ARTICLE IN PRESS

Energy Policy 34 (2006) 3184–3194

www.elsevier.com/locate/enpol

Stimulating the use of biofuels in the European Union:

Implications for climate change policy
Lisa Ryan, Frank Convery, Susana Ferreira
Department of Planning and Environmental Policy, University College Dublin, Richview, Dublin 14, Ireland
Available online 28 July 2005

Abstract

The substitution of fossil fuels with biofuels has been proposed in the European Union (EU) as part of a strategy to mitigate
greenhouse gas emissions from road transport, increase security of energy supply and support development of rural communities. In
this paper, we focus on one of these purported benefits, the reduction in greenhouse gas emissions. The costs of subsidising the price
difference between European bioethanol and petrol, and biodiesel and diesel, per tonne of CO2 emissions saved are estimated.
Without including the benefits from increased security of energy supply and employment generation in rural areas, the current costs
of implementing European domestic biofuel targets are high compared with other available CO2 mitigation strategies. The policy
instrument of foregoing some or all of the excise duty and other taxes now applicable to transport fuels in EU15 on domestically
produced biofuels, as well as the potential to import low-cost alternatives, for example, from Brazil, are addressed in this context.
r 2005 Elsevier Ltd. All rights reserved.

Keywords: Biofuels; Greenhouse gas emissions; Transport policy

1. Introduction Increasing the use of alternative fuels can address

Currently1 transportation fuels pose two important
challenges for the European Union (EU). First, under the
provisions of the Kyoto Protocol to the Climate Change
Convention, the EU has agreed to an absolute cap on
greenhouse gas emissions; while, at the same time
increased consumption of transportation fuels has resulted
in a trend of increasing greenhouse gas emissions from this
source.2 Second, the dependence upon oil imports from
the politically volatile Middle East generates concern over
price fluctuations and possible interruptions in supply.
Corresponding author. Tel.: +353 1 716 2676;
fax: +353 1 716 2776.
E-mail address: lisa.b.ryan@ucd.ie (L. Ryan).
1
The analysis in this study uses data from 1998 to 2004. The term
‘‘current’’ is used to refer to these data. More specific dates are
provided in the relevant tables.
2
The European Commission’s White Paper ‘‘European transport
policy for 2010: time to decide,’’ advanced the prospect of a rise of
50% in CO2 emissions from transport between 1990 and 2010 under
‘‘business as usual’’ policies.
both these challenges, by providing an opportunity to
reduce greenhouse gases and other polluting emissions,
and by improving the security of energy supply.
Additionally, the development of biofuels may create
new employment opportunities, especially in declining
rural areas.
Given that legislative efforts in the EU to promote
biofuels (discussed later) are recent, the policy implications
of their use remain largely unexplored. Biofuels are
currently commercially uncompetitive with fossil fuels
(petrol and diesel) in Europe. However, can they become
competitive once their external benefits to society, namely
the CO2 emissions reduction, security of energy supply and
rural development are accounted for? This paper addresses
part of this question by focusing on the first external
benefit, the reduction in greenhouse gas emissions.
The commercial price of transport fuel in the
European market before taxes and duties is assumed
here for simplicity to be equivalent to its private
marginal costs. This number is compared with the
private marginal costs of supplying biofuels in order to

