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Economy
Wednesday, 08-August-2007
Project Syndicate - There is rightly growing concern among the public and policymakers about climate change and its consequences. Combating climate change is an enormous and truly global challenge, requiring local, national, and international action. We must tackle it both effectively and urgently.

A key part of meeting our climate objectives is to minimize the harmful effects of transport on the environment. So-called “biofuels,” such as bioethanol and biodiesel, as well as developing the next generation of biofuels, must play a part in this. After all, every liter of petrol that is replaced with a biofuel benefits the environment.

Many countries around the world are producers or are emerging as producers of biofuels. Global production is rapidly increasing. World production of bioethanol, for example, doubled between 2000 and 2004. A further doubling is expected by 2010.

As output of biofuels increases, policymakers must ensure that global supplies are allocated effectively and smoothly between countries that produce and consume them. Free and open conditions for international trade are the most efficient way to allocate global resources, fully exploiting individual countries’ comparative advantages. This principle also holds true for the emerging biofuels market.

Today, however, trade in biofuels is limited. According to the United Nations Conference on Trade and Development, global trade in bioethanol accounted for less than 10% of global production in 2004, suggesting a large untapped trade potential. Part of the explanation no doubt lies in the presence of significant trade barriers.

For example, high tariffs are often placed on biofuels and biofuel feedstock – in some cases as high as 55% for bioethanol. At the same time, subsidies are widely used to encourage domestic production. Tax incentives are employed to stimulate use, as are mandatory blending requirements. In addition, different standards and certification requirements are applied.

While many of these measures are implemented for legitimate environmental policy reasons, they do pose challenges for trade in biofuels. As a first step toward eliminating unnecessary barriers, we must deepen our understanding of the effects on trade in biofuels of measures to promote their production and use.

Sweden and the Netherlands recently took the initiative for further analysis of this issue by the OECD. Sweden’s starting point is the conviction that a more liberal trade regime, coupled with global standards, is needed. As a first measure, Sweden argues for the elimination of all tariffs on ethanol.

Apart from environmental considerations, there are other important benefits of expanding world trade in biofuels. Generally, international trade is a strong instrument for development. Several developing countries have a comparative advantage in producing ethanol – and other biofuels, for that matter. Brazil, which is now the world’s largest producer and exporter of ethanol, is a case in point.

But there are also other developing countries that are already exporters of biofuels, and still others that view it as an important source of future income. Trade policy should support, not undermine, these countries’ ambitions.

Of course, some have raised concerns about the possible economic, social, and ecological repercussions, not least in developing countries, of a strong increase in demand for biofuels. For example, diverting too much land from food production to biofuel crops would risk sharp increases in food prices, while adequate environmental standards must accompany large-scale production use of biofuels.

Such concerns also matter to consumers of biofuels, who will ultimately determine demand for them. Appropriate national policies, as well as strong international cooperation, will be necessary to minimize the risks and exploit the benefits that biofuels markets imply for developing countries.

Creating an efficient market to expand world trade in biofuels is a policy for the future, one that is good for the environment and good for development. Increased trade, protection of the environment, and poverty reduction can, and must, go hand in hand.

Sten Tolgfors is Sweden’s Minister for Foreign Trade.

Copyright: Project Syndicate, 2007.
www.project-syndicate.org
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