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Agricultural Economics Research Review Vol. 25(No.1) January-June 2012 pp 137-150

Review Article

Transport Biofuel Production, Trade-offs, and Promotion Policies in Canada — A Review A.S. Bhullara*, Balbinder Deob and Jatinder Sachdevaa Department of Economics and Sociology, Punjab Agricultural University, Ludhiana - 141 004, Punjab School of Business, University of Northern British Colombia, Prince George, British Columbia, Canada a

b

Abstract. This review on biofuel policy, production status and studies on economic rationale has brought out that (a) Canada has huge fossil energy and is relatively free from the future energy insecurity; (b) the diversion of feed grains to biofuel production benefited the crop growers due to increased grain prices but adversely affected the livestock farmers, and consumers; (c) the biofuel production receives huge financial and market support from the government; (d) the environmental benefits of biofuels are meagre and too costly; and (e) the production of biofuels is a source of various multi-level latent conflicts. This experience suggests a re-direction of the policy towards increased research and development support for second generation biofuels. Key words: Biofuels, biofuel policy, trade–offs in biofuels, transport biofuel, Canadian biofuel policy JEL Classification: Q16

1. Introduction The demand of fossil fuels, as a source of energy, is going to increase in the foreseeable future and the fossil fuels are going to exhaust (USEIA, 2010; IAE, 2006; WEC, 2007; IPCC, 2000; Greenpeace, 2008). The reserves to production ratios are reported as 40 for oil, 60 for gas, and 120 for coal (Lior, 2010). The burning of fossil fuels results in higher emissions of Green House Gases (GHG) into the atmosphere. The global carbon emissions are increasing at 1.5 per cent annual growth for the past three decades (Pacala and * Author for correspondence, Email: [email protected]

§ This paper is largely a part of the studies undertaken by the authors at the University of Northern British Columbia, Canada. Authors are thankful to the University of Northern British Columbia, Canada for providing research facilities to conduct this study. However, the views and opinions expressed in this paper are not necessarily of any institution or organization.

Solocov, 2004) and its concentration in the atmosphere has reached 435 ppm CO 2 eq (carbon dioxide equivalent) (Bowen and Ranger, 2009) as compared to 280 ppm CO2eq during the pre-industrial era. The world-wide efforts are on to limit the concentration of GHG in the range of 450 to 550 ppm CO2eq and the temperature rise below the threshold level of two degree Celsius, but the target is quite challenging. The interesting point is that it is the use of fossil fuels which would cause future energy insecurity and the global GHG emissions. Therefore, the substitution of fossil fuel energy with low emission bioenergy is considered as the feasible option for long-run energy and environmental security. During the past one decade or so, various countries have made attempts to use ethanol and biodiesel as substitutes of conventional transport fuels. It was perceived that the production of biofuels will also aid in economic diversification, employment generation, rural development, waste management and

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improvements in human health (Taylor et al., 2005; Fraiture et al., 2008). But some controversial issues such as the trade-offs between biofuel and food and feed production and the resultant impact on the food and feed prices (Ajanovic, 2010; Auld, 2008; Msangi et al., 2007; OECD-FAO, 2010; Rajagopal et al., 2007; Rosegrant, 2008; Timilsina and Shreshta, 2010; Trostle, 2008; Wiggins et al., 2008), high water footprints (Fraiture, 2008; Gerben-Leenes et al., 2009; Gerbens-Leenes and Hoekstra, 2010; Lienden et al., 2010) and sustainability related issues (Lal, 2005; Petrou and Pappis, 2009) have also come into light with the production of biofuels. The consequential effects of trade-offs vary across countries depending upon their food availability, natural resources (especially land and water) and energy security status. These trade-offs impinge upon the biofuel production and promotion policies. Canada is blessed with immense natural resources and has a great potential for biofuel production. Canada occupies a large land area and produces huge quantity of biomass every year. Out of 998 million hectares of total land, 42 per cent is under forests, 25 per cent is timber productive forests and about 7 per cent is agricultural land. The timber productive forests spread over 245 million hectares of land contain a biomass stock of 15835 million tonnes of carbon with an energy content sufficient to meet 69 years of current energy demand in Canada. This demand is presently met with fossil fuels. The annual biomass harvest from forestry and agricultural sector is 143 million tonnes of carbon which is approximately equal to the annual atmospheric emissions of carbon. Canada has followed the biofuel production program enthusiastically and the federal and state governments have designed and allowed various economic incentives including the time-bound blending mandates of ethanol and biodiesel in the gasoline and diesel, respectively. The federal and the provincial governments and the biofuel producers’ organisation, viz. Canadian Renewable Fuels Association (CRFA), are optimistic about the future of biofuel programs, yet a scepticism about the rationality of biofuel expansion programs also prevails. However both, the federal as well as provincial governments, are continuing their support for the biofuel expansion programs. Therefore, the review of the biofuel policy in the broader context of the overall energy and agricultural situation was felt necessary.

