Stimulating the use of biofuels in the European Union: Implications for climate change policy

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.