16 Oct 2007 12:38:40 GMT
Source: Reuters

By Gerard Wynn

LONDON, Oct 16 (Reuters) - Biofuel supporters are fighting criticism that the "green", alternative transport fuel has raised food prices and harms the environment, amid mounting evidence that the debate is harming the industry.

The concerns come at a time of record oil prices which should be playing into the hands of producers of the substitute for gasoline and diesel.

Instead recent reports, for example from the OECD and by Nobel laureate chemist Paul Crutzen, have continued charges that a boom in biofuel production is spawning adverse trade-offs, putting the industry on the defensive as investors become wary.

"In terms of image it is harming us, and I would say unfairly harming us," said, Raffaello Garofalo, head of the Brussels-based lobby group the European Biodiesel Board.

The German biodiesel industry is lobbying against tax increases timetabled for next January, and one worry is that a tarnished reputation will play against them.

"We're worried that bad press about the social, environmental impacts will influence the tax decision," said Frank Bruehning, spokesman for the German biofuels association.

Biofuels are meant to be a dream answer to problems including climate change, energy dependency and dwindling farm incomes.

Produced from food crops like sugar cane, rapeseed and palm oil, they provide an alternative to conventional transport fuels like gasoline and diesel, seen important as oil supplies become ever more concentrated among fewer producing countries.

Also, these food crops absorb the greenhouse gas carbon dioxide as they grow, releasing it again when the biofuel is burned, implying that biofuels should be kinder to the climate.

But by using such crops, biofuels potentially compete with food production, threatening higher food prices.

In their 2007 "Agricultural Outlook" the United Nations's Food and Agriculture Organisation (FAO) and the Organisation for Economic Co-operation and Development (OECD) said biofuels were "one of the main drivers" for projected food price hikes of 20-50 percent by 2016.

SCAPEGOAT

Aggressive support including tax credits and import tariffs has driven a boom in biofuel production in the United States and Europe, which in turn is at least partly responsible for hikes in corn <CZ7> and rapeseed <COMX7> prices over the past year.

These higher input prices have hurt biofuel profit margins, and this falling profitability, linked to the food versus fuel debate, has made investors wary.

"There's no doubt investors will want to see the businesss sustainability," said Mark Campanale of London Bridge Capital, which helps raise finance for clean energy companies.

"If there's demand for the feedstock in the food markets there's a concern about the long-term viability."

The EBB's Garofalo says the biofuels sector is being made a scapegoat for higher food prices which have more to do with higher demand and bad harvests following floods and heatwaves in Europe and drought in Australia.

"The food industry has a wonderful alibi for higher food prices. You have a scapegoat. We are the bad ones (they say)."

CLIMATE

Analysts and environmental NGOs also doubt biofuels' claimed climate benefits. Even though they are derived from plants which absorb greenhouse gases, biofuels are not zero-carbon because of the greenhouse gases emitted in their manufacture.

For example, fertilisers used in agriculture emit a particularly potent greenhouse gas called nitrous oxide, better known as laughing gas.

A recent report by chemist Paul Crutzen suggested most biofuels contributed more to climate change than fossil fuels as a result of fertiliser use alone.

"It's just not true," said Bruehning, saying Crutzen assumed higher levels of fertiliser use than applied in Europe.

Producers will take heart from the European Commission, which says that even if the Crutzen report were widely accepted that would not spell the end of the European biofuel industry.

"No way. It's not only about climate change," said Ferran Tarradellas, EC energy spokesman, referring to other biofuel uses such as curbing energy dependence and boosting rural incomes in Europe and developing nations.

But investors see a link between the carbon emissions and the economic performance of European and U.S. biofuels.

"If the carbon-economics were better, if they were more efficient to produce, then the business economics would be better," said George Latham, manager of 1 billion pounds ($2.04 billion) of sustainable and responsible investment (SRI) funds at Henderson Global Investors.

"We don't have any exposure now to companies which are refining corn ethanol or rapeseed biodiesel."