Biofuel Expansion: Challenges, Risks and Opportunities for Rural Poor People

1. Biofuel Expansion: Challenges, Risks and Opportunities for Rural Poor People How the poor can benefit from this emerging opportunity Paper prepared for the Round Table…

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  • 1. Biofuel Expansion: Challenges, Risks and Opportunities for Rural Poor People How the poor can benefit from this emerging opportunity Paper prepared for the Round Table organized during the Thirty-first session of IFAD's Governing Council, 14 February 2008 Prepared by: Vineet Raswant, Nancy Hart and Monica Romano The opinions expressed in this paper are those of the authors and do not necessarily reflect official views or policies of the International Fund for Agricultural Development, except as explicitly stated.
  • 2. Biofuel Expansion: Challenges, Risks and Opportunities for Rural Poor People Food versus fuel: Can the agriculture sector meet biofuel demand without compromising food security? Farmers might benefit from high commodity prices but what about net purchasers of food? Climate change and environment: How effective are biofuels in mitigating climate change? Are we using the right yardstick to determine the amount of energy required to produce biofuels in developing countries where farmers are less likely to use nitrogen fertilizers and practice mechanized farming? Land use and tenure security: Will the increase in biofuel demand increase land use competition between food and fuel crops and result in tenure insecurity for small farmers? Impact on poverty alleviation: How does biofuel development affect the food security, energy needs and employment opportunities of poor rural people? INTRODUCTION On 2 January 2008, the cost of crude oil crossed US$100 a barrel for the first time, raising global concerns. Continuing near-record oil prices, fears of unaffordable and rapidly depleting sources of fossil fuel and the desire to achieve energy security and mitigate climate change have combined to heighten interest in biofuel production as a cost-effective, alternative source of energy. Many governments have developed policies meant to promote affordable, alternative energy sources capable of maintaining current energy consumption standards, supporting further economic growth and reducing oil dependency. In addition to producing energy from solar, wind, nuclear and marine sources, the policies also aim at producing biofuels to meet the ever expanding demand of the transportation sector, mainly bio-ethanol from grains, and bio-diesel from vegetable oils and animal fat. In 2006, bio-ethanol production was around 40 billion litres globally with 90 percent produced in Brazil and the United States, and bio-diesel production was more than 6 billion litres with 75 percent produced in the EU – mainly in France and Germany. Brazil, the most competitive producer with the longest history of bio-ethanol production, uses about half its sugarcane to produce bio-ethanol. Spurred by many of the same considerations as the developed countries, many developing countries are now launching biofuel programmes based on agricultural feedstocks: bio-diesel from palm oil in Indonesia and Malaysia as well as from oil-rich, inedible plants such as jatropha and pongamia in India; and bio-ethanol from sugarcane in Mozambique and in several Latin American countries, such as Honduras, Nicaragua and Panama. Although assessments of the global economic potential of biofuels have just begun, current biofuel policies could, according to some estimates, lead to a fivefold increase of the share of biofuels in global transport energy consumption – from just over 1 percent today to 5 to 6 percent by 2020.1 With increasing demand for biofuels, considerable land could be diverted from food to feedstock production. FAO estimates that the amount of land that would be used for the development of biofuels – at present about 1 percent of the world’s arable land – could increase up to 3 percent by 2030 and as much as 20 percent by 2050. Governments have provided substantial support for biofuel development to enable it to compete with conventional gasoline and diesel. The measures included consumption 1 World Bank, World Development Report (WDR) 2008. 1
  • 3. Biofuel Expansion: Challenges, Risks and Opportunities for Rural Poor People incentives (fuel tax reductions), production incentives (reduced taxes and direct subsidies) and mandatory blending standards. The private sector responded to these incentives, setting up processing plants for converting crops into energy in a relatively short time. Alarms were raised when the resulting increased demand for fuel crops contributed to increased commodity prices with adverse effects on consumers and environmentally sensitive land that was cleared for planting palm oil. These excesses raised some valid concerns about the impact of biofuel production on local environments, livelihoods of the displaced people and the global greenhouse gas (GHG) emissions. According to FAO, “biofuels