0301-4215/$ - see front matter r 2005 Elsevier Ltd. All rights reserved.
doi:10.1016/j.enpol.2005.06.010
 ARTICLE IN PRESS
L. Ryan et al. / Energy Policy 34 (2006) 3184–3194
derive a threshold value per tonne of CO2 reduction that
must be achieved if biofuels are to compete in price with
petrol and diesel in Europe. The gap between the
marginal costs of biofuels and traditional fuels moti-
vates the analysis of different instruments that would be
needed to encourage the uptake of biofuels: an excise
duty reduction, a subsidy to the production of biofuels
and/or relaxation of tariffs on imports from cheaper
non-EU producers.3 In addition, this threshold value, or
the cost of reducing a tonne of CO2 emissions using
biofuels, can be contrasted with the marginal costs of
achieving CO2 emission reductions elsewhere. It can be
compared, for example, with the cost of technical
measures in the transport sector to reduce greenhouse
gas emissions or with the price of buying allowances in
the CO2 emissions trading market.
The remainder of this paper is structured as follows:
Section 2 provides the policy and technical context
surrounding the adoption of biofuels in Europe. Section
3 computes the threshold value per tonne of CO2
reduction that needs to be achieved for biofuels to be
competitive with conventional transport fuels in Europe.
Section 4 outlines the policy implications and Section 5
summarises our conclusions.
2. European policy and technical context
In accordance with the ‘‘flexible mechanisms’’ of the
Kyoto protocol, the EU has introduced a CO2 emissions
trading scheme that commenced on a pilot basis in
January 2005.4 Although not included in this pilot
phase, reducing the transport sector’s emissions, and in
particular emissions from road transportation, is a
pressing issue as the latter currently represent 19% of
total EU CO2eq. emissions and are expected to increase
(European Environment Agency, 2004)5. The European
Commission foresees that three alternative transport
fuels, hydrogen, natural gas, and biofuels, will replace
transport fossil fuels, each by 5% by 2020 (Commission
of the European Communities, 2001).
3 scale of operation derived from the lack of market
There are other schemes possible to promote biofuels, such as
carbon-based fuel taxes, investment incentives, biofuels obligation, or
tender schemes. We are grateful to an anonymous reviewer for
pointing this out. In this paper we only deal with the three most
common schemes currently in place.
4
Directive 2003/87/EC of the European Parliament and of the
Council establishing a scheme for greenhouse gas emission allowances
trading within the Community and amending Council Directive 96/61/
EC. This text will apply to the existing 15 Member States, those
Accession States who joined in May 2004 and other countries (such as
Iceland, Norway and Switzerland) who choose to participate.
5
In the first pilot phase (2005–2007) trading is confined to CO2
emissions from power stations in excess of 20 MW (except incinera-
tors), oil refineries, smelters, manufacture of cement (4500 tonnes/
day), ceramics including brick, glass, and pulp, paper and board
(420 tonnes/day). See footnote 2.
3185
Biofuels are an alternative motor vehicle fuel pro-
duced from biological material and are promoted as a
transitional step until more advanced technologies have
matured. Hydrogen and natural gas are seen as medium
rather than short-term solutions, due to infrastructural,
cost and technical challenges.
Biofuels are viewed as an essential element in the
development of alternative fuel markets, and some
initiatives have already been introduced to promote
biofuels in the EU. Under the European Directive on the
promotion of the use of biofuels or other renewable
fuels for transport (European Parliament and Council,
2003), Member States are instructed to ‘‘ensure that a
minimum proportion of biofuels and other renewable
fuels is placed on their markets,’’ and reference values
for national targets are given as 2%, by 2005, and
5.75%, by 2010.6 Furthermore, Member States are
permitted to reduce excise duties on biofuels7 (Council
of the European Union, 2003). The Green Paper
‘‘Towards a European Strategy for Energy Supply’’
supports this initiative, and it also serves the reforms of
the Common Agricultural Policy to support rural
economies; by decoupling some subsidies from food
production, land is released for potential energy crop
production (Commission of the European Commu-
nities, 2003).
The EU directive lists 10 products that should be
considered as biofuels. Of these, there are two that have
been most frequently employed to date: (i) Biodiesel,
produced from plant oils, such as rape seed, soybean or
palm, or from organic waste material; which can be used
in a modified diesel engine or processed to be used in a
conventional diesel engine; and (ii) bioalcohol, such as
methanol and ethanol, which can be produced from
cereal crops or sugar beets and can fuel modified petrol
engines.
These categories of biofuels have gained the most
attention in the EU as they are produced from materials
that are suitable for agricultural production in the EU,
or are widely available waste products. Currently, other
possibilities are either prohibitively expensive or energy
intensive in their production,8 due mainly to the small
development for these fuels. Economies of scale may
reduce these prices significantly in the future. For a
general overview on biofuel choices and their character-
istics see van Thuijl et al. (2003) or Fulton et al. (2004).
There are many challenges facing alternative fuels before
they can gain widespread acceptance in the transport
6
Directive 2003/30/EC. Although these targets are indicative rather
than mandatory, failure to meet them requires Member States to
explain the discrepancy in their annual biofuels progress reports.
7
Directive 2003/96/EC.
8
In the medium term, technological advances in the thermochemical
processing of biomass could produce biodimethylether, synthetic fuels
and hydrogen, to take a few examples.
 ARTICLE IN PRESS
3186 L. Ryan et al. / Energy Policy 34 (2006) 3184–3194

fuels market. The existing petroleum infrastructure is Table 1

Costs of biofuels
standardised and has extensive coverage, and the cost
and therefore selling price of biofuels is significantly Biofuel Cost at filling station (h2004/1000 L)
higher than that of mineral oil fuels.
Feedstock Low Best estimate High

