September to a record high of $3.85 in December 2006. One can only speculate about the likely prices for corn and ethanol, as well as the crowding-out effects on other domestic agricultural outputs, if ethanol production expanded solely based on local production. In this case, autarky runs contrary to both energy security and food security. Globally, the trade-off between energy and food security is less likely to be a concern given the acres of idle land in the developing world.

Local (urban pollution) and global (carbon dioxide emissions) environmental concerns surrounding fossil fuel consumption have also generated interest in biofuels. A fierce controversy exists regarding the efficiency of biofuels in mitigating carbon emissions, reducing environmental impacts, and diverting already precious resources. The debate tracks back to the use of different methodologies as well as frequent biases in crop samples.

Questioning certain biofuels, some argue that ethanol production is actually a less efficient use of existing energy. In fact, total energy consumption for producing cereal-based ethanol has been cited as being more than twice that used to make petroleum gasoline. Most of the arguments questioning ethanol originate in the United States, where ethanol is largely produced from corn and grains in a temperate climate. Intensive agricultural practices used in the U.S. corn belt require heavy energy inputs such as fertilizers, herbicides, irrigation, and coal power generation, not to mention transportation costs.

Sugarcane-based ethanol—the type used in Brazil—has at least two advantages over alternative feedstock materials. First, sugar carbohydrates are already in a fermentable form, unlike those in starches and cellulosic materials, making the preliminary saccharification or hydrolysis step unnecessary. In the case of starches and cellulosic materials, additional steps imply higher capital needs and operating costs, tipping the net energy balance against non-sugar-bearing crops. Second, residues of sugar-bearing feedstock are often sufficient to meet on-site heat and power requirements. In fact, some Brazilian ethanol producers are net suppliers to the electricity grid. Under a scenario with full cross-border integration of agro-energy national markets, the use of sugarcane and other new, tropical biodiesel crops for transportation is a promising step for partially reducing the environmental damage associated with fossil fuels.

Biofuels may also be a catalyst for development in low-income countries. For example, biofuels-led, export-oriented agroindustrial development could promote backward and forward linkages—a welcome alternative from the current over-reliance on mineral and fossil fuel exports in Sub-Saharan Africa.

The benefits of biofuels-led development would extend beyond alleviating foreign-exchange constraints and advancing backward-forward linkages. The local consumption of fossil fuels would also be phased-out. In many countries, rising crude oil prices have more than cancelled out the theoretical benefits of the recent Multilateral Debt Relief Initiative. Sub-Saharan Africa is projected to save roughly $1 billion per year from the most recent debt forgiveness, but according to WorldWatch Institute, the International Energy Agency calculates that higher oil prices have cost the region an additional $10.5 billion per year in oil imports. Substituting oil imports with locally produced biofuels, as long as it does not result in inefficiencies, would bring an additional domestic economic gain.

Brazil’s development of ethanol is a successful story in South-South cross-fertilization, from the sugarcane plant to ethanol making and end-users. Similar processes for transferring and creatively adapting technology in other developing countries are also possible. For the global community, biofuels may offer a triple dividend: higher energy security, cleaner and lower-carbon environment, and more economic development.

Otaviano Canuto is the executive director for Brazil, Colombia, Dominican Republic, Ecuador, Haiti, Panama, Philippines, Suriname, and Trinidad & Tobago at the World Bank. The opinions hereby expressed are entirely those of the author and should not be attributed in any manner to the World Bank, or to its Board of Executive Directors or the countries he represents.