The 21st Century climate challenge

3Avoiding dangerous climate change: strategies for mitigationFigure 3.6Rapid transitionof the car fleetis possible—PakistanVehicles in Pakistan (millions)2.52.01.51.00.502000 2005Compressed natural gas (CNG)Other vehiclesSource: Government of Pakistan 2005.of the past 5 years. The United States has setparticularly far-reaching goals. In his 2007State of the Union Address, President Bushset a target of increasing the use of biofuels to35 billion gallons in 2017—five times currentlevels. The ambition is to replace around 15percent of imported oil with domesticallyproduced ethanol. 92 The European Union isalso actively promoting biofuels. Targets includeraising to 10 percent the share of biofuels inall road-transport fuel consumption by 2020.That figure is double the target for 2010—andaround 10 times the current share. 93Impressive targets have been backed withimpressive subsidies for the development of thebiofuels sector. In the United States, tax creditsfor maize-based ethanol production wereestimated at US$2.5 billion in 2006. 94 Overallsubsidies to ethanol and biodiesel, currentlyestimated at US$5.5–7.5 billion discountingdirect payments to maize farmers, are expectedto rise with production. 95 With the share ofmaize production directed towards ethanolmills growing, prices are rising sharply. In 2007they reached a 10-year high, even though thecrop of the previous year was the third higheston record. 96 Because the United States is theworld’s largest exporter of maize, the diversionof supply to the bioethanol industry has beeninstrumental in pushing up world prices. InMexico and other countries in Central America,rising prices for imported maize could createfood security problems for poor households. 97‘Biofuel mania’ has not so far left such adeep mark on the European Union. However,this is likely to change. Projections by theEuropean Commission point to increasingprices for oilseeds and cereals. The arable area forproducing biofuels will rise from an estimated 3million hectares in 2006 to 17 million hectaresin 2020. 98 Most of the increase in supply ofbiofuel in the European Union will come fromdomestic production of cereals and oilseeds,though imports are projected to account for15–20 percent of total demand by 2020. ForEuropean agriculture, the prospective biodieselboom offers lucrative new markets. As theCommission puts it: “The targets for renewableenergy can be seen as good news for Europeanagriculture: they […] promise new outlets anda positive development of demand and pricesat a time when farmers are increasingly facedwith international competition.” 99 Underthe reformed Common Agricultural Policy, aspecial premium is payable to farmers for theproduction of energy crops. 100Unfortunately, what is good for subsidizedagriculture and the biofuels industry in theEuropean Union and the United States is notinherently good for climate change mitigation.Biofuels do represent a serious alternative tooil for use in transport. However, the cost ofproduction of those fuels relative to the realamount of CO 2abatement is also important.This is an area in which the United States andthe European Union do not score very well.For example, sugarcane-based ethanol can beproduced in Brazil at half the unit price of maizebasedethanol in the United States and whereassugar-based ethanol in Brazil cuts emissions bysome 70 percent, the comparable figure for themaize-based ethanol used in the United States is13 percent. 101 The European Union is at an evengreater cost disadvantage (figure 3.7).Comparative advantage explains an importantpart of the price differentials. Productioncosts in Brazil are far lower because of climaticfactors, land availability and the greaterefficiency of sugar in converting the sun’s energyinto cellulosic ethanol. These differences pointto a case for less reliance on domestic productionand an expanded role for international trade inthe European Union and the United States.There is no inherent virtue in self-reliance.From a climate change mitigation perspective,the priority is to achieve carbon abatement atthe lowest marginal cost. The problem is thattrade barriers and subsidies are driving up thecost of carbon mitigation, while simultaneouslyadding to the cost of reducing oil dependency.Most developed countries apply importrestrictions on alternative fuels such as bioethanol.The structure of protection varieswidely—but the net effect is to substantiallylower consumer demand. The European Unionallows duty free market access for ethanol foraround 100 developing countries, most ofwhich do not export ethanol. In the case of142 HUMAN DEVELOPMENT REPORT 2007/2008