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This review paper is an effort in this direction with the following specific objectives: •

To describe the biofuel policy and the status of biofuel production,

•

To review the biofuel policy in the broader context of energy and agricultural situation,

•

To review the financial support to biofuel production and its outcomes, and

•

To identify the drivers of biofuel expansion programs and the options for the future.

The paper is organized into five sections. The following section describes the biofuel policy and the status of biofuel production in Canada. Section 3 reviews the biofuel policy in the broader context of energy and agricultural situation. The review of financial support to biofuel production and the outcomes are discussed in fourth section. The conclusions are given in the final section.

2. Biofuel Production Policy and Status The federal and the provincial governments in Canada have designed various incentives for the promotion of transport biofuels, viz. ethanol and biodiesel. The Canadian Biofuel Policy started with the measures to create demand for ethanol and biodiesel through the fixation of time-bound blending mandates and it was supplemented with the financial support policies of awarding capital and operating grants, tax and excise concessions, direct producer payments, and import tariffs to protect the industry from outside competition. The blending mandates promise a sure market for a certain quantity of biofuels and thus give signals to the producers to increase production and investors to establish new plants. 2.1. Ethanol and Biodiesel Blending Mandates Canada amended Canadian Environmental Protection Act 1999 in 2006 to empower the government to decide renewable fuel blending mandates. The federal mandate includes blending of gasoline with 5 per cent ethanol starting from 2010 and blending of diesel with 2 per cent biodiesel in 2012. The blending mandate for ethanol was implemented from 15 December, 2010 (CRFA, 2010). Likewise, various states also came out with ethanol and biodiesel blending mandates. These mandates would require

Bhullar et al. : Transport Biofuel Production, Trade-offs, and Promotion Policies in Canada Table 1. Renewable fuel mandates in Canada Jurisdiction Federal Alberta British Columbia Manitoba Ontario Quebec Saskatchewan Federal Alberta British Columbia Manitoba Saskatchewan

facilities. The funding is available to the projects that make use of agricultural feedstocks for biofuel production and have a minimum 5 per cent of agricultural producers’ equity investment in the project. The program has been extended up to 31 March, 2012.

Consumption requirement Ethanol 5% from 2010 5% from 2010 5% from 2010 5% from January 2008; 8.5% from April 2008 5% from January 2007 5% from 2012 (cellulosic ethanol) 7.5% from Oct 2006 Biodiesel 2% by 2012 2% by 2010 2.5% in 2008 2% by 2010 2.5% in 2008 and 5% in 2010

•

The ecoENERGY program is designed to provide incentives to support the production of renewable alternatives to the transport fuels, viz. gasoline and diesel. The C$ 1.5 billion program started from April, 2008 and will end on 31 March, 2017. The program provides incentive at the rate of C$ 0.10 and C$ 0.20 for the renewable alternatives of gasoline and diesel, respectively for the first three years and declines thereafter. The program is designed to replace the federal excise concessions with the direct payments to the producers. The program is administered by Natural Resources Canada and endeavours to develop a competitive biofuel industry.

•

Ethanol Expansion Program (EPP) was introduced in 2003 and aimed at creation of capacity of 1 billion litres of ethanol production and use. The other objective of EPP was the reduction of GHG emissions.

•

Biodiesel research program is a part of the Climate Change Action fund of the Government of Canada implemented by Natural Resource Canada and National Research Council. The program aims at identifying the cost-effective ways of biodiesel production, distribution and use. A small demonstration plant was constructed under this program which was later converted into a full commercial plant. Biodiesel blends of 5 per cent and 20 per cent in the diesel were tested in buses in real life situation, especially in cold weather conditions. A similar program called National Renewable Diesel Demonstration Initiative was also administered under Government of Canada’s Renewable Fuels Strategy.

•

The Agricultural Bioproducts Innovation Program (ABIP) is a multi-year program that mobilizes funds for research (145 million dollars for five years) in the private and public sectors and also aims at integrating resources to build larger research capacity in agricultural bioproducts and bioprocesses. Biofuel production is an integral part of this program.