(a) Costs of biofuels produced using current technology

Sugar crops 875 1265 1855
3. Biofuels vs. conventional fuels: the value of reducing
Starch crops 809 1173 1572
CO2 emissions Lignocellulosic crops 1148 1448 2435
Lignocellulosic residues 1052 1316 2232
Although the amount of biofuels produced in the EU Brazilian sugarcane 117 294 351
is growing, the quantities remain small compared to the Biodiesel
total volume of mineral-based transport fuels sold— Oil seeds 755 945 1092
approximately 0.3% of all EU petrol and diesel fuel in Used oil/fat 354 454 545
2003 (Kavalov, 2004).
Production costs of biofuels vary and are dependent (b) Costs of biofuels produced using future technology
on the prices of raw materials, the method of produc- Sugar crops 671 954 1432
tion, the extent of refining undertaken, and the Starch crops 653 963 1287
supplementary utilisation of by-products and waste. Lignocellulosic crops 699 884 1469
The European biofuels cost estimates utilised in this Lignocellulosic residues 638 802 1358
Brazilian sugarcane
paper, reported in Table 1a, come from Jungmeier et al.
(2005)9 who reviewed 73 academic, public and industry Biodiesel
Oil seeds 753 888 1068
studies to provide a comprehensive collection of cost
Used oil/fat 317 395 504
and CO2-equivalent (CO2eq.)10 emissions estimates for
biofuels. The costs are highly variable depending on the Notes:
various combinations of feedstock and country of
production. For this reason, Table 1a reports a range 1. Source of data is Jungmeier et al. (2005), who reviewed 73 studies
of cost estimates including the lowest, the most likely to provide a range of estimates for environmental performance and
values (‘‘best estimates’’), and the highest values from economic costs for biofuels within the VIEWLS project. Data are
the studies. Overall, the best estimates in Table 1a are at expressed in h2004.
2. Current technology refers to technology of production utilised
the upper end of values reported in other studies (see for until 2010. Future technology refers to technology after 2010.
example den Uil et al. (2003), Edwards et al. (2004) or 3. Costs include production, transportation, conversion and
Kavalov (2004)), while the full range of values falls distribution.
within the range of the literature. Although the best 4. Biodiesel costs estimated per litre of energy-equivalent diesel. We
estimates in Table 1a represent the most likely values, it assume the energy density of petrol to be 34.3 MJ/l (Nommensen,
2005).
is evident that some producers in Europe are producing 5. Bioethanol costs estimated per energy-equivalent litre of petrol. We
with costs at the lower margin at this time. Jungmeier et assume energy density of petroleum diesel to be 39.4 MJ/l
al. estimate the future costs (post-2010) as significantly (Nommensen, 2005).
lower and these are represented in Table 1b. Note that
because both biodiesel and bioethanol contain less
energy per litre than the corresponding fossil fuel, the
Table 1a shows that using current production
total cost per litre in Tables 1a and b is given as a cost
technology the cheapest bioethanol produced in Europe
per energy-equivalent litre.11
comes from starch crops. Overall, however, the cheapest
9
This project was undertaken as work package 2 of the VIEWLS
bioethanol, comes from sugarcane in Brazil. Table 1a
project (Clear Views on Clean Fuels), which was funded as EC Project also shows that biodiesel is cheapest when produced
NNE5-2001-00619 from February 1, 2003–January 31, 2005. More from waste oils and fats.
details on the project and the consortium involved can be found at To be profitable, biofuel prices must cover production
www.VIEWLS.org. and distribution costs and be competitive in price with
10
The emissions of CO2 and other greenhouse gases (N2O, CH4,
HFC, PFC, SF6) are combined and represented as with ‘‘CO2eq’’.
emissions units by multiplying the different emissions (in metric tons) (footnote continued)
by the global warming potentials of the individual greenhouse gases substitute a biofuel for a fossil fuel, the difference in energy content
and summing together. will most likely translate into increased fuel consumption and therefore
11
Bioethanol contains 67% as much energy per litre compared with this real cost must be taken into account when comparing fossil fuel
petrol and biodiesel contains 87% as much energy per litre compared and biofuel prices. For this study, we consider it appropriate to convert
with diesel (Fulton et al., 2004). The energy-equivalent cost is the the biofuel costs from an energy basis to energy-equivalent litres, since
relevant variable since the targets contained in the EU biofuels we would like to compare the prices of fuels at the filling station and
directive are given on an energy basis. In addition, if consumers the effect of excise duty rebate on prices (per litre).
 ARTICLE IN PRESS
L. Ryan et al. / Energy Policy 34 (2006) 3184–3194
Table 2
Cost comparison of biofuels with petroleum fossil fuels
Biofuel Cost at filling station (h2004/1000 l)
Feedstock Biofuel Fossil fuel
Bioethanol
Sugar crops 1265 366
Starch crops 1173 366
Lignocellulosic crops 1448 366
Lignocellulosic residues 1316 366
Brazilian sugarcane 294 366
Biodiesel
Oil seeds 945 386
Used oil/fat 454 386
Notes:
1. Best estimate value of current costs from Table 1a used for cost of
biofuel.
2. Price of fossil fuel is petrol price for bioethanol and diesel price for
biodiesel. The values are 6-month averages for EU15 for July-
December, 2004. Available from EU Oil Bulletin at http://euro-
pa.eu.int/comm/energy/oil/bulletin/2005_en.htm (accessed
2005).
3. Costs of biofuels and fossil fuels are before excise duties and VAT.
conventional transport fuels. The European Oil Bulletin
contains data on the final price paid by consumers in the
EU for petrol and diesel and on the excise duties and
value added tax (VAT) charged in all EU countries.
In Table 2 we compare the average pre-tax fossil fuel
price12 (i.e. the price before excise duty and VAT), that
would be the value assigned to biofuels on the market,
for the period July–December 2004 with the actual costs
of biodiesel (produced from EU15 oilseeds and waste
oil) and bioethanol (produced from EU15 wheat and
sugar beet, and the cheapest Brazilian sugarcane) from
Table 1a. Table 2 provides thus a rough comparison of
the costs of biofuels with those of mineral fuels.
A couple of considerations must be taken into
account when using the pre-tax price of fossil fuels as
proxy for their costs: the pre-tax fossil fuel prices do not
subtract profit margins, and they are derived from
erratic and very high fossil fuel prices. Both factors tend
to drive up the fossil fuel cost estimates and thus could
bias the cost difference with biofuels in the last column
of Table 2 downwards. Nevertheless, it appears that the
prices are not decreasing. Fig. 1 presents the historical
pre-tax petrol and diesel nominal prices, which have
increased in EU15 since 1999. Additionally, a projected
increasing fossil fuel demand in emerging economies
such as India and China is likely to translate into
pressure for even higher fossil fuel prices than those used
to compute the numbers in Table 2.
12
EU Oil Bulletin provides weekly and monthly average prices for
transport fuels in EU15 and EU25. The data used is the 6-month
average for petrol and diesel prices in EU15 from June–December
2004. It is available at http://europa.eu.int/comm/energy/oil/bulletin/
2004_en.htm.
3187
Table 2 applies to current conditions, and thus it also
ignores the evolution of the costs of biofuels and fossil
fuels in the medium and long term. Some studies predict
that the costs of cellulosic ethanol will drop considerably
Difference to equal the pre-tax price of petrol after 2010 (Depart-
ment of Transport (UK), 2003; Fulton et al., 2004). These
899 findings are consistent with the numbers in Table 1b.
807 According to Table 2, however, current biofuels are
1082 not cost competitive with conventional fossil fuels in
950
Europe unless the biofuels are imported from Brazil. The

