The interconnections between Fossil Fuel Subsidy Reforms and biofuels

Albeit not without some controversy, mandates like the Renewable Energy Directive (RED) aim to increase biofuel consumption to reduce greenhouse gas emissions (GHG) in the transport fuel sector (Britz & Hertel, 2011). At the same time, Fossil Fuel Subsidy Reforms (FFSR) to support governments’ climate objectives are gaining traction in the political sphere, such as in the European Union, where it is explicitly mentioned in the ‘Green Deal’. These two fuel types are known to interact though price mechanisms (Delzeit et al. 2021c; Winchester & Ledvina, 2017), but the impact of fossil fuels and biofuels policies on one another remains to be investigated. Using the DART-BIO model, a Computable General Equilibrium (CGE) model, we study how phasing out fossil fuel consumption subsidies and biofuel mandates would impact one another. We find that where both policies are implemented they can have a positive additive effect. For example, a FFSR can support the achievement of biofuel consumption targets at lower costs when it is implemented in the same region. If the FFSR occurs abroad however, it can have a detrimental impact on the biofuel target through a leakage effect. We estimate that the EU would need to spend USD 2 billion more on biofuel subsidies to meet the maximum allowable biofuel target of RED, given that the rest of the world phases-out subsidies but the EU does not. Through their impact on the global market, biofuel subsidies can also lead to leakages. A region that implements neither policy would experience an increase in its consumption of fossil fuels and decrease in its consumption of biofuels as a result of each policy being implemented abroad. In conclusion, while the policies can have a positive additive effect, they also lead to leakages that are detrimental to the overall goal of reducing GHG emissions that they aim to achieve.