Tax Exemption for Biofuels in Germany: Is Bio-ethanol Really an Option for Climate Policy?

In 2002 the German Parliament decided to exempt biofuels from the gasoline tax to increase their competitiveness compared to conventional gasoline. The policy to promote biofuels is being justified by their allegedly positive effects on climate, energy, and agricultural policy goals. An increased use of biofuels would contribute to sustainable development by reducing greenhouse-gas emissions and the use of non-renewable resources. The paper takes a closer look at bio-ethanol as a substitute for gasoline. It analyzes the underlying basic German, European, and worldwide conditions that provide the setting for the production and promotion of biofuels. It is shown that the production of bio-ethanol in Germany is not competitive and that imports are likely to increase. Using energy and greenhouse-gas balances we then demonstrate that the promotion and a possible increased use of bio-ethanol to reduce greenhouse-gas emissions are economically inefficient and that there are preferred alternative strategies. In addition, scenarios of the future development of the bio-ethanol market are derived from a model that allows for variations in all decisive variables and reflects the entire production and trade chain of bio-ethanol, from the agricultural production of wheat and sugar beet to the consumption of bio-ethanol in the fuel sector.