Source: Laan et al. (2009)

more than 2 billion litres of ethanol in 2011 and 600 million litres of biodiesel in 2012. Table 1 gives the information of federal and provincial mandates of ethanol and biodiesel in Canada. 2.2. Biofuel Production Policies The biofuel policy of Canada consists of various support programs to create ethanol and biodiesel production capacity and promote the market by using various economic policy tools (CRFA, 2010; Laan et al., 2009; Natural Resource Canada, 2010; Walburger et al., 2006). These are discussed below: 2.2.1. Federal and Provincial Support Programs

•

•

The Biofuels Opportunities for Producers Initiative (BOPI) was a C$ 20 million program implemented by the Agriculture and Agri-Foods Canada. The BOPI provided assistance to farmers and rural communities to hire experts to carry out feasibility studies for biofuel production and develop business proposals. The ecoAgriculture Biofuels Capital Initiative (ecoABC) is a federal government funded C$ 200 million program that makes available C$ 25 million per project as repayable contribution for construction or expansion of biofuel production

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The NextGen Biofuels Fund is a part of Sustainable Development Technology Canada and is meant for developing technologies and the markets for biofuels produced from the nontraditional renewable feedstocks.

2.2.2. Fiscal Incentives: Federal and Provincial

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Biofuel production is exempt from the federal excise duty @ 10 cents per litre.

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British Colombia (BC) provides C$ 0.1375 per litre for ethanol and C$ 0.1425 per litre of biodiesel as renewable fuels incentive in Greater Vancouver Region and C$ 0.0775 per litre for ethanol and 0.0825 per litre for biodiesel in other regions of BC.

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Alberta allows a producer’s credit of 9 cents per litre of ethanol production to plants having a minimum production capacity of 150 million litres and 14 cents for the plants having capacity less than 150 million litres. However, the product must be produced in Canada.

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Manitoba provided direct producer’s incentive for ethanol produced in the state at the rate of 20 cents per litre in the years 2008 and 2009 and committed to pay 15 cents per litre in the years 2010, 2011 and 2012 and 10 cents per litre in 2013, 2014 and 2015.

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Nova Scotia allows fuel tax exemption of C$ 0.154 per litre of biodiesel produced in Nova Scotia.

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Saskatchewan allows C$ 0.15 as fuel distributive credit for ethanol provided ethanol is produced and consumed in the province.

•

Some limited period other incentives were provided by various provinces.

2.2.3. Domestic Market Protection

Canada is protecting its domestic production of biofuels in two ways. First, there is an import tariff of C$ 0.0492 per litre on the ethanol imported from the countries other than United States or the countries with which Canada has a free trade agreement. Second, the incentives are being altered in such a way that these encourage domestic production. For example, direct producer payments and capital and operating grants are taking the place of excise and other tax exemptions. The state funding of research and development is an

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effort to increase productivity and decrease the domestic cost of production to avoid competition from cheap imports from the countries like Brazil. 2.3. Biofuel Production Status To meet the mandatory blending norms, the ethanol requirement will be of more than 2 billion litres per year. This requirement can be met with domestic production or imports. The ethanol production capacity has grown at a very fast rate since 2005 when the incentives were introduced (Figure 1). At present, the production capacity of the Canadian ethanol plants in operation is around 1.8 billion litres (Table 2). In addition, plants with a capacity of 226 million litres are either under construction or have been proposed. Most of the operational plants are corn-based, followed by wheat-based plants. The corn-based production capacity stands at 1307 million litres, followed by wheat-based with 344 million litres. Wheat-corn mixture-based plants have ethanol production capacity of 172 million tonnes. The biodiesel production also picked up after the year 2005, but at a low pace, probably due to late implementation year of the blending regulation and the low magnitude of blending mandates, i.e. 2 per cent in comparison to ethanol’s 5 per cent. Most of the biodiesel plants are either at the proposal stage or under construction and intend to use oilseeds or multi-feedstocks to produce biodiesel. Overall, Canada’s biofuel policy aims at production growth with an element of inbuilt flexibility. The mandatory review of biofuel policy considering environmental and economic merits, by a House or Senate Committee after every two years leaves a scope for bringing the desired changes in the policy. Timebound blending mandates, protection and direct payments to the producers are being used as ways and means to promote domestic production and with time the volume-based incentives such as tax credits are replacing the other support instruments. Tax credits coupled with subsidized finance decrease the price and enhance competitiveness and the demand. The biofuel policy, so far, has been able to successfully introduce the biofuels as a transport fuel.

