Uepa

U. E. P. A.
EUROPEAN UNION OF ETHANOL PRODUCERS
Brussels, 14th
February 2006
GT BIO 3/06
About the competitiveness of the
present and future EU ethanol industry
The current debate over bioenergies, and fuel ethanol in particular, is being spurred on by
increasing worries over energy supply and prices. The last example being the Russian/Ukrainian
crisis which dramatically reinforces the EU’s urgency to take action in finding new energy sources,
preferably environmentally sustainable and economically viable.
Whereas the environmental benefits of fuel ethanol are widely recognised, its economic
performance is criticised by some who claim that fuel ethanol is not competitive. It is a fact that,
under existing economic models, fuel ethanol is still less competitive with gasoline but we shall
recall this is not the reason why the EU has decided to promote fuel ethanol. More strategic and far-
reaching motives have pushed the EU to follow the track of a number of countries in the world.
These are the imperative need to reduce our energy dependency at a time where oil scarcity is a
world-wide concern; the threat of global warming with its unpredictable and devastating
consequences on the planet; and the necessity to stimulate economic growth and create jobs. These
motives have already a heavy cost on society and the recent sharp oil price increase shows how
vulnerable our economy is. It is also overwhelmingly recognised that, if unresolved, these concerns
will have a far greater cost that is almost impossible to measure.
Consequently, UEPA considers that any economic assessment aimed at comparing gasoline with
fuel ethanol should take these three different parameters into consideration in any projection made.
When dealing with competitiveness, the need to include the external costs of gasoline is a
prerequisite in order to avoid biased conclusions hence inappropriate actions.
We recognise the complexity of such a task but some data could easily be compiled if this general
principle were accepted and endorsed by decision-makers and analysts. With ethanol increasingly
becoming a strategic product all over the world, the EU should careful examine the economic,
social and environmental impact of not developing its own fuel ethanol industry and totally relying
on external supply.
Comparing the competitiveness of fuel ethanol with gasoline is important but existing economic
instruments are not designed to properly address this key issue. In this respect, UEPA wish to share
the following comments with you.
Production costs vs market prices
Table 1 compares the production costs between the EU and the two largest world ethanol producers,
Brazil and the USA. These production costs may vary depending on the evolution of raw
materials/energy market prices and currency exchange rates.

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- e-mail: uepa@skynet.be – www.uepa.be
2
Table 1
Comparing production costs
EU BRAZIL USA
Production costs
(1$ = 1€/hl)
50 251
352
60 % 80% 50%
18% 0% 17%
Raw material
Energy/Environ.
Others (Labour,
capital cost)
22% 20% 30%
Production (Mhl,
2004)
18.5 146 143
Both Brazil and the USA started their fuel ethanol programme more or less shortly after the oil
shock of the 70’s. Not only Brazil and the USA are 30 years ahead of the EU but their respective
governments have been greatly contributing to the expansion of the industry with substantial
financial support and appropriate policy framework aimed at boosting demand. Thanks to a long-
term strategic approach conducted by the Brazilian government, ethanol has remained continuously
cheaper than gasoline at the fuelling station for the last 6 years. These continuous efforts have
come to fruition and this explains why and how the Brazilian and US ethanol industries have
become strong industries. The economies of scales definitely contribute to this success and demand
is progressing quickly in both countries.
In the EU, the economics are indeed less attractive and this is a logical consequence stemming from
the fact that the EU’s initiative on the biofuels programme was adopted in 2003 and is still not
implemented in most Member states. However, UEPA believes that, should the EU implement an
appropriate set of measures to really kick start the fuel ethanol market at EU level, the industry
would be able to get closer to the level of production costs in the US.
Bringing production costs down is the main driver for the ethanol industry and 3 major factors are
key to achieve this:
a. Generating economies of scale through the implementation of the biofuels directive. In 2000
the average ethanol factory had a capacity of 300.000 hl whilst new fuel ethanol plants
coming on stream have now a capacity of 2 Mhl, a size which is comparable to Brazilian or
US plants.
b. Investing in technology will improve ethanol yields in fermentation. Table 2 shows that
commoditization in the US has increased fermentation yields by 20-25%.
c. Developing the so-called second-generation fuel ethanol. The ethanol industry works very
hard towards this objective to produce cellulosic-based ethanol for instance. Biomass (such
as straw, beet pulp etc.) contains up to 70% sugars and using these unutilised raw materials
would increase the ethanol yields per hectare by 40%.
1
The increase from 20$/hl to 25$/hl is due to the increase of the price of sugarcane.
2
The increase from 30$/hl to 35/hl is due to the increase of energy costs.