72
natural question is whether they become competitive
559 once the external benefits to society are accounted for,
68 namely the reduction of CO2 emissions, security of
energy supply and rural development. For example,
recent estimates have put the number of jobs in rural
areas that could be generated by achievement of the EU
biofuel targets at 212,000 and 354,000 in 2010 and 2020,
respectively, under current policies (Whitely et al., 2004),
corresponding to approximately 1.5–2.5% of the EU15
April
unemployment in 2005, 14.7 million (Eurostat, 2005). It
is not clear, however, how rural employment generation
can be translated to rural development and how many of
these jobs would not be removed from food-producing
activities. The focus of this paper, is on the benefit to
society related to climate change, namely the reduction
of greenhouse gas emissions from transport.
The estimation of greenhouse gas and energy balances
of biofuels is complex. The full fuel cycle and not just
the direct emissions during combustion must be
considered for comparison with fossil fuels. While the
combustion of biofuels is considered to be CO2-neutral
(IPCC, 1996), their production requires inputs that may
distort the positive energy and greenhouse gas balance.13
The final accounting is country-specific and is a function
of the raw material cultivated, the associated agricultur-
al yield, and the utilisation of by- and co-products, for
example as fuel in the production process, and as animal
feedstuffs (Henke et al., 2003; Shapouri et al., 2002). If
by-products have an economic value they bear a part of
the energy and emission burden.
Table 3 presents a range of estimates of the CO2eq.
emissions savings (or total greenhouse gas emissions
weighted in terms of their global warming potentials), as
a result of utilising biofuels over the corresponding fossil
fuel. The CO2eq. emissions include cultivation, produc-
tion, distribution and vehicle emissions for biofuels. For
consistency with the cost data in Tables 1a and 2, the
CO2eq. emissions data are also from the Jungmeier et al.
(2005) review.14 Since there were not enough CO2
emissions data available for biodiesel produced from
13
For example nitrate fertilisers, which cause the emission of N2O
gas.
14
As mentioned above, the VIEWLS study reviewed 73 studies and
provided a range of emission values, which include all stages of the life
cycle of both biofuels and fossil fuels (Jungmeier et al., 2005).
 ARTICLE IN PRESS
3188 L. Ryan et al. / Energy Policy 34 (2006) 3184–3194

500

450

400

350

300
/1000litres

250

200
Petrol
Diesel
150

100

50

0
1998s02 1999s01 2000s01 2001s01 2002s01 2003s01 2004s01 18/03/2005

Fig. 1. Historical nominal petrol and diesel prices. Notes: (1) Prices are EU15 6-month averages. (2) To provide an indication of the continuing trend,
the spot prices for 14/3/05 and 18/4/05 are given. Source: EUROSTAT, 2005 and EU Oil Bulletin.

