The Role of Biofuels in the Global Transportation Fuel Market
Mar 23, 2016
As of 2014, about 34 billion gallons of biofuels were produced worldwide on an annual basis, three-quarters in the form of ethanol and most of the remainder as biodiesel. Ninety percent of the total is produced in ten countries--the U.S., Brazil, Germany, China, Argentina, Indonesia, France, the Netherlands, Thailand, and Canada. This amount accounts for about 2 percent of global transportation fuel consumption.
A 2013 study by the Organization for Economic Cooperation and Development (OECD) and the UN’s Food and Agriculture Organization (FAO) projected that total bio-fuel production would increase to 46 billion gallons annually by 2023. While this level represents a 3.5 percent annual growth rate from current levels, it is less optimistic than earlier projections from market analysts such as Pike Research, which suggested at least a doubling of global bio-fuel production over roughly the same period.
According to a tally published by the Biofuels Digest, as of the beginning of 2015, 64 countries around the world had renewable fuel mandates or targets, either on a nationwide basis or at the state/provincial level, including the 28 member countries of the European Union. Most of the ethanol mandates call for between 5 and 10 percent content, while the biodiesel mandates call for between 2 and 5 percent. The mandates are generally adopted in an effort to reduce greenhouse gas emissions and smog by substituting renewable fuel for fossil fuel use, and in many cases countries are also seeking to reduce reliance on imported petroleum. For 2012, the Global Renewable Fuel Alliance estimated that global ethanol production reduced greenhouse gas emissions by 98 million tonnes of carbon.
In North America, the U.S. and Canada have nationwide mandates, while Mexico has a mandate in the city of Guadalajara, with the addition of a mandate for Mexico City being strongly considered. In Central America and the Caribbean, Costa Rica, Jamaica, and Panama have mandates. In South America, Brazil and Paraguay have a 27.5 percent minimum ethanol content requirement for their vehicles, and Argentina, Colombia, Ecuador, Paraguay, and Peru have mandates for either ethanol or biodiesel content, while Chile and Uruguay had non-mandatory targets.
In the Asia-Pacific region, Australia, India, China, Indonesia, Malaysia, New Zealand, the Philippines, South Korea, Thailand, Vietnam all have mandates. In Africa, Angola, Ethiopia, Malawi, Mozambique, Mauritius, South Africa, Sudan, and Zimbabwe have mandates, but in several countries meeting the mandate is subject to supply availability.
There appears to be no international entity that regularly tracks all international trade flows of renewable fuels, but in recent years, the total annual volume traded is estimated to have been between 3 and 4 billion gallons, or about 10 percent of global biofuels production. The majority of that trade consists of ethanol--about 85 percent--with the remainder as biodiesel, which is a slightly higher level than their share of total biofuels production.
Interestingly, it appears that only a portion of that volume occurs in the form of shipments from biofuel-surplus countries into biofuel-deficit regions, which is the most common rationale for international trade flows. The majority of the recent flow results instead from the idiosyncrasies of national biofuel policies in some of the leading biofuel-producing countries. For example, despite being the leading producer of biofuels in the world and having a substantial tariff protecting the U.S. market, the United States was a net importer of ethanol until 2010, because a provision of U.S. trade preferences with nations in the Caribbean Basin allowed for those countries to import ethanol from Brazil, remove a bit of water from the shipment, and re-export to the United States on a duty-free basis as a product of those countries. That tariff was allowed to expire at the end of 2011.
The United States became a significant net exporter of ethanol in 2011 largely because of a shortfall in the Brazilian sugar crop that year, which left Brazil short of the volume of domestic ethanol needed to fulfill their requirement for their motor vehicles, even after they lowered it from 25 to 20 percent. Of the record 1.2 billion gallons of ethanol that the United States exported in 2011, roughly one-third went to Brazil.
The U.S. has remained a significant net exporter of ethanol ever since 2011. This outlet became even more important in 2014, when the Environmental Protection Agency started a rulemaking process that would enable it to lower the annual Renewable Fuel Standard (RFS) levels for corn-based ethanol due to concerns over the ‘blend wall’. Although those new RFS levels are being challenged in federal court by the U.S. ethanol industry, access to export markets in 35 countries has allowed U.S. ethanol companies to maintain their production levels even in the face of policy uncertainty. However, despite its large export position, the U.S. still imports some ethanol from Brazil, because that country’s use of sugar as a feedstock rather than corn has allowed it to qualify as an ‘advanced biofuel’ under U.S. law and also receive favorable treatment in the California fuel market.
With the completion of the Paris Agreement on climate change late last year, biofuels could play an even more important role in the world’s efforts to reduce greenhouse gas emissions, depending on the choices that national governments make in this area over the next several years.