3
In contrast, the US have clearly demonstrated how efficient strong long-term political support can
be. Table 2 illustrates how production costs have been worked out over years and this progress is
likely to continue as consumption will double by 2012 following a recent legislation3
.
Table 2
Evolution of ethanol economics in the USA
$/gallon 80’s 90’s 2000 2012
Production in Mhl 7 35 63 290
Ethanol production costs 1.57 1.32 1.17 ?
Unit construction costs 2.50 2.00 1.30 ?
Yield (ethanol corn)
In gallon /bushel
2.3/2.4 2.5/2.6 2.7/2.8 ?
(source: “The influence of policy on biofuels implementation”, DJ Stevens,
Technology Systems Pacific Northwest National Laboratory,CA).
Aside from production costs, one should take a close look at market prices which may greatly
differ. Price fluctuations happen when supply and demand are unbalanced and this may even occur
under speculative unbalance. When supply and demand are balanced, the “market equilibrium”
price is reached. These factors are always in movement and international trade, especially with
politically unstable countries or due to environmental disasters, may aggravate the frequency and
the amplitude of the price impact.
This explains why the EU currently pays more than 60 $ a barrel of oil when oil production costs in
the Middle East are more than five times less. Besides, no one can say what will be the oil price in
the near or longer future although many analysts converge in that the price is unlikely to go below
50 $ a barrel4
. With emerging economies rapidly developing such as China, India, Brazil and with
oil reserves depleting, oil demand is deemed to skyrocket hence tremendously pressuring on prices.
Fuel ethanol is under the same economic rules. Being an agricultural product, it is also subject to
natural/environmental constraints which may impact on supply in either direction
(surplus/shortage). Despite the fact that ethanol production costs in Brazil are unbeatable world-
wide, the market price of ethanol in this country is currently at 47$5
per hl and according to ICIS-
Lor, Brazilian ethanol (96% vol) FOB Rotterdam was at 36-39$/hl in January 2004 and jumped to
55-56$/hl in December 2005 (60% increase). The fast-growing consumption of fuel ethanol in
Brazil6
is likely to push ethanol prices up and, despite a significant agricultural potential, increasing
world ethanol demand will unavoidably impact on market prices.
Consequently, the development of fuel ethanol in the EU must be carefully evaluated in the global
context of fuel ethanol growth. As ethanol may replace gasoline partially and even totally in flex-
fuel cars, ethanol becomes a strategic product which means that its price will be dependent on a
variety of factors which go farther than the mere production costs aspect. Today, if the EU had no
3
On August 8, 2005, President Bush signed the Energy Policy Act of 2005 (H.R. 6) into law which includes a
nationwide renewable fuels standard (RFS) that will double the use of ethanol and biodiesel by 2012.
4
The US Energy Information Agency forecasted that oil will remain above 50$ a barrel for the next 25 years.
5
February 2006 price.
6
More than 1 mlm flex-fuel vehicles are running in the country and 71% of all cars sold in November 2005 were flex-
fuel cars.

4
indigenous ethanol production, it would pay for ethanol at much higher prices than its production
costs. Equally true, if the EU had indigenous supply of oil, we would be able to control oil prices.
Our strong suggestion is that, when it comes down to reflecting on the economics of any future fuel
ethanol industry, the EU should establish under which conditions it will not find itself in the same
situation as it is with oil. Developing it’s own industry by maximising the use of existing
technologies and exploiting its natural resources in a sustainable way is clearly one solution;
Promoting research to make biomass an economically viable feedstock and move towards the so-
called ‘second generation’ biofuels is a second one.
Let’s look at things the right way: production costs will decrease as a result of appropriate
decisions. But the launching of a fuel ethanol industry should not be stopped or slowed down
because production costs are high in current circumstances.
Competitiveness and external costs
An industry is competitive when it is able to extend its market shares and when it delivers better
results than its competitors. Sticking to this simple definition, the EU ethanol industry is less
competitive than the gasoline industry which itself is very competitive because it eyes growing
market shares and skyrocketing profits.
However, greenhouse gas emissions are directly linked with global warming, itself responsible for
climate change, the most critical challenge human kind is faced with. It is of course difficult to
measure the future cost of climate change to the society and basically there is no economic model
today capable of evaluating the cost of such a threat which will irreversibly damage the planet. This
idea was reflected upon in the White Paper7
on European transport policy for 2010: time to decide:
"towards modal rebalance and greater internalisation of external costs”. The recent climate events,
such as hurricanes and their heavy cost on society, have fuelled these widely debated concerns. It
was estimated that, for example, “the hurricane Rita cost between 2.5 and 5 billion dollars to
insurers which is nothing compared to Katrina8
”.
Assessing the cost of climate change is a prerequisite if the EU is to define sustainable energy
policies. Concretely, it is no longer suitable to simply consider the production cost of an energy
source and external costs – on the environment and society – must be included in the economics. If
external costs are not internalised, the market is somehow distorted to the benefit of non sustainable
technologies. This principle was recognised in a number of EU policy documents such as the Green
paper9
: Towards a European strategy for the security of energy supply: “Fiscal instrument (…)
should lead to the internalisation of damage caused to the environment”.
Today, fossil fuels do not pay for the damage they create on the environment and society whilst fuel
ethanol is not fairly “compensated” for the damages it avoids. We should recall that, according to an
independent Life Cycle Analysis conducted by Ademe Direm in France, fuel ethanol generates 75%
less CO2 emissions than gasoline. If that emission avoidance would be properly measured in terms
of economic benefits to the environment and society, the cost of ethanol would not have the same
weight in the on-going debate over biofuels as oil’s cost would substantially increase.
7
COM(2001)370.
8
“La Grande Epoque” Aurélien Girard.
9
COM(2000)769.

