Biofuels help reducing our reliance on fossil fuels. In their attempts to meet agreements on limiting greenhouse gas emissions, governments subsidize farmers to grow bioenergy crops. However, current ways of subsidizing farmers in the EU are not optimal. Conventional crops receive large amounts of funds, while upcoming technologies such as biofuel production receive relatively little support. Biofuel crops receive up to 45 euro per hectare for up to 70% of the allocated land, while conventional crop production can receive subsidies up to several hundreds of euros per hectare. Furthermore, the actual subsidy requirements of farmers for both production types are non-uniformly distributed across space, so there are lots of potentials for increased social benefits when subsidies do not follow a fixed level but vary according to local production characteristics.
In a paper to be published in the journal Renewable & Sustainable Energy Reviews, we discuss the implications of heterogeneity in production factors for the benefits associated with different subsidy schemes. Using estimates of the future value of land use they assess the potential gains of subsidy schemes that take the site-specific production factors into account relative to fixed payment levels in the Netherlands. The study shows that agricultural subsidy spending can be reduced and simultaneously improve the total stimulation potential of biofuel policies, when schemes: 1) are based on the amount of produced biomass instead of the area deployed for production; 2) accommodate differences in opportunity costs related to switching from current production to biofuel production, and 3) aim to stimulate sites that currently receive high amounts of subsidy for conventional crop production.
These findings are partly due to the fact that farmers currently receive high amounts of subsidy for conventional crop production, such that conventional land-use types outcompete the production of biofuels even when biofuel production would be more profitable in an unsubsidized market. Once the EU starts to lower agricultural subsidies for conventional crops, biofuel production becomes more competitive and farmers transiting into biofuel production often require only little reconcilement to maintain initial profit levels. The benefits to society stem from reduced aggregate subsidy spending and savings on carbon emissions.
Furthermore, maintaining a fixed subsidy for all farmers in a region overcompensates farmers that have local advantages compared to less efficient production sites. The researchers discuss that fixed subsidies therefore also form a barrier for more ambitious climate targets. Increasing aggregate biofuel production levels requires higher subsidy levels. Under a fixed per hectare aid, subsidy spending increases across all sites that already receive aids, whereas subsidies that vary locally only increase in aggregate by the amount required for the stimulation of new production sites. This is important considering the need for more action than currently addressed by the climate agreements made in Paris last year.
The study indicates that at low fuel prices the gains of policies that pay attention to spatial variation in production factors increase compared to fixed payment schemes. Moreover, the total subsidy requirements increase when fuel prices are low, making it more important to allocate funds efficiently. So especially considering current low oil prices induced by last year’s price drop, subsidies that are tuned to local production factors may help setting up a more efficient transition towards the production of more sustainable forms of energy.
Read the full paper