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Government Support for Ethanol and Biodiesel in China
Executive summary
In recent years, the governments of a growing number of countries have promoted industrial-scale production and use of liquid biofuels—fuel-grade ethanol and biodiesel1— and backed that commitment with financial support. This report, one of a series of country studies undertaken by or for the Global Subsidies Initiative (GSI) of the International Institute for Sustainable Development (IISD), examines the types and magnitude of support to biofuels in China.
Maintaining a reliable and secure energy supply to power China’s economic boom is one of the Chinese Government’s top priorities. With oil imports surging, private car use soaring and the costs of environmental pollution mounting, a domestic biofuels industry seemed an attractive option to Beijing. The Chinese Government also saw a biofuels industry as a means of building a “new socialist countryside” by providing alternative markets for grain and improving incomes and employment opportunities in China’s impoverished rural areas. China is now an enthusiastic supporter and promoter of biofuels for transport.
According to government data commissioned by the GSI, China provided a total of RMB 780 million (US$ 115 million, roughly US$ 0.40 a litre) in biofuel subsidies in 2006 (table below). These comprised support for ethanol in the form of direct output-linked subsidies paid to the five licensed producers, as well as tax exemptions and low-interest loans for capital investment. Further support is provided through mandatory consumption of ethanol-blended fuel in ten provinces (a ten per cent blend with gasoline, E10).
No official subsidies are currently available for biodiesel, although this is likely to change in the near future, with direct subsidies expected to be introduced before 2010. Ethanol and biodiesel industries are also likely to benefit from subsidies for feedstock production and soft-loans for research and development. A lack of publicly available data prevented the quantification of these forms of support.
Total support for ethanol and biodiesel is expected to reach approximately RMB 8 billion (US$ 1.2 billion) by 2020, according to official estimates. This is likely to be a significant underestimate, as it does not include support to feedstocks such as the RMB 3000 (US$ 437) per hectare per year available from 2007 for farmers growing feedstock on marginal land.
Official data on biofuel production and subsidies in China
China launched its Ethanol Promotion Program in 2002. The programme has steadily expanded over time, with the provision of support shifting from direct subsidies to taxbreaks and low-interest loans. China now produces around 1.6 million tonnes of fuel ethanol a year, with maize constituting about 80 per cent of the feedstock in 2007. One large, stateowned enterprise owns or has a significant stake in four of the five plants that are licensed to provide ethanol to state-owned petrol stations for blending and distribution. The sector is heavily regulated, with new ethanol plants requiring central government approval. All transport fuel prices in China are controlled by the government and the ethanol price is set at 0.911 times the ex-factory price of gasoline (research octane 90) with a sales price within RMB 4000–5000 (US$ 584–730) per metric tonne. However, following the government’s decision to lift petrol prices in June 2008, the ethanol price reportedly rose to RMB 5890 (US$ 859) per tonne (China Chemical Reporter, 2008).
China’s Medium and Long-Term Development Plan for Renewable Energy nominates biomass energy as a priority sector and sets targets of 2 million tonnes by 2010 and 10 million tonnes by 2020 for non-grain fuel ethanol use.
As China is a net importer of vegetable oils, the government has not promoted biodiesel use as a transport fuel. At present, biodiesel is not officially distributed through petrol stations in China, nor is there a national biodiesel standard. Producers sell it directly to users, without taxation or direct fuel subsidies. According to Chinese Government sources, total Chinese biodiesel output in 2006 was 190 000 tonnes. Press and other reports indicate that the figure now is much higher, with estimates of recent production in the range of 200 000 to 300 000 tonnes. The absence of taxation on this level of biodiesel consumption provides an unofficial subsidy of around RM 65 million (US$ 9.4 million) per year (foregone consumption- and value-added tax revenue on 200 000 tonnes of biodiesel consumption).
A target for biodiesel use has been set for 200 000 tonnes by 2010 and 2 million tonnes by 2020. To help reach the 2020 target, it has been reported that the Chinese biodiesel industry expects a comprehensive development plan to be released by the end of 2008, with direct production subsidies to be awarded this year.
China’s biodiesel industry is dominated by small-scale operators using animal fats or waste cooking oil as feedstock. However, the prospect of government support is attracting larger market entrants as well as foreign investment. There are now at least eleven operational biodiesel plants with at least another twenty-eight planned or under construction, including some with an annual production capacity of over 100 000 tonnes. Compared with the ethanol sector, the biodiesel industry is largely unregulated and there is significant involvement from the private sector.
The high cost of feedstock in 2007 and the first half of 2008 eroded profitability of both fuel ethanol and biodiesel production in China. High maize and cassava prices and the fixed ethanol price means Chinese ethanol producers rely on government subsidies to turn a profit. Ethanol producers have called for more government subsidies and a more flexible pricing formula to take into account rising feedstock prices. Waste oil prices have also risen significantly and, with Chinese fossil diesel prices capped by the state and remaining relatively flat compared with international diesel prices, profitability for biodiesel has been significantly eroded. In the absence of subsidies, biodiesel producers survive by either switching to production of alternative products for the chemicals industry or taking advantage of localized fossil-diesel shortages by charging users a premium for biodiesel. Little of either fuel is imported or exported.
The Chinese Government now realizes the inherent conflict between biofuels and food production in China. China’s Ethanol Promotion Program was originally envisaged as a means of using up stockpiles of maize that had gone stale. It was not until these stockpiles were depleted, and ethanol producers turned to fresh maize, pushing domestic prices to record highs, that the government became aware of the potential for biofuels to compete with food crops for land and undermine China’s food security policy. China is experiencing a sustained period of inflation with rising food prices, underpinned by domestic and international biofuels production. Rising vegetable oil prices as a result of international biodiesel production in particular have hit China hard. The government responded by halting the construction of new maize-based ethanol plants and promulgating policies to encourage the production of biofuels from non-grain feedstocks grown on marginal land.