Table 3
Overview of CO2eq. emissions savings from biofuels, compared with reference fossil fuel vehicle

Biofuel CO2 eq. emissions savings

Feedstock g/km t/1000 L

Low Best estimate High Low Best estimate High

Bioethanol
Sugar crops 50 90 169 0.7 1.2 2.2
Starch crops
50 30 70 0.0 0.4 0.9
Lignocellulosic crops 181 183 184 2.6 2.5 2.4
Lignocellulosic residues 190 191 192 2.7 2.6 2.5
Brazilian sugarcane 169 212 254 2.4 2.9 3.3
Biodiesel
Oil seeds 30 82 115 0.5 1.3 1.8

Notes:
1. All biofuels and reference vehicle CO2eq. emissions values from VIEWLS project (Jungmeier et al. 2005).
2. Assume reference petrol vehicle consumes 2.5MJ/km and produces 230g/km CO2eq. emissions.
3. Assume reference diesel vehicle consumes 2.1MJ/km and produces 180g/km CO2eq. emissions.
4. Brazil estimates exclude transport to Europe and import tariffs.
5. All CO2eq. emissions represent full life-cycle emissions, i.e. ‘well-to-wheel’.

waste oils and fats, this feedstock is not included in
Table 3 and subsequent tables.
The wide range of values presented in Table 3 is a
result of differences in calculation methods, production
yields and the use of co- and by-products in the
production chain in the studies collected by Jungmeier
et al. (2005). The first three values in Column 2 represent
the range of CO2 g/km savings for bioethanol pro-
duced from sugar, starch crops, lignocellulosic crops
and residues, and Brazilian sugarcane, and biodiesel
 ARTICLE IN PRESS
L. Ryan et al. / Energy Policy 34 (2006) 3184–3194
produced from oilseed compared with a ‘‘standard’’
petrol or diesel vehicle.15 As before, due to the wide
range of estimates published, the low, high and best
estimates of values from the literature are presented. The
best estimates do not represent average values, but
rather values that have a realistic use of co- and by-
product credits. The values in the last three columns of
Table 3 convert the estimates of the reductions in
CO2eq. emissions from g/km to the quantity of CO2eq.
emissions that would be saved by substituting 1000 litres
of diesel and petrol with the energy equivalent biofuel
litres. For example: 1.2 tonnes of CO2eq. emissions
saved per 1000 litres of petrol substituted with energy-
equivalent bioethanol from sugar crops ¼ (90 g/km)/
(0.073 L/km)  1000.
According to Table 3, both biodiesel and bioethanol
have a positive energy balance. Use of European
bioethanol yields a CO2 emissions savings of 13–83%
compared with operation of a standard petrol vehicle,
given above. Table 3 also shows that bioethanol
produced from Brazilian sugarcane has a better well-
to-wheels energy balance than bioethanol produced
from starch and sugar crops in the EU. This is due to
the high productivity of sugarcane crops in Brazil and
the use of by-products (the remains of the crushed cane
after the sugar is extracted) to provide energy to nearly
all processing plants. In fact, many biofuel processing
plants in Brazil are net exporters of electricity resulting
in fossil fuel requirements near zero (Fulton et al., 2004).
For biodiesel, the CO2eq. emissions savings range
between 36–83% compared with conventional diesel.
With data on the commercial price (p) net of excise
duties and taxes, private marginal costs of supplying
biofuels (MCPriv) from Table 2, and on the tonnes of
CO2 emissions saved by the introduction of biofuels
from Table 3, we can derive a threshold value per tonne
of CO2eq. emissions reduction that needs to be achieved
if biofuels are to compete with conventional transport
fuels in Europe. This threshold value represents the cost
to society of reducing a tonne of CO2eq. emissions using
biofuels and is therefore denoted MCSoc.
½MC Priv
p
MC Soc ¼ (1)
tCO2 reduced
The results of this calculation are presented in Fig. 2.
The columns in the figure represent the low, best
estimate and high values16 for the threshold value
calculations. The results are sensitive to the value of
the denominator. For example, the high value or worst
15
Based on a vehicle with the following energy/fuel usage: Petrol:
2.5 MJ/km or 0.073 L/km; Diesel: 2.1 MJ/km or 0.053 L/km.
16
Low CO2 mitigation costs are estimated from (low biofuel
cost
fossil fuel price)/high CO2 emissions savings; high CO2 mitiga-
tion costs are estimated from (high biofuel cost
fossil fuel price)/low
CO2 emissions savings; best estimate costs utilise best estimate values
for the biofuel costs and CO2 emissions savings.
3189
case CO2eq. emissions mitigation cost using bioethanol
produced from starch is extremely high, since its
production chain emits rather than saves CO2eq.
emissions (see column one, Table 3). If the value of
the CO2eq. emissions savings (denominator) is set to
near zero (rather than left as a negative value), MCsoc
rises to a high value, which is not fully shown in Fig. 2.
These threshold values, or the costs per tonne of CO2
emissions mitigated for European biofuels, are esti-
mated between h229–2085 (excluding the estimate for
bioethanol with positive CO2eq. emissions). However, it
is less than zero for bioethanol produced in Brazil from
sugarcane. These values also represent the cost of the
direct subsidy required to equalise the price difference
between fossil fuels and biofuels at the filling station.
4. Policy implications
Society has a number of choices to reduce the amount
of greenhouse gasses released in the atmosphere includ-
ing switching to less carbon intensive fuels, reducing
energy consumption, or carbon sequestration.
According to Fig. 2, for EU biofuels to be economic-
ally efficient as a measure to reduce CO2eq. Emissions—
based on current costs and prices—the marginal benefit
of reduction of CO2eq. emissions would need to be at
least h229/tonne. This would stimulate the use of
bioethanol from wheat and would encourage the
development of better performing biofuels. To evaluate
the magnitude of the numbers in Fig. 2, an estimate of
the marginal benefit of CO2eq. emissions abatement is
needed. The European CO2 emissions trading scheme
provides some direction, as the price per tonne of CO2
emerging from this market will inform participants to
what extent they should abate or purchase allowances if
necessary.17
When comparing the cost of CO2 reductions by
utilising biofuels with the prices from the European CO2
emissions market, it must be noted that current prices
represent a conservative estimate of the value of the
benefits to society of CO2 abatement. Member States
have given the participant sectors very generous alloca-
tions, and the participant sectors are likely to have lower
abatement costs than the non-participants. Both these
factors tend to reduce the price of the allowances traded
in the market (Convery and Redmond, 2004). Since the
basis for these calculations is a wide range of studies
(Jungmeier et al., 2005), the CO2eq. emissions mitiga-
tion costs for biofuels estimated in this paper are within
17
Trading started in January 2005, and since November 2003 a
futures market for CO2 emissions was in operation. Although the EU
emissions trading scheme includes only CO2 emissions rather than
CO2eq. emissions, the price is not likely to change greatly for CO2eq.
emissions, since CO2 emissions make up the largest share of
greenhouse gas emissions.
 ARTICLE IN PRESS
3190 L. Ryan et al. / Energy Policy 34 (2006) 3184–3194

