Regulatory Impact Analysis Biofuels as an example By Senior Adviser Johan Nitter-Hauge Ministry of Finance, Norway.

Regulatory Impact Analysis

Biofuels as an example

By Senior Adviser Johan Nitter-Hauge

Ministry of Finance, Norway

Finansdepartementet

Rationale for intervention

• Rationale for intervention Markets don´t always secure efficiency

Eg. externalities, information failure, public goods.

• Objectives defined to reflect outcomes (eg. crime reduction) rather than just outputs or inputs (eg. prosecutions, prison staff).

• Cost-benefit analysis – some examples: Transportation sector Climate Change Programme Supporting people programmes

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Climate Change Programme - biofuels

• According to the Kyoto protocol of 1997, Norway has commitments in relation to its Co2-emissions.

• The transportation sector is responsible for about one quarter of energy-related greenhouse gas emissions.

• Replacement of conventional hydrocarbon based fuels with fuels made from renewable bio-sources, e.g. rape seed or palm oil could be one way of reducing the emissions.

• Appraisal looked at a scenario where 2 % of the fuels consists of biofuels.

• The main biofuels today are ethanol and biodiesel. In Norway they are imported.

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Biofuels - benefits

• Biofuels have a ”lower carbon footprint” than conventional fuels. 100 % carbon savings assumed.

• 2 % biofuels content results in a reduction in total Co2 emitted in Norway of 160 000 tons per year.

• The social cost of Co2 is set at 25 euros per ton.

• Thus, the value of the annual benefit in Norway is 4 mill. euros.

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Biofuels - costs

Biofuels have a lower energy content than conventional fuels.

Resource costs of biofuels passed on to consumers.

Other (non-monetary) costs:

Crops that otherwise would become food might instead become fuel. Biofuel programmes could raise food prices. Higher crop prices could harm the poorest people.

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Costs of a 2 % biofuel scenario

BioethanolPrice at the pump (eurocents per litre)

Additional cost (eurocents per litre)

Total additional cost (mill. euros)

Total volume sold 2004

Conventional fuel

42,31 2139 mill. litres

Bioethanol2 % (E02)

42,38 0,06353 1,398

E02 energy-corrected

42,69 0,38 8,13

Biodiesel

Conventional diesel

49,30 1782 mill. litres

Biodiesel2 % (E02)

49,68 0,38 6,86

E02 energy-corrected

49,81 0,508 9,02

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Benefits and costs in summary• Reduced Co2 emitted: 4 mill. euros

• Total additional cost (8,13+9,02)mill. euros: 17,15 mill. euros

• Net benefit: - 13,15 mill. euros

Cost-efficiency:

• Reduced Co2-emissions: 160 000 tons

• Cost per ton of Co2 abated: 107 euros

• Social cost of Co2 per ton: 25 euros

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Sensitivity analysis

• A cost decrease of 30 % means that the cost per ton of Co2 abated could be 64 euros.

• According to the Stern report, the social cost of Co2 should be about 60 euros.

• An oil-price of 80 dollars per barrel makes biofuels competetive with conventional fuels.

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Conclusion - biofuels

• The measure does not pass a cost-benefit test with today´s prices of Co2.

• However, a measure should be included in a climate change programme even though it does not pass a cost -benefit test if it is anticipated that it will help to secure access to less costly carbon savings in the future.

• Thus, the greatest potential for reducing costs lies in the development of next generation technologies to utilize the cellulosic content of the plants.

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Biofuels – what did the government decide?

• There will be a biofuel obligation where the fuel sellers have to ensure that at least 2 % of the fuel they sell for road transport is biofuel by 2008.

• By 2009 at least 5 % of the fuel sold for road transport shall be biofuel.

• New regulations circulated for comments.

In addition: • Tax reliefs for biofuels and so-called flexi-fuel cars are

already in place.

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The Preservation of Climate