3. Energy and Agricultural Scenario vis-àvis Biofuel Production Energy and agricultural situations are the two important factors in the biofuel policy of any country.

Bhullar et al. : Transport Biofuel Production, Trade-offs, and Promotion Policies in Canada

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Figure 1. Ethanol production capacity growth Source: Adapted from Laan et al. (2009) Table 2. Feedstock-wise ethanol and biodiesel production capacity in Canada (million litres per year) Feedstock

Wheat Corn Wheat corn mixture Others** Total Oilseeds Multi-feedstock Others*** Total

Operational

Ethanol 344 (2*) 1307 172 10 (10*) 1833 Biodiesel 30 135 41 (16*) 206

Proposed including under construction

Total

190 0 0 36 226

534 1307 172 46 2059

387 393 0 780

417 528 41 986

Notes: * Capacity of the demonstration plants in the stated capacity. ** includes energy beets, municipal solid wastes and wood wastes *** includes yellow grease, recycled oil/tallow Source: Calculated from CRFA, (2010)

The energy insecurity causes desperation and strongly induces the search for the alternative sources of energy in a short-time span. A comfortable state of supply allows time for meticulous planning and implementation of biofuel production programs and

integrating the biofuels in the energy mix. Similarly, the agricultural scenario of a country has implications for the biofuel production too. In case the food and feed grains are directly used for biofuel production, it can result in reduced food supply and high food prices. Biofuel feedstock production can also indirectly compete for land and other resources used for producing food and feed. 3.1. Canadian Energy Status vis-à-vis Biofuel Production Canada has large and secure energy sources for a long period. It possesses 3.9 per cent, 5.6 per cent and 22.0 per cent of the world reserves of crude oil, natural gas and uranium, respectively (Table 3). It is the third largest producer of hydroelectricity. The ecoENERGY Task Force (2008) estimated that Canadian oil reserves of 180000 million barrels of oil equivalent (Mboe) are sufficient to run two billion passenger cars for a life span of 200 thousands kilometres, gas reserves of 10000 Mboe to heat all households for 75 years and coal reserves of 31000 Mboe for providing electricity to all households for 100 years. 3.1.1. Energy Use in Transport

The consumption of energy by the transport sector and its share in the total energy consumption are the important factors for production and use of biofuels that is ethanol and biodiesel as substitute for the

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Crude oil reserves Hydroelectricity production Natural gas production Natural uranium production

Global rank

Percentage to world total

2 3 3 2

3.90 11.70 5.60 22

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between 2008 and 2020. The projected increase in demand for energy from gasoline is 16 per cent, 29 per cent and 8 per cent in the same respective scenarios during this period.

Table 3. Canada and world – The energy status Category

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3.1.2. Energy Use for Transportation and GHG Emissions

Energy-use is a major contributor to GHG emissions in Canada. The energy-use accounted for 79.2 per cent of the total GHG emissions in 1990 and this proportion increased to 81.3 per cent in 2008. The total GHG emissions in Canada increased by 24 per cent between the years 1990 and 2008 but the emissions from the use of energy increased by 27.3 per cent during this period. The GHG emissions from the use of energy in the transportation sector increased by 36.6 per cent during the period 1990 to 2008, i.e. from 145 thousand kt CO2 eq to 198 thousand kt CO2 eq. Overall, while the use of energy for transportation was 25 per cent of the total energy consumption, it was responsible for 33 per cent of the total GHG emissions from energyuse (Table 6).

Source: Senate Committee on Energy, the Environment and Natural Resources, 2010.

conventional transport fuels. The transport sector is the second largest consumer of energy in Canada. Out of the 10383 peta joules of the total energy demand, the transport sector accounted for 2570 peta joules in 2008. The share of transport sector in the total energy demand was about 25 per cent (Table 4). The demand of transport sector for energy will increase in future, though the magnitude will be significantly affected by the future oil price. In the reference case scenario, the demand for energy in the transport sector will increase by 19 per cent between 2008 and 2020. In low oil price scenario, it will increase by 33 per cent, and in high oil price scenario the increase in demand will be about 10 per cent.

Since Canada owns huge fossil energy resources, it can afford to take time to research, plan and experiment before the large-scale introduction of alternative energy sources. The transport fuels, especially gasoline and diesel, account for a substantial share in the total energy-use and GHG emissions and therefore, it is prudent to focus on finding alternatives of the transport fuels.