accounted for The impact of increased food prices, the fastest-growing market for agricultural especially on the poor, has drawn products around the world and was a billion- considerable attention. Yet, the potential for dollar business. Increasing oil prices in biofuel production to enhance the national recent years had had devastating effects on energy security for most of the low-income many poor countries, some of which spent countries that are also net oil importers has six times as much on fuel as they did on had relatively little attention. health. In that regard, the modern form of bioenergy could create great opportunity”. These negatives notwithstanding, as a renewable energy source, biofuels can help mitigate climate change and reduce dependence on oil in the transportation sector. They can also have a positive impact on the limited foreign exchange reserves of many developing countries. When well managed, they also offer large new markets for higher prices products for agricultural producers that could stimulate rural growth and farm incomes. This paper considers the pros and cons of the debate over the potential social, economic and environmental impact of the increase in biofuel production. It also recognizes that the developing world has its own set of bio-energy issues, which can be different from those of the developed world. ISSUES 1. Food versus fuel – high food prices Biofuel production has pushed up prices of some food crops, an expected outcome when they are also used as feedstock. For example the price of maize increased by 23 percent in 2006 and some 60 percent during the past two years, largely because of the U.S. bio- ethanol program.2 The U.S. is the world’s largest maize exporter and when its biofuel expansion contributed to a decline in grain stocks, it also, inadvertently, contributed to an increase in world cereal prices. Similar price increases have occurred for oil crops such as palm, soybean and rapeseed because of bio-diesel production. Some food price increases are anticipated but, as with most aspects of biofuel, estimates vary. The International Food Policy Research Institute (IFPRI) projects maize prices to rise 20 percent by 2010 and 41 percent by 2020, with similar increases for oilseeds (26 percent by 2010, and 76 percent by 2020), and wheat (11 percent by 2010 and 30 percent by 2020). FAO, on the other hand, projects that prices of coarse grains will increase by 15 percent by 2016, whereas the price of wheat would remain unchanged. It should be noted, however, that although price increases are blamed on increased biofuel production, issues such as stock levels, exchange movements and weather, as well as intangible factors such as speculation also affect price increase in commodities. Historically, agricultural prices have been affected by energy prices, especially in countries that employ intensive farming practices, because the increased cost of fossil 2 WDR, 2008. 2
  • 4. Biofuel Expansion: Challenges, Risks and Opportunities for Rural Poor People fuel based inputs, such as diesel, fertilizers and pesticides eventually lower output. Now, with rising energy prices and improved bio-energy conversion technologies, energy prices and feedstock prices are increasingly being linked. These linkages are more readily visible in the more integrated markets of sugar and bio-ethanol in Brazil but most probably will soon emerge in other feedstock prices as well. However, as these markets become linked, the energy prices will place a “ceiling price” on feedstock prices, because feedstock prices account for more than 70 percent of biofuel costs. Thus, in order to remain competitive for the energy market, agricultural feedstock prices cannot rise faster than energy prices, which will limit price increases. Moreover, the new second-generation technologies currently being developed would lead to efficient conversion of ligno-cellulosic biomass (from grasses and other biomass) into liquid and gaseous energy forms. This would allow use of cellulose-rich biomass to be grown on marginal lands that do not compete with food. It would also make many more species of plants potential sources of energy. Impact on the poor.The development of biofuel as a source of energy, when grown on a large scale, could represent a paradigm shift in agricultural development. As with all shifts, there will be both winners and losers. Urban and rural landless households, wage- earning households, rural households that are net purchasers of food and urban consumers are all expected to suffer as food prices increase. The general price increase in most commodities has led to some concerns about the impact on the poor. Usually, as one staple becomes more expensive, people replace it with a cheaper one. But, if the prices of nearly all staples go up, consumers are left with no alternatives. If this remains the trend, some nutrition studies show that the number of food-insecure people in the world would rise by more than 16 million for every percentage increase in the real prices