A report has been put together by 10 agencies (including the World Bank, the UN and the World Trade Organisation) which concludes that biofuel subsidies should be removed to help deal with the volatile global food prices.
Biofuels were previously considered the energy source of the future (being renewable) and thought to be the fuel which would be the way to deal with fossil fuel dependence in developed countries. However the growing demand for biofuels has pushed up food prices due to the diverting of corn, sugar cane and other crops from the food market on to the energy market. The report claimed that 20% of sugar cane crops were used for biofuels between 2007 and 2009. This increased demand puts upward pressure on prices, especially since supply is relatively inelastic in agricultural produce.
Another reason that analysts are arguing for the reduction in energy derived from biofuels is that they can be as polluting as fossil fuels, but in a different way: land must be cleared and planted elsewhere to make up for the loss of food crops.
Although reduction in biofuel subsidies will reduce pressure on food prices, it definitely wont help oil prices, another commodity experiencing volatile price fluctuations. The recent fall in popularity of nuclear energy due to the crisis in Japan, when coupled with reduced supply of biofuels means that demand for oil is likely to surge leading to an increase in prices in this market instead.
Hi Annie, how would a reduction in biofuel subsidies reduce pressure on food prices. I thought it will increase food prices?
ReplyDeletehi,
ReplyDeleteFirstly reducing subsidies for biofuels raises the cost of production so output is likely to fall or demand for biofuels will fall due to the high prices. Use of crops for biofuels increases the global demand for agricultural produce, and an increase in demand leads to an increase in price. So if demand fell, prices would fall. If you think about it, if all the crops that are currently being used for fuel were sold as food there would be a larger supply of food on the world market, so prices should go down.
Does that make sense?