Gasoline and diesel accounted for 85 per cent of the energy-use (54 % from gasoline and 31 % from diesel) by the transport sector in the year 2008 (Table 5). The demand for energy from diesel is projected to grow by 27 per cent, 45 per cent and 15 per cent in the reference, low and high oil price scenarios, respectively Table 4. Demand projections for energy in Canada Sector

Energy demand Residential sector Commercial sector Industrial sector Transport sector

Baseline demand, 2008 (peta joules) 10383 (100.00) 1451 (13.97) 1467 (14.13) 4895 (47.14) 2570 (24.76)

Increase in demand during 2008-2020 (%) Reference case oil Low oil price High oil price price scenario scenario scenario 13.30

20.18

7.35

6.89

9.92

3.58

20.58

27.47

17.58

9.95

14.26

3.84

19.14

33.11

10.31

Source: National Energy Board (2009) (Calculated from the given figures)


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Table 5. Demand projections for energy by fuel type in the transport sector Fuel type

Aviation fuel Diesel Ethanol Gasoline Others Total

Baseline demand, 2008 (peta joules)

Increase in demand during 2008-2020 (%) Reference case oil Low oil price High oil price price scenario scenario scenario

249 (9.69) 808 (31.44) 26 (1.01) 1394 (54.24) 93 (3.62) 2570 (100.00)

12.85

19.68

9.64

26,61

44.80

15.10

23.07

42.30

15.38

16.14

29.34

7.60

15.05

21.50

9.68

19.14

33.11

10.31

Source: National Energy Board (2009) (Calculated from the given figures) Table 6. Canada’s GHG emissions: 1990-2008 (000 kt CO2 eq) Source

1990

2008

Total emissions Emissions from energy-use Emission from energy as % to the total emissions Emissions from transportation Emission from transportation as % of energy emissions

592 469 79.2 145 30.9

734 597 81.3 198 33.2

Change 1990-2008 Absolute Percentage 142 128 53 -

24.0 27.3 36.6 -

Source: Canadian Renewable Fuels Association (2010)

3.2. Canadian Agricultural Scenario vis-à-vis Biofuel Production Biofuel programs are believed to succeed only if these fit well in the food and agri-ecological situation, trade-offs and externalities associated with the biofuel expansion (Bhullar et al., 2011). Canadian biofuels are produced, by and large, from food and feed grains. Out of the total ethanol capacity (operational and proposed) of 2059 million litres per year (Table 2), 63 per cent is corn-based, 26 per cent is wheat-based and 8 per cent is corn-wheat mixture-based. The full utilization of corn- and wheat-based ethanol production capacity needs 3.27 million tonnes of corn and 1.57 million tonnes of wheat per annum, respectively. The dual feedstock capacity, i.e. wheat plus corn, requires additional 0.50 million tonnes of wheat or 0.43 million tonnes of corn or mixture of both depending upon the

technical feasibility of the proportion of each in the mixture (Table 7). At the current productivity level of around 9 t/ha of corn and 2.85 t/ha of wheat, the area required for producing corn and wheat is 0.36 Mha and 0.55 Mha, respectively. The land needed to produce the feedstock for wheat plus corn ethanol plants is in the range of 0.05 - 0.18 Mha. The total land requirement for ethanol feedstock production ranges from 0.96 Mha to 1.09 Mha. This much land has to come from either the inter-crop area shift or increase in the cropland area. The historical experience shows the absence of both. The total cropland area has remained stagnant. The area under corn remained almost constant between 1980 and 2010, but the production did increase significantly due to increase in the yield. The area under wheat declined significantly, but the production did not decline much though witnessed year-to-year large

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Table 7. Feedstock requirement for ethanol production Feedstocks grain type

Corn (C) Wheat (W) Wheat-corn (W+C) Total

Ethanol production capacity (million litres)

Ethanol production per tonne of feedstock* (litres)

Feedstock required (Mt)

Additional land requirement to produce feedstock (Mha)

1307 534 172 2014

400 340 340(W)-400(C) -

3.27 1.57 0.43(C)-0.50(W) 5.27-5.34

0.36 0.55 0.05(C)-0.18(W) 0.96 (C)-1.09 (W)

Corn

Harvested area (hectares)

Production (tonnes)

Harvested area (hectares)

Production (tonnes)

*FAO (2008) Source: Calculated from the CRFA’s list of biofuels plants in Canada.

