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BOX 3.10

Lessons from a “green” industrial policy: U.S. biofuels

In recent decades, concerns about national energy security, dwindling reserves of easily recoverable petroleum (and oil price hikes), and health and safety have prompted many industrial countries to look for renewable energy alternatives, including biofuels. The U.S. biofuels program offers useful lessons on green industrial policies—two of which appear particularly relevant for developing-country policy makers. First, biofuel industrial policies have mixed consequences for competition among technologies. The relationship between fi rst-generation (ethanol, primarily from corn and sugar) and second-generation (or cellulosic) biofuels, which are being developed to prevent higher food prices and land use changes, has long been viewed as a cooperative process. By developing an infrastructure for handling large volumes of biomass and constraining fuel refi ners to blend increasing quantities of biofuels in fossil fuels, producers of fi rst-generation biofuels would naturally pave the way for a new generation of biofuels. But a recent study suggests that fi rst-generation biofuels would be a tough competitor for the nascent industry of next-generation biofuels (Babcock and others 2011). And the difficulty of the nascent technology is heightened by the fact that “declining industries are generally more successful in forming lobby groups and securing policy concessions from governments” (Damania 2002). Second, the reversibility of a policy (and thus the risk from capture) depends on the instrument used. Producers of biofuels used to be supported through subsidies (or, equivalently, tax breaks).

policies in a few countries lead to escalating support globally, beyond what is justified by market failures. Sixth, green growth is about synergies between economic growth and environmental protection. And more targeted innovation and industrial policies represent a way to capture these synergies. Indeed, if and where these policies can promote growth cost- effectively and provide environmental benefits, it is possible that they can be developed to generate synergies between economic and environmental objectives.

In the United States the corn-based ethanol tax credit has been complemented by an import tariff on all sources of ethanol, with the tax credit working with federally mandated blending minimums to ensure a domestic market for ethanol. U.S. ethanol subsidies are estimated to have cost taxpayers $6 billion in 2009 (Karp and Stevenson 2012). They likely imposed significant costs on developing-country suppliers that are more efficient—such as Brazil, which uses sugar cane as a feedstock (though in 2009/10, Brazil imported small amounts of ethanol from the United States due to high food demand for sugar and competing crops worldwide). The subsidies sharply pushed up corn prices, though part of that increase could have been avoided if the U.S. market had been open. The phasing out of the U.S. tax credit (and tariff) at the end of 2011 marked the end of the taxpayer’s support to biofuels. But the support by the consumer still remains, through the blending requirement of increasing amounts of ethanol. What is worrisome is that the consumption mandates appear far more difficult to reverse than direct subsidies—which were subject to annual review by legislative bodies in the United States and in most European Union member states. With consumption mandates, biofuel policies are less susceptible to public fi nance pressure. Although the amounts at stake are substantial, the fact that the burden is spread across millions of consumers reduces the political pressure to relieve it. Indeed, substantial coordination would be needed on the consumer side to stand up against the mandates if warranted from a cost-benefit perspective.

In sum, a balanced view of costs, potential benefits, side-effects, and risks is needed to analyze the desirability of green innovation and industrial policies. The fact that these policies have influenced the structure of several economies suggests that they are options for transforming economies and bringing them toward more environment-friendly patterns. But the potential for costly failure and waste of scarce public resources always needs to be factored into any policy decision. In the following three chapters, we explore the three key inputs in a greener production


Inclusive Green Growth  
Inclusive Green Growth  

As the global population heads toward 9 billion by 2050, decisions made today will lock countries into growth patterns that may or may not b...