2200
High
2000 Best estimate
Low
1800

1600

1400
/tCO2eq. mitigated

1200

1000

800

600

400

200

0
Sugar crops Starch crops Lignocellulosic crops Lignocellulosic
residues Brazilian sugar cane Biodiesel/oil seeds
-200

Fig. 2. Range of estimates for threshold values (biofuel mitigation costs), h/tCO2eq. emissions Notes: (1) Data from Jungmeier et al. (2005). (2)
Threshold value calculation ¼ price difference between biofuel and fossil fuel on energy-equivalent basis divided by tonnes of CO2eq./1000 l saved
through use of biofuel.

the range in the literature. Nevertheless, the estimated
threshold cost of biofuels is significantly higher than the
traded price of CO2 emissions of around h17/tonne CO2.
(See Fig. 3).18
Moreover, the threshold cost is at the higher end
compared with the costs of CO2 emissions mitigation
overall in the transport sector. Blok et al. (2001)
estimated that the cost of technical measures to reduce
greenhouse gas emissions in the transport sector would
range between h73–350/tCO2.
4.1. Costs of excise duty rebate
Given the cost differential with fossil fuels, govern-
ment intervention is needed in order to promote the
market introduction of biofuels. There are several
possible ways to do this. Currently the most widely
used method of subsidy in Europe is the rebate of excise
duties. The recent EU Directive on the taxation of
energy products and electricity, permits partial or total
exemptions in the taxation of biofuels (Council of the
18
The European Union Allowance (EUA) price development graph
is based on daily price information obtained from Point Carbon’s daily
allowance market newsletter Carbon Market Daily—www.PointCar-
bon.com. We are grateful to Luke Redmond for compiling it for us.
European Union, 2003). Many countries have already
introduced an excise duty rebate on biofuels and others
are considering doing so.
Table 4 compares the cost difference between a fossil
fuel and the corresponding biofuel, from Section 3, with
the excise duty applied to mineral fuels in each EU15
country. This table shows that at these fossil fuel prices
(July–December 2004), the cost difference between
European bioethanol and petrol is higher than the
excise duty applied to petrol in all EU15 countries, and a
remission of excise duty would be insufficient to equalise
the prices between fossil and biofuels. For diesel fuels,
the cost difference between biodiesel and diesel utilised
for private consumption is also greater than the excise
duties applied to diesel in all EU15 countries. This
demonstrates that further intervention would be needed
in all countries to promote biofuels in the EU transport
fuels market. However, this is obviously subject to the
level of oil prices. As fossil fuel prices rise, the level of
subsidy required to compensate the cost difference
between biofuels and fossil fuels is reduced. The rebate
of excise duty of transport fuels constitutes an exemp-
tion to Community State Aid Rules19 and is permitted
under certain conditions when the tax reduction given
19
Article 87(3)(c) of the EC Treaty.
 ARTICLE IN PRESS
L. Ryan et al. / Energy Policy 34 (2006) 3184–3194 3191

Fig. 3. Carbon prices December 2004–July 2005. Source: Point Carbon 11/7/2005 (www.pointcarbon.com).

