Hans-Werner Sinn

Nationalökonomie & Finanzwissenschaft

Ifo Viewpoint

Ifo Viewpoint No. 88: Should We Run Our Cars on Food?

Munich, 16 October 2007

Ban Ki-moon, Secretary General of the United Nations, recently visited the Antarctic and was impressed by the melting ice he saw. Then he was in Brazil, and he was impressed by the fact that in Brazil a quarter of automotive traffic runs on bio fuel. Oil pressed from rape seed can be used as diesel fuel, and from maize or sugar beets ethanol can be made, to replace gasoline.

Bio fuel is considered by the UN as one of the options to fight climate change. Many countries officially share this view. The USA generously subsidizes the production of ethanol from maize. The production of this type of fuel is currently growing at an annual rate of 12 percent in the USA and almost 10 percent worldwide. EU countries subsidized the production of bio fuels with 3.7 billion euros in 2006 and intend to cover 8 percent of their motor fuels from biological sources by 2015 and 20 percent by 2020. The Kyoto Protocol allows countries to meet their target reductions of carbon dioxide by substituting bio fuels for fossil fuels. This is all done to slow down global warming.

But is it really a wise and ethically acceptable strategy to burn food rather than eat it? If we allow food to be used for the production of bio fuels, food prices will be linked to the oil price, as the head of the German farmers association happily announced. Indeed, food prices are currently increasing in Europe because more and more farmland is being used for bio fuels instead of for food production.

This development is not sustainable. The so-called tortilla crisis, which led to protests in Mexico City in January this year, gives an impression of what we may expect. The price of maize, half of which is imported from the USA, more than doubled in the course of a year, primarily because of the maize used for the production of bio ethanol. Mexico tried to solve the problem by imposing a state-administered price ceiling for tortillas made of maize, combined with duty-free imports of maize.

The Mexican tortilla crisis sarcastically demonstrates the deficiency in an environmental policy that seeks to reduce the greenhouse effect by promoting the production of bio fuels. The problem is that the advocates of this policy have not made clear where the land will come from that will be used for the production of bio fuels and other natural fuels. Until the answer is given, it is hard to see the logic in the promotion of bio fuels and other natural fuels.

In principle there are only three ways to procure land for the cultivation of bio fuels. Firstly, land can be withdrawn from the production of food (or fodder to feed animals to make food). Secondly, from the production of natural materials, wood in particular. And thirdly from nature. The perversity of the first course is manifest – it cannot be pursued with a clear conscience because there is no surplus food production in the world. Whoever wishes to grow bio fuels on land that was previously used for food production must realise that this increases food prices and burdens especially the poorest of poor. We are taught not to throw away food, but we shouldn’t burn it either.

Only two alternatives remain, but these are also hardly convincing. To cultivate bio fuels on land that would otherwise be used for the production of sustainable construction materials drives up the prices of these materials and encourages their substitution by non-sustainable materials. Then less wood and more concrete and steel is used for construction. This is unobjectionable on ethical and social-policy grounds, but it does not help the environment.

Wood stores carbon, which is taken from the air by photosynthesis. The larger the stocks of wood on earth, in the form of living trees or in the form of wooden construction material stored in buildings, the smaller the portion of carbon dioxide in the air and the cooler the earth remains. Taking the land used for the production of bio fuels from forests means speeding up global warming, as the plants under consideration are all much smaller and hence store much less carbon than trees.

To be sure, in addition to the negative storage effect, there might be a positive effect on the world climate insofar as bio fuel may replace fossil fuel for combustion processes. But this assumes that the oil sheikhs will extract less oil because there is more bio fuel. If they don’t, the bio fuel will simply come in addition to fossil fuel, and the positive effect is absent. World market prices of fossil fuels will simply be lower than they otherwise would be, such that the total consumption of fossil and bio fuels taken together rises by the extra production of bio fuel. The negative storage effect in this case prevails, and global warming accelerates.

The remaining alternative is land that has not been previously used commercially. But here too the analysis comes to the same conclusion because such land is usually wooded. The substitution of forests by maize, rape and other oilseed cultivation reduces the stock of biomass and likewise leads to an increase in the concentration of carbon dioxide in the air. Brazil has cleared huge areas of its jungles in order to produce the bio ethanol that impressed the Secretary General. By doing so, the country has done a great disservice to the world climate.

Every year, the world loses a forest area the size of Ireland. This accounts for 18 percent of annual carbon dioxide emissions, more than from the world’s entire transport sector. Deforestation must be reversed not accelerated.

The analysis shows that it makes little sense to take land in whatever form and use it for the production of bio fuels. Only the possibility of making bio fuels without the use of additional land is justifiable in terms of environmental and social policy. This would mean using agricultural waste, which would otherwise rot and produce nearly equal amounts of carbon dioxide and methane, an even more dangerous greenhouse gas.

These options should be explored and supported, also by the state. But it makes no sense to officially promote the production of bio fuels on land that would have been used for other purposes.

Hans-Werner Sinn
Professor of Economics and Finance, University of Munich
President of the Ifo Institute

Project Syndicate, November 2007; Revised version. Earlier published as "Refuelling instead of Feeding". Published as "Tanken statt essen?", WirtschaftsWoche, no. 36, September 3, 2007, p. 162.