Wheat

Figure 2. Canada’s corn and wheat production trends Source: Adapted from CRFA (2010)

fluctuations (Figure 2). So the demand for biofuel feedstock was met from the additional production resulting from the increase in yields. But, the additional production has other competing demands, especially of corn for livestock production. Mussel and Martin (2007) have reported that the subsidized ethanol production induced demand for corn had disturbed the agricultural growth scenario of Canada. They found that with the establishment of trade agreement with USA and Mexico and the signing of World Trade Organisation’s Agreement on Agriculture, the support for the export of wheat had to be withdrawn to avoid the issue of export subsidies which were untenable as per the clauses and the

regulations of these agreements. Consequently, the wheat exports declined and the area under wheat went down dramatically in 1990s (Figure 2) paving way for the production of oilseeds and pulses that provided the protein-rich feed for the livestock. The area under traditional feed crops, viz. barley and corn, remained steady but yields improved significantly. The increased supply of feedstuffs like corn and oilseeds induced the growth of livestock production. The herd size of sow increased from 1.0 million in 1990 to 1.55 million in 2007. The beef cow inventory which was little more than 3 million in mid-1980s increased to more than 5 million in 2005. Along with this, the access to the US and other world markets also improved under these

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C$ billions


Figure 3. Composition of Canada’s agri-exports to US Source: Adapted from Mussel and Martin (2007)

agreements. So Canada turned from a raw bulk exporter of agricultural commodities to an exporter of valueadded processed consumer products, especially the livestock products. The export of bulk and intermediate agricultural commodities became steady after the mid1990s but the export of processed agricultural consumer goods to the US increased at a fast pace (Figure 3). The bulk exports to the countries, other than US, followed an increasing trend up to mid-1990s but a declining trend afterwards. The export of intermediate and processed agricultural consumer goods increased continuously since the mid-1990s (Figure 4). The diversion of corn to biofuel production resulted in an increase in the feed prices and adversely affected the profit margins of livestock-based production. Consequently, a declining trend started in the livestock, based on the production and the size of sow and cow herds declined from 1.55 million and 5.0 million in 2005 to 1.3 million and 4.5 million, respectively in the first quarter of 2010 (Statistics Canada, 2010). Canadian livestock industry is vocal and has been pointing out consistently that increase in the feed costs, due to redirection of feed grains for biofuel production, is responsible for the decline of livestock industry (USDA, 2009). However, the biofuel industry opines that any fall in the supply of feed can

be met by the use of dried distiller grains, a byproduct of biofuel industry, as feed (USDA, 2009). 4. Estimates and Outcomes of the Support for Biofuels The promotion programs of biofuel industry in Canada include support for research and development, business planning, plant construction and biofuel production, distribution and consumption. The outcome of the support has been examined by the interest groups as well as by the scientific community. The topmost interest group, i.e. biofuel industry represented by the Canadian Renewable Fuels Association (CRFA) got a report prepared by Doyletech Corporation (2010) to present the total economic impacts of the biofuel plants in Canada. The total impacts of 28 Canadian renewable fuels plants were divided into construction and operating impacts. The economic impact of the construction phase of renewable fuel plants included total direct investment of C$2.326 billion, the total net economic activity of C$2.949 billion (including C$100.2 million to municipal governments, C$492.1 million to provincial governments, and C$679.9 million to the federal government), and the creation of 14,177 direct and


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C$ billions

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Figure 4. Composition of Canada’s agri-exports to countries other than US Source: Adapted from Mussel and Martin (2007)

indirect jobs during the respective construction periods. The economic impact of operating the renewable fuels plants included the production of a total of 2.25 billion litres of renewable fuels annually, a net annual economic benefit of C$1.473 billion to the Canadian economy (including C$14.1 million to municipal governments, C$108.8 million to provincial governments, and C$111.8 million to the federal government) and the creation of a net 1,038 direct and indirect jobs annually. It also estimated an annual benefit of C$540 million derived from the additional oil exports that became possible because of biofuel production. In total, the estimated annual positive economic impact of renewable fuels was to the tune of C$2.013 billion. The estimates of the study accounted the benefits of the external investment on the local communities. The study assumed that had the investment not made in ethanol plants in Canada, it might have gone outside Canada. A number of assumptions regarding the price of inputs and outputs were also made. To supplement this, CRFA released its own report card in November 2010 and reported that (a) biofuel feedstocks production do not effect the food and feed prices as these come from the additional production of maize and wheat obtained through productivity gains, (b) ethanol and biodiesel will