Table 4
Comparison of price difference between biofuel and fossil fuel with excise duty applied in EU15 Member States

Member states Bioethanol and petrol cost difference h/1000 l Biodiesel and diesel

Sugar Starch Lignocellulosic Lignocellulosic Brazilian Petrol excise Oil seeds Diesel excise
crops crops residues sugarcane duty duty

Belgium 911 819 1094 962
60 574 551 340

Denmark 907 815 1090 958
64 541 573 367
Germany 928 836 1111 979
43 654 575 470
Greece 872 781 1055 923
98 296 537 245
Spain 891 800 1074 942
79 396 554 402
France 953 862 1136 1004
17 589 587 417
Ireland 885 793 1068 936
86 443 546 368
Italy 862 770 1045 913
109 564 533 413
Luxembourg 888 797 1071 939
82 442 554 265
Netherlands 865 773 1048 916
106 665 542 265
Austria 879 788 1062 930
91 425 548 310
Portugal 888 796 1071 939
83 523 566 308
Finland 910 818 1093 961
61 597 578 347
Sweden 908 816 1091 959
63 547 554 402
United Kingdom 931 839 1113 982
40 675 588 675
EU15 average 896 805 1079 947
74 529 557 373

Notes:
1. Fossil fuel prices are 6-month averages for EU15 for July-December, 2004.
Available from EU Oil Bulletin at: http://europa.eu.int/comm/energy/oil/index_en.htm.
2. Biofuel prices from best estimates in Table 1a.
3. Excise duty from EU Oil Bulletin, 31 March 2005.