5
Aside from the fact that fuel ethanol has a positive impact on the environment, it brings many more
social advantages which, we believe, should also be taken into account when comparing fuel
ethanol economics’ to gasoline’s.
Contrary to oil, fuel ethanol production is job intensive and it is estimated that for 1000 tonnes of
fuel ethanol produced, 6.310
jobs are created whilst gasoline production only supports 0.08 jobs. In
2004, the US ethanol industry supported more than 147,000 jobs which boosted the US household
income by $4.4 billion11
. Most importantly, these jobs are mainly located in rural areas that would
provide an alternative for EU farmers and their productions especially in the context of recent
reforms. These jobs would generate tax income for the Member states and that should also be
acknowledged when addressing the fiscal cost of fuel ethanol. In opposite, if these jobs are not
created, a social cost would emerge for instance unemployment benefits.
Finally, if ethanol production is significant enough to absorb the cereals exported under the costly
EU intervention scheme, the EU would also save a lot of financial resources. As an indication, the
US Department of Agriculture (USDA) estimated that, in 2004, ethanol production reduced farm
program costs by $3.2 billion11
.
Competitiveness and political choices
When certain people address the competitiveness of EU produced fuel ethanol, it is often compared
to Brazilian ethanol which, as we know, is the result of years of financial and political investments.
Not being competitive under these circumstances would be surprising.
Not only is there no long-term logic of not promoting an EU fuel ethanol industry but comparing an
infant industry with the world’s largest producer is unfair and makes no sense. Assessing the
conditions under which the EU could improve its competitiveness would be more constructive and
beneficial to the EU’s interests. Should the EU, and indeed the Member states, establish fair and
coherent measures12
aimed at boosting a fuel industry, UEPA is convinced that the impact on
production costs would be a question of time. Cutting production costs is a natural inclination for
any industry facing competition and certain producers have already invested in costly technologies
using biomass as feedstock.
Furthermore, it is essential to stress that the Brazilian government intervenes whenever needed to
avoid economic disruption in the ethanol/sugar sector. As stated earlier, the Brazilian ethanol
market price is at 47$ per hl and the increased consumption is likely to have an upward effect on
this price thereby upsetting the development of fuel ethanol. However, according to a press article13
,
the government has already taken measures to avoid further increase of the ethanol price which
could jeopardise the development of fuel ethanol and in particular the FFVs market.
This demonstrates that the Brazilian success is the result of constant governmental initiatives which
includes intervention on the market to regulate prices between the different products.
10
PriceWaterHouse Coopers study; Ecobilan: “Evaluation des externalités et effets induits économiques, sociaux et
environnementaux des filières de production de biocarburants en France”; Nov. 2004.
11
Source: Renewable Fuel Association, USA.
12
See UEPA’s stategic paper on the development of fuel ethanol in the EU on our website www.uepa.be
13
Source: FO Licht, January 27, 2006.