of staple foods, meaning that 1.2 billion people could be chronically hungry by 2025 – 600 million more than previously predicted. However, whether the impact of a rise in food price would be as severe as noted by the nutrition studies is uncertain. There could be considerable offsetting benefits from development of biofuels. From the point of view of poor farmers who have dealt with declining commodity prices for more than 40 years (see Chart 1), increasing food prices provide an opportunity for increasing benefits and intensifying production which could lead to increased food output. Moreover, bio-fuels can also contribute to alleviating poverty through employment creation. Because biofuel production is labour intensive, there could be significant employment creation, offsetting the overly negative picture of the food security estimates quoted above. If mechanisms are Biofuel production would add an introduced to ensure that much of the increase in estimated 9 million jobs in China, prices accrues to the farmers, both biofuel and 1 million jobs in Venezuela by increased food prices can stimulate rural economic 2012 and up to 1.1 million jobs in growth through additional capital inflows, create Sub-Saharan Africa (S. De Keiser demand for goods and services that provide and H. Hongo, 2005). employment, reduce rural-urban migration, and create linkages and multipliers. This has been observed in Brazil where biofuel production in sugarcane-producing regions stimulated rather than competed with the other food crops and the income generated 3
  • 5. Biofuel Expansion: Challenges, Risks and Opportunities for Rural Poor People through agro-industrial activities related to sugarcane helped “capitalize” agriculture and improve conditions for producing other crops.3 Chart 1 2. Climate change and the environment One of the big selling, but most debated, points of biofuel is its carbon neutrality. This means that the growing plants absorb carbon and, when harvested, release only the amount of carbon they absorbed. There is little doubt that most biofuels emit fewer greenhouse gasses than fossil fuels when used for energy, thus mitigating the effect on climate change. The debate is over the net carbon savings which means factoring in the amount of fossil- fuel energy needed to produce the biofuel energy throughout its entire production cycle. At issue is whether the calculation should include only inputs used directly for growing the feedstock such as the nitrogen fertilizers or the energy used by farm machinery or if it should include even the energy used to make the agricultural machinery. The results will vary, depending on the type of feedstock, cultivation methods, conversion technologies and energy efficiency.4 Sugarcane-based bio-ethanol saves between 80 and 90 percent of GHG emissions per mile while bio-diesel from soybeans can save 40 percent.5 In general, biofuels from grains have lower performance, reducing carbon emissions by 10 to 30 percent per mile or, in some cases, even producing higher emissions than fossil fuels.6 3 S. Zarrilli, 2006, “Trade and Sustainable Development Implications of the Emerging Biofuels Market” in International Centre for Trade and Sustainable Development Linking Trade, Climate Change and Energy: Selected Issue Briefs 4 P. Hazell, Bioenergy: Opportunities and Challenges, presentation, Sweet Sorghum Consultation, IFAD, Rome, November 2007. 5 Ibidem. 6 Ibidem. 4
  • 6. Biofuel Expansion: Challenges, Risks and Opportunities for Rural Poor People Energy parameters have been well researched for carbon savings based on agricultural practices in developed countries, but would it be correct to apply these analyses to developing countries without further study? Clearly, less use of fertilizer and labour- intensive farming feedstock production in developing countries is comparatively advantageous from the point of view of the mitigation agenda. However, the degree of advantage would need to be substantiated through further analysis. The labour-intensive biofuel production capability of the developing world’s small farmers appears to be relatively more environmentally friendly than large-scale, commercial, monocropping operations in the developed world. Due to, inter alia, low commodity prices, poor farmers of the developing world have had no funds and few incentives to buy fertilizers that emit GHGs, and they rarely use mechanized farm equipment that consumes polluting fossil fuels. Expansion of the agricultural frontier. When land is cleared for planting biofuel crops, the effect can be harmful to the environment, because expansion of biofuel crops can displace other crops or threaten ecosystem integrity by shifting from biodiverse ecosystems and farming systems to industrial monocultures. In Brazil, it is feared that future sugarcane expansion might involve fragile areas. In Indonesia and Malaysia, 14 to 15 million ha of peat lands have been cleared for the development of oil palm plantations. According to the EU, a change in land use such as cutting forests or