by a Member State is not higher than the cost difference
between the biofuel and fossil fuels. In this case the price
difference between fossil fuels and biofuels before excise
duty and VAT is substantially higher than the excise
duty in all countries.
Table 5 presents the revenue foregone in EU15 as a
result of eliminating excise duties per tonne of CO2eq.
emissions saved. It is calculated as the value of excise
duty foregone per 1000 l of energy-equivalent biofuel
sold (EU15 average), divided by the best estimate of
tonnes of CO2 emissions saved per energy-equivalent
litre of biofuel from Table 3.
The values in Table 5 are lower than the best estimates
of the costs of the financial support required to the prod
 ARTICLE IN PRESS
3192 L. Ryan et al. / Energy Policy 34 (2006) 3184–3194
Table 5
Cost or revenue foregone as a result of an excise duty rebate (h/
tCO2eq.)
Biofuel Feedstock h/tCO2eq.
Bioethanol
Sugar crops 429
Starch crops 1286
Lignocellulosic crops 211
Lignocellulosic residues 202
Brazilian sugarcane 182
Biodiesel
Oil seeds 279
Notes:
1. Average excise duty for petrol and diesel in EU15, 31/03/2005.
Available at http://europa.eu.int/comm/energy/oil/bulletin/2005_en.htm.
CO2eq. emissions savings from best estimates in Table 3.
uction and distribution cost difference between Eur-
opean biofuels and fossil fuels, illustrated in Fig. 2. This
is clear since the difference between biofuel and fossil fuel
costs on average is currently higher than the excise duty.
Even if the costs of either an excise duty rebate or
subsidising the cost difference were comparable, the
rebate of excise duty may be preferred due to the ease of
implementation. The transaction costs can be low, since
the rate of subsidy is fixed at the excise duty rebate and
hence once a fuel meets the criteria of the definition of a
biofuel, the supplier is automatically awarded an
exemption from excise duty. With a scheme comprising
compensation of the cost difference of fossil fuels and
biofuels, in order to ensure that the price of the biofuel
matches that of the corresponding fossil fuel, the amount
awarded must continuously change and may be subject
to renegotiation. However, direct subsidy ensures that
the price of a biofuel matches that of the corresponding
fossil fuel. An excise duty rebate is not tied to prevailing
oil or biofuels costs; therefore the implicit subsidy given
is not a function of the current price differential.
Reducing excise duty on fuels would affect an
important source of government revenue. Revenue from
transport fuel excise duty in 2002 for the 15 Member
States in the EU reached h178 billion (ACEA, 2004).
Energy and transport taxes in 2002 made up 2.6% of
total GDP and 6.3% of total taxation in EU15
(Commission of the European Communities, 2004). In
addition, although on average the costs of remitting
excise duties are comparable with the cost difference
between biofuels and fossil fuels, for many countries, the
rebate of excise duty may not be sufficient to make all
biofuels competitive with mineral fuels.
4.2. Tariffs and world prices
So far we have focused primarily on biofuels
produced in EU15. Do the results change if the
accession of 10 new Member States20 to the EU in
2004 is considered? Kavalov et al. (2003) estimate the
potential contribution of the new Member States at 1%
of the enlarged EU fuels market. With optimal
technology, the potential rate of substitution could be
2% of diesel consumption and 3% of petrol consump-
tion. This production is sufficient to meet the new
Member States requirements under the EU biofuels
Directive, but it can only be a small supplement to EU15
biofuel production. In addition, the biofuels production
costs in accession countries appear to be similar to those
in EU15, as lower factor costs are offset by lower yields.
Potential sources of cheaper biofuels are found in
non-EU countries from South America and Asia. The
bioethanol market in Brazil has been established since
the launch of a biomass programme in the 1970s (the
Proalcool programme). The Brazilian government has
supported this programme with vehicle technology
subsidies and fuel tax reductions. Currently it is
mandatory to blend petrol up to 20–25% with
anhydrous bioethanol. This rule has provided a stable
market for bioethanol producers in Brazil over the last
30 years and created a low risk environment for
investors. As a result, Brazil has a significant cost
advantage in the production of bioethanol compared
with the EU, mainly due to large-scale commercial
production (reaching 13.7 billion litres in 1997 (Fulton et
al., 2004)) and favourable conditions for the cultivation
of sugarcane. This has led to cheap bioethanol and high
capacities available for export.
From Table 2 it can be seen that if bioethanol imports
from Brazil are used, the net costs per tonne of CO2
emissions reduction in the EU fall dramatically, to the
point where it is competitive in private cost terms with
petrol and diesel. Note however, that this conclusion
holds at current prices, i.e. it relies on a sufficient
Brazilian export capacity and assumes no import tariffs.
Tariffs of approximately h0.1–0.2/l 21 exist on imported
bioethanol to the EU. The EU Council Regulation22 on
laying down specific measures concerning the market in
ethyl alcohol of agricultural origin, introduced a
monitoring system from January 2004 affecting bioetha-
nol imports. An export and import license scheme was
introduced and the Commission has the power to
administer tariff quotas ‘‘resulting from international
agreements concluded in accordance with the Treaty
from other legislative acts of the Council.’’ The
International Energy Agency has called for the lowering
20
Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania,
Malta, Poland, Slovenia, Slovakia.
21
The tariff on bioethanol depends on whether it is denatured
(h0.102/l) or undenatured (h0.192/l). Germany requires bioethanol to
be undenatured but other Member States do not. Information on
tariffs is available on http://europa.ey.int/comm/taxation_customs/
dds/en/tarhome.htm.
22
Council Regulation no. 670/2003.
 ARTICLE IN PRESS
L. Ryan et al. / Energy Policy 34 (2006) 3184–3194
of tariffs on biofuels (Fulton et al., 2004), and it appears
that the EU is negotiating with Latin American
countries to reduce tariffs for the import of bioethanol
into the EU.23
5. Conclusions
The substitution of fossil fuels with biofuels has been
proposed in the EU as part of a strategy to mitigate
greenhouse gas emissions from road transport, increase
security of energy supply and support development of
rural communities. This paper focused on one of these
purported benefits, the reduction in greenhouse gas
emissions, and examined whether implementing this
measure is economically efficient. The current cost of
subsidising the price difference between European
biofuels and fossil fuels per tonne of CO2 emissions
saved is calculated to be h229–2000. This is the
threshold value that must be assigned to one tonne of
CO2 emissions, in order for the biofuels policy measure
to be economically efficient; it is high compared with
other available CO2 mitigation strategies, both within
the transport sector and (especially) outside. CO2
allowances in the EU are being traded at around h17/
tonne. The marginal abatement costs of CO2 emissions
for the road transport sector are in the range of
h73–350/tCO2 (Blok et al., 2001). The cost of subsidising
biofuels falls within the upper end of this range. It seems
then that supporting biofuels is currently not efficient
without including the economic benefits from additional
employment generated or the resulting incremental
security of energy supply. Even in this case, it is likely
that these strategic and social objectives could be met by
alternative means that are less expensive. The use of
biofuels is currently cost efficient only when the
bioethanol is imported from Brazil, assuming that the
Brazilian supply is perfectly elastic and import tariffs are
sufficiently low.
If the production of European biofuels for transport
is to be encouraged, exemption from excise duties is the
instrument that incurs the least transactions costs, as no
separate administrative or collection system needs to be
established. However, for most European countries,
total exemption from the prevailing excise duties would
not suffice to make production viable. Moreover, given
the pressure that most EU countries are under to reduce
budget deficits and taxes simultaneously, it seems
unlikely that the stimulation of biofuels will be seen as
a priority. These conclusions are valid at current costs
and prices (oil prices at approximately $50 bbl).
However, anecdotal evidence shows that a number of
entrepreneurs are producing biofuels at the lower
margin of the costs specified here profitably, once an
23
Personal communication DG TREN 11/2004.
3193
excise duty rebate is given. For example, the production
of biodiesel in Germany reached 1.04 million tonnes in
2004 and 170,000 tonnes of bioethanol were produced in
Spain in 2003. It is likely that growth in the volume of
the business will engender both economies of scale and
innovation that will reduce costs substantially (Jungme-
ier et al., 2005). However, under current conditions, it
seems that it will take time, large scale, innovation and
higher fossil fuel prices before European biofuels will be
able to compete on a cost-effectiveness basis with
imports from Brazil or alternative abatement options.
Acknowledgements
We would like to thank Pearse Buckley of Sustainable
Energy Ireland for invaluable comments and material in
relation to this work, and an anonymous reviewer for
very useful comments to an earlier version of this paper.
We are grateful for the support of the Irish Research
Council for Humanities and Social Sciences for this
work. The usual disclaimer applies.
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