Policies for Biofuel Feedstock Production

Public Disclosure Authorized DIRECTIONS IN DEVELOPMENT Countries and Regions Public Disclosure Authorized Biofuels in Africa Opportunities, Prospects, and Challenges Public Disclosure Authorized Donald Mitchell Public Disclosure Authorized Biofuels in Africa Biofuels in Africa Opportunities, Prospects, and Challenges Donald Mitchell © 2011 The International Bank for Reconstruction and Development / The World Bank 1818 H Street, NW Washington, DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org All rights reserved 1 2 3 4 13 12 11 10 This volume is a product of the staff of the International Bank for Reconstruction and Development / The World Bank. The findings, interpretations, and conclusions expressed in this volume do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgement on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this publication is copyrighted. Copying and/or transmitting portions or all of this work without permission may be a violation of applicable law. The International Bank for Reconstruction and Development / The World Bank encourages dissemination of its work and will normally grant permission to reproduce portions of the work promptly. For permission to photocopy or reprint any part of this work, please send a request with com- plete information to the Copyright Clearance Center Inc., 222 Rosewood Drive, Danvers, MA 01923, USA; telephone: 978-750-8400; fax: 978-750-4470; Internet: www.copyright.com. All other queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank, 1818 H Street, NW, Washington, DC 20433, USA; fax: 202-522-2422; e-mail: [email protected]. ISBN: 978-0-8213-8516-6 eISBN: 978-0-8213-8517-3 DOI: 10.1596/978-0-8213-8516-6 Cover image: “Baobab, Guineafowl, and Beadwork,” oil on canvas, by Andry Kashivi, South Africa, 2000, courtesy of World Bank Art Program. Cover design: Naylor Design, Inc. Library of Congress Cataloging-in-Publication Data Mitchell, Donald, 1947 Nov. 29- Biofuels in Africa : opportunities, prospects, and challenges / Donald Mitchell. p. cm. Includes bibliographical references and index. ISBN 978-0-8213-8516-6 — ISBN 978-0-8213-8517-3 (electronic) 1. Biomass energy—Africa. 2. Power resources—Government policy—Africa. I. Title. HD9502.5.B543M58 2010 333.95'39096—dc22 2010044318 Contents Foreword xi Acknowledgments xiii About the Author xv Abbreviations xvii Executive Summary xix Chapter 1 Introduction1 Chapter 2 Understanding Biofuels in Africa5 Production6 Consumption 20 Prices 27 Trade 30 Biofuel Standards 31 Greenhouse Gas Emissions, Carbon Credits, and Biofuels 32 Summary and Conclusions 37 Notes 40 References 41 v vi Contents Chapter 3 Biofuel Production Costs 47 Straight Vegetable Oil Production Costs and Prices 49 Jatropha Plantation Production Model 52 Producing Biodiesel from Jatropha Oil 60 Ethanol Production Costs 61 Summary of Biofuel Production Cost Estimates 71 Volatility of Production Costs and Managing Price Risk 72 Summary and Conclusions 74 Notes 76 References 77 Chapter 4 Global and Regional Demand for Biofuels 79 Energy Prices 80 Mandates and Subsidies 82 Biofuel Demand in the African Region 85 Global Demand for Biofuel Imports 98 Summary and Conclusions 108 Annex 112 Notes 113 References 113 Chapter 5 Case Studies 117 D1 Oils Plc 118 Diligent Tanzania Ltd. 125 SEKAB BioEnergy Tanzania Ltd. 130 Lessons Learned 133 Notes 135 References 136 Chapter 6 Policies for Biofuels in Africa 137 Policies for Biofuel Feedstock Production 139 Policies for the Manufacture of Biofuels 146 Policies for the Domestic Sale of Biofuels 146 Investment Incentives for Biofuels 147 A Biofuel Development Strategy 147 Development of the Policy Framework 150 The Role of Donors, Multilateral Institutions, Foreign Investors, and the Development Community 152 Contents vii Summary and Conclusions 152 References 153 Appendix A The Brazilian Experience 155 Historical Developments 155 Environmental Effects of Producing Sugarcane 157 Lessons from the Brazilian Experience 161 Note 162 References 162 Appendix B Selected Data for African Countries 163 Index 173 Boxes 2.1 Clean Development Mechanism 36 3.1 Comparison of Wages for Harvesting Jatropha and Tea 57 3.2 Ethanol versus Biodiesel: Production Costs in Iowa 62 3.3 Ethanol Producer VeraSun Bankrupt after Failed Hedge 73 4.1 Econometric Model of Transport Fuel Demand 92 6.1 Mozambique’s Biofuel Policy and Strategy 138 6.2 Malawi and Zambia: Neighboring Countries, Different Biofuel Policies 140 6.3 Tea Research Institute of Tanzania 145 Figures 2.1 Consumption Mandates for Biofuels 23 2.2 The Impact of Biofuel Mandates on Food Crop Prices 25 2.3 Monthly U.S. Ethanol and Gasoline Prices, 2000–10 28 2.4 Monthly Brazilian Ethanol and Gasolina Prices, 2001–10 29 2.5 Import Tariff on Biofuels 30 3.1 Elasticities of Jatropha Oil Production Costs to Critical Variables 58 3.2 Monthly