6
Replacing gasoline with ethanol: the domino effect
UEPA is concerned that, in the framework of very important discussions over biomass or biofuels,
certain key economic effects are not referred to at any stage.
For example, the fact that fuel ethanol could replace gasoline up to 5.75%14
by 2010 would avoid
importing an estimated 0.5 million barrels per day which, at current price, would save some $34
million per day meaning more than 12 billion dollars per year in the EU-25. This number is even
more striking when we know that certain Commission services have estimated the fiscal costs of
biofuels (to achieve the 2010 objective) between 10 to 12 billion euros per year ! In the USA, it was
estimated that in 2004, the use of ethanol avoided the import of 143.3 million barrels of oil and
reduced the US trade deficit by $5.1 billion15
.
In addition, reducing oil consumption in the EU would impact on oil prices. In draft papers on the
Biomass Action Plan, this benefit was estimated at €20 billion a year but unfortunately, the number
was deleted in the final paper. Irrespective of whether that number was accurate or not, it is
astonishing that no reference is made to this very likely and important benefit to the consumer. In
the USA, it was estimated that, if ethanol were removed from the market, gasoline prices would
increase 14.6% in the short term and 3.7% in the long term even after refiners built new capacity or
secured additional sources of supply16
.
Conclusion: promoting sustainable competitiveness
Promoting biofuels and fuel ethanol in particular is a choice that the EU has made in 2003 based on
very important observations: the EU is too dependent on energy supply and the economic cost of
this situation is heavy and will become heavier unless alternative sources are secured. Furthermore,
global warming, a major threat to humanity, makes it imperative to promote sustainable and
environmentally friendlier energies. It is proven that global warming is responsible for increasing
climatic disorders which have devastating consequences on human lives, mostly in developing
countries. The cost is huge and impossible to measure especially as far as human lives are
concerned.
Fuel ethanol is a perfectly suitable option and it emits 75% less CO2 than gasoline17
. The EU has
significant potential land, labour force and technology to achieve its targets. Production costs in the
EU are higher but this is because we compare them with countries where fuel ethanol
consumption/production is significant and heavily supported. However, productions costs will go
down as production grows and investments in new technologies are made.
Most importantly, considering the major stakes that motivated the promotion of fuel ethanol
meaning the huge economic burden of growing oil dependency and global warming, looking at
production costs only is totally inappropriate and would always give the advantage to oil, an energy
that we need to urgently cut our dependency on and which emits extensive greenhouse gases.
Oil does not pay for its negative impact on society and the environment whilst the environmental
and social benefits of fuel ethanol are not taken into account when we compare the two products.
14
In energy content.
15
Source: LECG, LLC January 2005.
16
Source: LECG, LLC, May 2004.
17
1 kg of gasoline burnt emits 3.650 kg of CO2. Ecobilan “Energy and greenhouse gas balances of biofuels’ production
chains in France”; Ademe Direm Dec. 2002.

7
Unless the EU establishes an economic model that internalises these external costs, it will be
extremely difficult to economically justify what is environmentally, socially and politically
imperative to undertake now. If the EU is serious about promoting sustainable energy sources, it is
essential to link these different parameters in any economic assessment study.
Besides, we believe that it is misleading to compare ethanol production costs to a highly volatile oil
price. The latter more than quadrupled over recent years and could increase further in case of a
political crisis or an environmental disaster. When making this comparison, the unavoidable
conclusion is that fuel ethanol is not competitive which offsets the real issue meaning the
unpredictability of oil prices and its detrimental socio-economic and environmental effects.
The fuel ethanol price is also subject to certain fluctuations especially in countries such as Brazil
where it is already a strategic product substituting gasoline. Currently, the ethanol price in Brazil is
twice as much as its production costs and the government, together with the industry, has recently
taken measures to fix ethanol prices at a reasonable level18
. When debating over fuel ethanol, the
issue of reducing production costs is important but what is of far greater strategic significance is to
reduce the number of factors that will lead the EU in a vulnerable position, supply and hence price
wise.
As things currently go in the world, fuel ethanol consumption is deemed to grow rapidly and we can
only urge the EU to have the ambition to develop a strong fuel ethanol industry and take the
appropriate decisions to reach this strategic goal. This is the policy conducted by many countries in
the world. As President Bush19
recently said “ we must change how we power our automobiles (…)
and our goal is to make this new kind of ethanol (from wood chips, stalks, or switch grass) practical
and competitive within six years (…) and replace more than 75 percent of our oil imports from the
Middle East by 2025”.
Fuel ethanol is a strategic and complex product which touches on many crucial issues hence the
concept of competitiveness should be re-visited to integrate the stakes our society is confronted with
and give rise to sustainable competitiveness.
Competitiveness should not justify inaction but adapt to societal stakes to better guide our actions,
with the help of common sense.
***
18
See note 13.
19
President Bush State of the Union address to congress on 31st
January 2006.

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