Classifying Biofuel Subsidies: Farm Bill and WTO Considerations

by Cindy O'Connor (Advanced Biofuels USA) Report from a Washington DC, September 14, 2010 briefing sponsored by Food & Agricultural Trade Policy Council

With legislative work beginning on the next Farm Bill and new WTO rounds; the issue of biofuel subsidy classification is of great importance to the success of the biofuels industry. The classification of agriculture and non-agricultural products is of significant importance. These classifications determine whether WTO complaints can be filed against US or by the US government according to current WTO rules on subsidies.

Farm Bill Randy Schnepf, Specialist in Agricultural Policy, Library of Congress, Congressional Research Service stated that in present U.S. farm biofuel policy is categorized as non-agricultural or agricultural. Non-Agricultural supports include tax credits, mandates, tariffs, research and development funding and infrastructure. The agricultural category includes: biomass crop assistance program (BCAP), biomass research and development. Current government biofuel policy does distort markets, but current U.S. biofuel policies such as environmental policy prevent limitations under WTO rules. The farm bill is linked to biofuel policy because the biodiesels and ethanol are produced using agricultural feedstock. There are also mandated programs to assist with the production of biofuels and biodiesel such as the Biomass Crop Assistance Program (BCAP) and biomass research and development which are not subject to WTO rules.

It is important to note that ethanol is classified as an agricultural product, but not biodiesel (which was in 1994). One of the reasons why biodiesel has not been classified as an agricultural product is due to European sensitivities and policy.

“Farm Bill” legislation, The Energy Policy Act of 2005 and the Energy Independence and Security Act of 2007 support the biofuel production.

Alternative advanced products used to produce biofuels such as algae are not considered under current law as an agriculture crop eligible for traditional price support subsidies. These advanced products usage amounts used to produce biofuels have not been counted and recorded as field grown products historically have been. Many policymakers feel these alternative sources have not been used to produce significant amounts of biofuels to warrant further support other than research and development funding. Therefore, these alternative sources have not been included in the legislative definition of agriculture crop eligible for subsidies.

World Trade Organization Tim Josling, Senior Fellow and Professor Emeritus, Institute for International Studies, Stanford University Professor and IPC member has co-written an article with David Blandford and Jane Earley titled Biofuel and Biomass Subsidies in the US, EU and Brazil: Towards a Transparent System of Notification. Members of the WTO can file a complaint, according to WTO subsidy rule interpretation, if a subsidy unfairly provides an advantage to another country. However, if supports and subsidies are provided and classified as part of a government mandated policy, for example environmental policy mandate, no action can be taken by another country. Currently there is confusion among the members about the actual biofuel subsidies and classifications of each individual WTO countries. There is no uniform process to collect and record biofuel subsidy data among the member countries which prevents a rational uniform classification of all the WTO countries of agricultural biomass.

In conclusion, future farm bill policy will be influenced by budget implications and the importance of the issue with the current future Senators and Congressmen. Due to the lack of a common consensus among its members regarding the subsidy classifications and uniform industry data the WTO will continue to have impediments in the development of future biofuel rules.