become competitive (rather much cheaper) with gasoline and diesel, respectively in few years, (c) biofuel production contributed positively to the reduction of GHG emission, and (d) the positive energy balance of biofuel feedstock production in Canada. Auld (2008) estimated the ethanol demand with mandates, total and per litre producer and capital subsidies and the subsidy for carbon offset up to the year 2012. As per the study, the demand for ethanol will almost double between 2008 and 2012. The total subsidies will increase from C$ 238 million in 2008 to C$ 383 million in 2012, but per litre subsidy will decline from C$ 21.8 to C$ 16.7. The subsidy for the offset of a tonne of CO2 eq stood at C$ 440 in 2008 and is projected to decline to C$ 335 in 2012 (Table 8). In a similar but comprehensive study Laan et al. (2009) have estimated the direct as well as the indirect support for biofuel production in low and high support scenarios (Table 9). In the low support scenario, the total as well as per litre support for ethanol will decline sharply, but in the high support scenario, the support will fluctuate but follow a little declining trend. The biodiesel subsidies will increase in 2011 but start declining in 2012. It may be due to the fact that the


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Table 8: Ethanol subsidy per litre and per tonne of carbon offset Item

2008

2009

2010

2011

2012

Ethanol demand with mandates, million litres Producer and capital subsidies, C$ million Subsidy per litre, cents Subsidy per tonne of CO2 eq offset, C$

1082 238 21.8 440

1096 297 17.8 359

2247 382 17 343

2274 386 17 342

2302 383 16.7 335

Source: Auld (2008) Table 9. Biofuel subsidy, total and per litre in Canada Scenario 2006

Estimates 2007

2008

2009

Projections 2010 2011

2012

Ethanol Total support estimâtes (C$ millions) Low 167 241 High 179 272 Consumption 333 1173 (million litres) Total transfer (C$/litre) Low 0.50 0.21 High 0.54 0.23 Total support estimâtes (C$ millions) Low 31 46 High 31 72 Consumption 40 90 (million litres) Total transfer (C$/litre) Low 0.78 0.51 High 0.78 0.80

305 366 1537

163 462 1477

154 458 1437

134 460 1812

93 379 2267

0.20 0.24

0.11 0.32 Biodiesel

0.11 0.32

0.07 0.25

0.04 0.17

73 100 120

57 104 201

97 153 290

94 174 671

64 137 671

0.61 0.83

0.28 0.52

0.34 0.53

0.14 0.26

0.10 0.20

Source: Laan et al. (2009)

stipulated 2 per cent biodiesel blending in the diesel is slated to start from the year 2012 and the capacity building to meet the requirement is under way. Hence, the grants for capacity building will be awarded till then. However, due to increase in production, per litre subsidies will follow a declining trend. The cost of avoidance of one tonne of CO 2eq with ethanol produced from corn and wheat was in the range of C$ 200 and C$ 430 in the year 2008. It was expensive by 4.23 to 33.83-times than the carbon offsets purchased from carbon markets. The avoidance of carbon with canola-based biodiesel was even more costly. The avoidance of one tonne of CO2eq ranged from C$ 265 to C$ 580 which is 8 to 137-times expensive than the offsets purchased from the carbon market.

Both the studies bring out that the biofuel production is surviving on the governmental financial support and is likely to remain so in the near future. The evidence that biofuels significantly reduce greenhouse gas emissions, once taking into account the life-cycle energy-use and consequent GHG emissions of the biofuel production, is inconclusive. The biofuel production subsidies benefit a section of the farmers while impose the costs on the others, e.g. the corn and wheat growers benefit while the livestockowning farmers suffer due to the increase in feed grains prices. Auld (2008) has estimated that domestic consumers have to incur excess expenditure to the tune of C$ 400 million due the increase in the food prices.

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5. Biofuel Production and Latent Conflicts Arguments and counter-arguments are on between the interest groups led by CRFA and independent researchers/ groups examining the prudence of biofuel production in Canada. CRFA tries to inflate the economic and environmental benefits of biofuel production, while the methodical research studies show the disappointing performance of biofuel programs. Much greater conflict is ensued within the farming community. The grains producing farmers support the biofuel programs as the production of biofuels opens another market for their produce and the increased demand pushes the grains prices upward. On the other hand, the farmers engaged in the livestock-rearing oppose the biofuel production because any increase in the prices of feed grains escalates the cost of livestockrearing and makes them uncompetitive in the market. In case the biofuel production remains financially unviable and survives with the support of tax payers money for a long time, it is a ground for a potential conflict between the tax payers and biofuel business entities and/ or government. So far the general public has consented to use their money to support biofuel programs considering positive environmental benefits of biofuels. The public allowed the government to extend financial support to biofuel business entities. But the persistent absence of tangible environmental benefits, it will be difficult for the government to continue the financial support.