The lack of available land on which feedstock crops can be produced is the most significant constraint on the expansion of China’s biofuels production. China already endeavours to feed its 1.3 billion people, around 20 per cent of the world’s population, with less than seven per cent of the world’s arable land. Land and water resources have been stretched to the limits of sustainability (if not beyond) to achieve food security.
Chinese officials themselves have noted that an increase in ethanol production would depend on whether enough land could be found to plant feedstock crops and that, given the shortage of suitable land, it would be very difficult to achieve the large-scale production targets laid out in the Medium and Long-term Plan. The authors estimate that, at the very least, 2.23 million hectares would be used for the production of biofuels in China next decade if production and planting targets are met.
The government has identified 35 to 75 million hectares of marginal land that might be suitable for biofuel feedstock crops. There is no set definition of “marginal” land but it appears to include saline land, steep hillsides and may also refer to land that is not currently being used for any obvious productive purpose. The economic, social and environmental impacts of using these lands for biofuel production will depend on local circumstances.
From an economic perspective, the extent to which marginal land could viably support biofuel crops is uncertain. Yields from sub-optimal lands may be insufficient to make cultivation profitable. Also, there have been no analyses to determine whether growing feedstock crops is the most economically valuable allocation of China’s land resources.
The use of marginal land for feedstock production may provide opportunities for poor farmers. Biofuel crops could provide a source of cash income for farmers in some of China’s poorest regions, particularly if farmers are able to contract directly with energy companies. However, there is evidence that small landholders can be at risk of displacement due to illegal or unjust land acquisitions, as local government and investors establish large-scale biofuel developments. Many of the potential non-grain feedstocks identified by the Chinese government (such as cassava and sweet potatoes) could in fact be directed towards food production or animal fodder, helping to alleviate high food prices. If biofuel crops divert water and fertilizer from food crops, that also could affect food availability and prices.
From an environmental perspective, the cultivation of feedstock crops such as sweet sorghum on degraded saline or arid lands could be beneficial for erosion control and improvement of soil health. Where forest, grassland or vegetated hillsides are converted for feedstock production, there will be consequential carbon dioxide emissions from vegetation and soil, potential loss of biodiversity, erosion risk and impacts water quality due to pesticide and fertilizer run-off.
The National Development Reform Commission (NDRC) has identified Southwest China as a key area for the production of Jatropha curcus as a biodiesel feedstock, and provincial governments have set ambitious acreage targets for the establishment of jatropha plantations. Southwest China is one of China’s most ecologically important regions, containing most of China’s remaining natural forests as well as the headwaters of the Yangtze and the Mekong rivers. The development of large-scale jatropha plantations could threaten biodiversity and harm important waterways, through erosion and agricultural runoff. Subsidies available to farmers for the cultivation of biofuel crops on marginal land are significantly higher than those paid to farmers to set aside marginal land for conservation purposes, so withdrawals from China’s environmental set-aside program (Grain for Green) are possible.
These area payments could also be become expensive for the government if farmers and agro-industries are able to access generous per hectare payments for growing small quantities of biofuel feedstocks on infertile land. Such an outcome would deliver little biofuel per subsidy-dollar. On the other hand, putting in place minimum yield or land quality requirements would risk encouraging the cultivation of arable land for feedstocks.
Even under the most optimistic scenarios for Chinese biofuel production (if production targets are met) soaring private vehicle ownership means domestic production of biofuels would have a negligible effect in reducing China’s oil consumption or increasing energy security. China is projected to use 800 million tonnes of oil equivalent in 2030, according to the International Energy Agency. By 2020, the government target of 12 million tonnes of biofuel production would be equivalent to less than two percent of total oil consumption (taking into account the lower energy content of biofuels compared with petroleum).
Pollution benefits are likely to be marginal, also. Analysis by the Chinese government found significant reductions in sulphur, carbon monoxide and greenhouse gas emissions from vehicles using E10 compared with running the same vehicles on gasoline. Once all stages of the production of the biofuels were taken into account, however, the reductions were found to be minor, and some pollutants actually increased using E10 in place of pure gasoline.
Maize farmers in China have benefited from increased prices as a result of fuel ethanol production. Some jobs have been created in impoverished rural areas. However, these localized benefits would seem to be outweighed by more widespread negative effects of higher food prices, which hit China’s poor hard in 2007 and 2008. Small-scale farmers face increased risk of displacement and land seizures as a result of provincial government and investor enthusiasm to expand large-scale biofuel feedstock production into new areas.
Government support for biofuels in China does not appear to be delivering the hoped-for benefits for energy security, pollution control and rural development that motivated the development of its biofuel policies. There is also the potential for unintended negative consequences that could actually undermine the government’s economic, social and environmental goals.
On this basis, the authors recommend that:
- direct production-linked subsidies for fuel ethanol production be eliminated and direct subsidies for biodiesel production should not be introduced; and
- government support for biofuels demonstration projects should be limited to those that can clearly avoid competition with food or feed production to encourage greater research and development of genuinely non-food biofuels feedstock sources, particularly lingo-cellulosic sources.
- any subsidies paid to farmers for conservation set-aside programs should be brought into line with those paid to farmers to produce biofuels (or the latter subsidies reduced);
- the survey of marginal land currently being conducted should investigate the likely impacts of biofuels production on marginal land on food production, the environment and local livelihoods; and
- site-specific assessments ensure that biofuel development on marginal land is appropriate under local circumstances.
Further Reading
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November 2008