Minimum Wages in African Countries 60 3.3 Elasticities of Ethanol Production Costs to Critical Variables 68 4.1 Real Primary Commodity Prices, 1900–2009 81 4.2 Retail Fuel Prices in Africa, 2008 85 4.3 Fuel Consumption versus GDP in Low- and Middle-Income Countries, 2005 88 viii Contents 4.4 Fuel Consumption versus Price in Low- and Middle-Income Countries, 2006 89 4.5 Fuel Consumption versus Urbanization in Low- and Middle-Income Countries, 2005 90 4.6 EU Ethanol Prices, July 2006–July 2010 101 4.7 EU Greenhouse Gas Savings from Biofuels 103 5.1 Jatropha Labor Requirements 121 5.2 Jatropha Crop Calendar, Zambia 123 5.3 Diligent Tanzania Ltd. Production Cost Shares, Year 10 128 Tables ES.1 Estimated Biofuel Production Costs in Sub-Saharan Africa xxvii 2.1 Biofuel Yields of Major Feedstocks 17 2.2 Oil Content of Oilseeds Used for Biodiesel 20 2.3 Carbon Dioxide Emissions from Transport Fuels and Electricity 35 3.1 Prices of Major Vegetable Oils Used for Biodiesel, Northern Europe, 2003–09 50 3.2 Smallholder Jatropha Oil Production Costs for Local Use 51 3.3 Jatropha Plantation Oil Production Costs, Alternative Cases 53 3.4 Prices and Feedstock Costs of Major Ethanol Feedstocks, 2008 61 3.5 Ethanol Production Costs from Sugarcane, Alternative Cases 65 3.6 Estimated Biofuel Production Costs in Sub-Saharan Africa 71 4.1 Biofuel Mandates and Targets, Production Incentives, and Trade Policy for Major Consumers and Selected African Countries 83 4.2 Gasoline Prices in Malawi, 2009 86 4.3 Recent Trends in Urbanization, Economic Growth, and Population, 2000–07 91 4.4 Estimated Elasticities for Factors Determining Transport Fuel Demand 94 4.5 African Transport Fuel Consumption: Actual 2005 and Forecast 2020 96 4.6 Transport Fuel Net Import Costs as a Share of GDP: Actual 2005 and Forecast 2020 97 Contents ix 4.7 Non-EBA Countries with Duty-Free EU Access under Provisional EPAs 102 4.8 African Countries with Duty-Free Access to the EU under the EBA Initiative 102 4.9 U.S. Renewable Fuel Standard Mandates, by Source 105 4A.1 Retail Fuel Prices in Africa, November 2008 112 5.1 Jatropha Oil Extraction Processes, Equipment Costs, and Efficiency 124 B.1 Selected Data on Population, Population Density, and Income 164 B.2 Selected Data on Food Consumption and Nutrition 166 B.3 Selected Data on Agricultural Land and Use, 2007 168 B.4 Selected Data on Agricultural Productivity and Food Production, 2003 170 Foreword Biofuels offer new opportunities for African countries. They can con- tribute to economic growth, employment, and rural incomes. They can become an important export for some countries and provide low-cost fuel for others. There is also a potentially large demand for biofuels to meet the rapidly growing need for local fuel. Abundant natural resources and low-cost labor make producing biofuel feedstocks a viable alternative to traditional crops; and the preferential access available to most African countries to protected markets in industrial countries provides unique export opportunities. Biofuels also bring challenges and risks, including potential land-use conflicts, environmental risks, and heightened concerns about food security. These challenges and risks can be effectively dealt with through gov- ernmental policies. However, biofuel policies are lacking in most African countries, resulting in limited opportunities for biofuel production. Without established policies, investors are reluctant to produce biofuels; and land-users’ rights, environmental impacts, food security issues, and consumer concerns may not be adequately addressed. This book examines the potential of African countries to produce biofuels for export or domestic consumption and looks at the policy framework needed. It is part of the effort by the World Bank’s Africa Region to examine critical issues that affect the region and to recommend policies xi xii Foreword that effectively address these issues while providing an enabling environ- ment for the private sector. The book is intended to inform policy mak- ers and the larger development community of the global and domestic market opportunities facing biofuel producers, as well as the challenges of producing biofuels, in the Africa Region. Shantayanan Devarajan Karen Brooks Chief Economist Sector Manager Africa Region Agriculture & Rural Development Unit World Bank Africa Region World Bank Acknowledgments For their support of the research, the author thanks Shanta Devarajan, chief economist of the World Bank’s Africa Region; Karen McConnell Brooks, sector manager, and Stephen Mink, lead economist, of the World Bank’s Africa Region Agriculture and Rural Development Department; Jonathan Lingham of the U.K. Department for International Develop - ment (DFID); and John McIntire, World Bank country director for Tanzania, for their support of the research.

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