Conclusions and Policy Implications This review has brought out that (a) Canada owns huge fossil energy resources and is free from the future energy insecurity. It can afford to take time to research, plan and experiment before large-scale introduction of alternative energy sources, but certainly not in a desperate situation to produce biofuels; (b) the diversion of feed grains to biofuel production though has benefited the crop growers due to increased grain prices, has adversely affected the livestock-rearing farmers and has also distracted the continuing agricultural growth trend; (c) the Canadian consumers have to spend more on food because of the increase in the food prices; (d) the biofuel production survives on the huge governmental financial assistance and market support; (e) the GHG reduction benefits of biofuels are costly than the carbon offset purchased from the market and; (f) biofuel production is a source of multi-

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level latent conflicts. The review has clearly depicted the imprudence of biofuel production in Canada as it has failed to meet the intended objectives. Then, why the policymakers are supporting the biofuel production and what are the probable drivers of this policy? First, the ostensible benefits have a mass appeal and political directorate responded to that as general public settle for forgoing a little for environment. A survey of public opinion has reported that 89 per cent of Canadians support the move towards a low carbon economy, 78 per cent support the current renewable fuel standards that mandate the blend of renewable fuels in the gasoline sold in Canada, and 86 per cent wish to have a long-term plan to push up the production of renewable fuels (cited in CRFA, 2010). Secondly, it is also reported that intense lobbying by interest groups persuaded the Government of Canada for support to the biofuel industry. CRFA and grain growers have maintained a pressure on the government to support biofuel programs (Laan et al., 2009). Western Canada Wheat Growers Association (2008) has supported the biofuel production with grains as feedstock as it will open another outlet for their produce and help to avoid the cumbersome export logistics and reduce the dependency upon uncertain export market. Thirdly, the consistently rising international crude oil prices since 2002 (peaking in 2008) have tempted the policymakers to look for substitutes and earn more by exporting the oil. Lastly, like many other countries, Canada has also leaned towards biofuel production, induced by the prevailing world-wide enthusiasm and optimism about the potential environmental benefits. However, the initial ecstasy and optimism is paving the way for economic rationale and the positive as well as negative aspects of biofuels are under the scrutiny of researchers and analysts throughout the world. The positive side of the biofuel policy followed in Canada is that it has successfully introduced the biofuels as evidenced by the fact that ethanol-blended gasoline is being sold across the country. But, by now the introductory phase is over and experience has brought out some lessons in the light of which the policy requires appropriate changes. First, the ethanol production capacity created and under creation is almost capable to meet the existing blending mandates


and therefore, the ethanol production from food and feed grains needs to be capped at this level. It will not be practical to withdraw the committed support to the existing or upcoming projects in midway, but no new commitments should be made for the future first generation plants. Second, the real hope lies in producing second generation biofuels as every year huge quantity of cellulosic biomass is produced in the country. Therefore, in place of supporting the first generation biofuels, funds should be pumped in the research and development of second generation biofuels. Third, the type of feedstock for second generation biofuel plants must be identified and evaluated for their energy and environmental benefits. The type of feedstock may vary across agroclimatic regions but it must promise high Net Energy Ratio (NER) and substantial GHG offset. A lot of confusion about the magnitude of NER and GHG offset capabilities of first generation biofuels prevails and therefore, for the second generation biofuels, a prior assessment is essential to avoid the costly mistakes and future regrets. Fourth, the feedstock for the second generation biofuels will come from either cut biomass or the wastes like crop residues, crop byproducts, etc. In the case of cut biomass, it has to be renewed at the harvest rate and the renewed biomass must absorb the same amount of carbon from the environment. Otherwise the very purpose of reducing GHG emission will be defeated. The use of wastes must encompass minimum trade-offs. For example, the use of crop residues as feedstock devoid the soils from nutrients which the soils receive with the recycling of crop residues back into the soil (Lal, 2005). Such side effects also need prior examination. The biofuel production will succeed only if it is in alignment with agro-ecological system and has the minimal competition with food and feed.

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