IARU International Scientific Congress on Climate Change, Copenhagen, 10-12 March 2009 Sustainability standards for bioenergy A means to reduce climate

IARU International Scientific Congress on Climate Change, Copenhagen, 10-12 March 2009

Sustainability standards for bioenergy A means to reduce climate change risks?

Prof. Dr. Renate Schubert, Julia BlaschInstitute for Environmental Decisions (IED)

3/11/2009 Institute for Environmental Decisions / [email protected] 2

Agenda

1. Risks of unregulated bioenergy use

2. Sustainability standards

3. Market failure in the bioenergy market

4. Overcoming information asymmetries

5. Predictions on consumers’ WTP

6. Addressing public externalities

7. Conclusions and recommendations



Bioenergy accounts for ~10% of global primary energy supply

More than 85% thereof is traditional bioenergy use in the developing world

Production and use of modern bioenergy, esp. of biofuels, usually depends on government support

Exception: Brazilian ethanol Biofuel subsidies in Europe, US and CA: ~ 11 Bio. US-$ in

2006

Often cited motivations for support policies: (1) climate change

mitigation (2) energy autonomy (3) rural development



Unregulated support bears risks for- Climate

- Biodiversity

- Food security

- Soil and water resources

- Social development

Two origins of risks: (1) unsustainable behavior of market

actors AND (2) unsustainable government support policies

Can regulation reduce these risks?



Possible regulation: sustainability standards for bioenergy

production

Sustainability standards have to refer to:

I.Required life-cycle-GHG emission reduction

II.Minimum land use changes (direct and indirect LUC)

III.No conversion of natural ecosystems

IV.Conservation of water and soil quality

V.Controlled use of GMO

VI.Compliance with basic labor standards



Certification schemes need to attest compliance with the

standard

Product labels as visible signs to consumers

Open question: What type of scheme should be

introduced?

-Voluntary certification

-Mandatory certification

-Binding minimum standard



Examples for legislation and initiatives on sustainable bioenergy

- National: Criteria for biofuels support in GB, DE, CH;

Criteria for biofuels of Swedish energy company SEKAB

- Supranational:

Criteria for biofuels support in European RES Directive

- International:

Criteria of Roundtable on Sustainable Bioenergy (RSB)

Sustainability Task Force of Global Bioenergy Partnership (GBEP)



Open question:

- Why don’t markets provide sustainable bioenergy by

themselves?

Answer: Potential sources of market failure are

- Information asymmetries between producers and

consumers

- Public externalities of bioenergy production


3. Market failure in the bioenergy market Information asymmetries

Consumers cannot observe production methods

- They have incomplete information on the production processes

- Production method is a “credence characteristic” of bioenergy

Producers know modes of production, i.e. information

asymmetry (Akerlof,1970)

Results:

No price premium for sustainable bioenergy

Producers supply unsustainable bioenergy


3. Market failure in the bioenergy market Public externalities

Positive externalities from sustainable bioenergy production

- Positive effects on biodiversity, climate, soil/water, etc.

- But: No remuneration for provision of these public goods

Negative externalities from unsustainable bioenergy production

- Deforestation, soil degradation, loss of biodiversity, etc.

- But: No private costs for damages caused

Result: too little sustainable, too much unsustainable b.e.



Simultaneous occurrence of information asymmetries and

public externalities

consumers will not reveal their true willingness to pay

for sustainable bioenergy

producers will not produce sustainable bioenergy

Two sources of market failure

Two instruments to correct them


4. Overcoming information asymmetries

General effect of standards/ certification/ labeling

- Producers can credibly signal their modes of production

- Consumers can distinguish products according to production

methods used at low information costs

Result: Socially preferable market outcome

- Producers can capture price premium for sustainable bioenergy

- Consumers can adapt purchasing behavior to their preferences


4. Overcoming information asymmetry

Open question: Will private actors introduce voluntary

standards?

- Producers aim at capturing price premium

- Price premium will only emerge if consumers show necessary

willingness to pay

- Problem of insufficient WTP because of public externalities prevails

No, we will not observe voluntary standards; mandatory

certification as solution! (= Instrument 1)


5. Predictions on consumers’ WTP

Theoretically, willingness to pay depends on

- Consumers’ preferences for “green” product characteristics

- Existence of private benefits from “green” product characteristics (i.e.

health, taste)

- Share of “concerned” consumers in population

- Consumers’ ability to pay the price premium

Generally, WTP studies for “green” products predict:

- Share of “concerned” consumers: 30-50% of population

- WTP for price premium: up to 5-10% of product price


5. Predictions on consumers’ WTP Market share of certified Sustainable Forest Management

- In 2008 around 8.3% of global forest cover (~ 13.4% of managed forests)

was certified by either FSC or PEFC

- 80-90% of certified forests lie in Europe, North America, Russian

Federation

Market share of certified “green electricity”

- In 2006 share of certified electricity was +/- 5% in European countries with

some exceptions (NL, SE)

Limited market share for sustainable bioenergy



How to design the mandatory certification: Taxation vs.

binding minimum standard (BMS) Taxation

Perverse incentive of taxation Less sustainable bioenergy than before intervention

High tax rate required due to high social costs of unsustainable bioenergy production (i.e. deforestation, use of GMO, child labor)

Unsustainable bioenergy will be noncompetitive Producers will have to exit the market



Taxation vs. binding minimum standard (BMS)

Binding minimum standard (BMS)

BMS equals an “infinitely” high tax on unsustainable

bioenergy production

Like a tax BMS will force producers of unsustainable

bioenergy to exit the market

However: No perverse incentive like from taxation

And: BMS may exhibit higher political feasibility

BMS are dominant solution (=Instrument 2)



Mandatory certification and a binding minimum standard…

eliminate the worst environmental and social effects of

bioenergy production

pave the way for comprehensive requirements for

sustainable land-use in the whole agriculture and

forestry sector

must be embedded in a broader package of policy

measures



Recommendations for implementation

Step-wise approach: implementation at national, regional

and then international level (to ensure compatibility with

GATT/WTO law)

Criteria on international level: Recognized body such as

Global Bioenergy Partnership (GBEP) or Roundtable on

Sustainable Biofuels (RSB) should take the lead

Intermediate solution: bilateral agreements between

important producer and consumer countries



Next steps/Outlook

Short-run: Unconditional promotion of bioenergy should be

brought to an end

instead: minimum standard + phase out subsidies for bioenergy of

outstanding sustainability

Long-run: Integrated taxation strategy for fossil fuels and

unsustainably produced renewable energy is needed

aim: change of relative prices in the energy market in favor of sustainable

renewable energy products with proven potential to mitigate climate change


New Report: „Future Bioenergy and Sustainable Land Use“

Latest report by the German

Advisory Council on Global

Change (WBGU)

For more information:

www.wbgu.de

Documents

IARU International Scientific Congress on Climate Change, Copenhagen, 10-12 March 2009 Sustainability standards for bioenergy A means to reduce climate