draining peat land can cancel GHG emissions savings “for decades”. Measures to control indiscriminate land use changes are underway. The EU is contemplating a policy proposal to ban imports of biofuels derived from crops grown on forestlands, wetlands or grasslands. Any country developing bio-fuels policy also needs to consider similar legislation to address indiscriminate expansion of land. Soil and water management. Some feedstocks, such as sugar cane, require considerable quantities of water7 while others such as jatropha require less. In dry areas, the competition between food and fuel crops may become the overriding issue in the fuels vs food debate and the issue could be addressed by investing in soil management and water saving technologies, some of which are uneconomical under present circumstances with declining commodities prices. Improvement in crop productivity as well as the shift from high water-use bio-fuel crops (such as sugarcane) to drought- tolerant crops (such as sweet sorghum) are also options to address the issue of water scarcity. The processing of energy crops into biofuels also requires water and, though new conversion plants offer options for controlling water pollution, existing processing facilities can discharge organically contaminated effluent. All agrochemical runoff and sediments are problematic, but these problems apply as much to food crops as they do to biofuel crops. Impact on soil is another environmental concern that, again, is not unique to biofuels. For rural areas that fertilize with crop wastes and manure rather than external inputs, biomass production could lead to dramatic declines in soil fertility and structure. But, there are also exceptions. Biofuel plants such as jatropha and pongamia that grow on marginal lands have potential to improve soil quality and coverage and reduce erosion while their oilcakes can provide organic nutrients for improving soil.8 There are many different scenarios and rigorous lifecycle analysis of potential environmental impacts is needed of different biofuel production systems to ensure the development of environmentally friendly biofuel programmes. 7 WWF, 2006, Sustainability Standards for Bioenergy, Germany. 8 S. Kartha, 2006, “Environmental Effects of Bioenergy” in Hazell, P. and Pachauri, R.(eds) Bioenergy and agriculture: promises and challenges Focus 14, Brief 5, December. Washington, DC: IFPRI. 5
  • 7. Biofuel Expansion: Challenges, Risks and Opportunities for Rural Poor People Local-level environment. Amid concerns that biofuel cultivation, refining, combustion and transport can result in significant environmental problems that are likely to become more acute as biofuels production and trade expand, there is also belief that biofuel cultivation can have positive impacts in rural areas where poor people have limited options to meet their energy needs. Fuelwood is usually their primary household energy source, but its harvesting is usually unsustainable and can contribute to deforestation. Burning animal dung – another important energy source – can cause serious health problems. Substituting biofuels for fuelwood and dung can increase energy efficiency and decrease health risks. At the same time, biofuel cultivation, if combined with appropriate technologies, can open the door to sustainable, low-cost, off-grid electricity generation, with the added benefits of reducing women’s domestic chores and increasing opportunity for rural industry and employment. 3. Land use and tenure security In reality, biofuels are not different from other cash crops but high demand and rapid expansion of biofuel production could increase conflict over land rights and utilization. If land tenure systems are weak, there is risk of appropriation of land by large private entities interested in the lucrative biofuels markets. The poor, who often farm under difficult conditions in remote and fragile areas and generally have little negotiating power, may be tempted to sell their land at low prices or where land is “de jure” owned by the state (typical in most African countries), find their land allocated to large, outside investors. Appropriate policies for biofuels should be developed and integrated into a broader strategy of protecting land rights of the poor and disadvantaged, including Indigenous People, who are mostly at risk of becoming “bio-fuel refugees”, to ensure that they retain ownership or usufruct rights to their land. Prioritizing improvement of land policies and land administration systems will be important to maximize the extent to which poor smallholder farmers can benefit (particularly those with insecure or customary tenure) or, in some cases, to protect them. It should be noted that competition for land uses between food and fuel is not as much an overriding issue in many developing countries, where land patterns, conditions and uses are different from those in the developed world.9 Africa’s population density is lower than in Europe and the U.S., and l
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