Biofuels Could Help Cut Farm Subsidies
The trend toward increasing production of biofuels provides an opportunity to dismantle agricultural subsidies and tariffs, according to the International Monetary Fund’s top economist.
Writing in the December issue of the IMF’s Finance & Development magazine, Simon Johnson looks at how the adoption of biofuels is driving up world food prices.
Over the past 12 months, the world has experienced a substantial inflationary shock in the form of higher food prices, partly fueled by increasing demand for crops for biofuels production. This shock doesn’t necessarily translate into higher sustained inflation, Johnson writes; monetary policy in most countries appears to be responding appropriately. “But it will have adverse effects, particularly on relatively poor urban residents in low-income countries.”
There are also two potential silver linings: direct benefits for farmers in low-income countries and potential policy space for removing agricultural subsidies in rich countries.
In the IMF staff’s assessment, a significant part of the latest jump in food prices can be traced directly to biofuels policy, Johnson writes. “A key part of this approach to biofuels is agricultural protectionism. A number of countries, including Brazil, can produce ethanol much cheaper, with a greater saving of nonrenewable energy and lower emissions, for example, by using sugar. But this sugar-based ethanol is subject to a prohibitive tariff in the United States (and there are similar barriers in Europe).”
In addition, production subsidies in rich countries, which are intended to encourage innovation in this sector, seem to have led to excessive entry into the US ethanol distillery business.
The greatest potential gains of using crops for biofuels are for farmers everywhere, including the rural sector of poorer countries, Johnson writes. Urban dwellers are likely to be hurt (as a result of higher food prices), so the net impact for each country will vary.
There is another potential opportunity in this rapidly developing difficult situation, Johnson writes. “Farm subsidies of various kinds in rich countries have long plagued the international trading system and currently make it difficult to move forward with further trade liberalization. Rich countries are reluctant to improve access to their most protected markets.”
With high food prices, subsidies are less compelling and—depending on how they are structured—may not even pay out when prices are above a certain level, Johnson writes.
Industrial countries need to seize this moment and eliminate subsidies in such a way that it is hard to reimpose them later.
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