As the Group of Eight world leaders discuss the environment, the world economy and global food prices and the impact of biofuels, the struggling UK Government of Prime Minister Gordon Brown, has made a significant concession to slow the use of biofuels.

It is the first significant retreat by a major government from a biofuels target and is a direct reaction to the growing concern that increasing biofuels output is helping fuel the explosive rise in food prices we have seen in the past year.

Much of that is blamed on the United States’ policy of using corn for ethanol production, and attempting to protect that by pricing Brazilian ethanol out of the huge American market.

But Europe and Britain have recent introduced new policies aimed at lifting the proportion of biofuels used in their respective economies over the next few years.

But Britain has partially reversed its new policy only months after revealing it.

A review commission by the Government has recommended that the government put the brakes on its biofuels policy. Here’s the report.

The current target is to get 2.5% of the UK’s transport fuel needs from biofuels this year, doubling by 2010. But in the report, Professor Ed Gallagher, a former head of the UK Environment Agency said this should be slowed down, with the 2.5%, but raised by 0.5 percentage points a year to 2013-14. Those increases would have to be justified on the UK biofuels industry proving its “green credentials”.

In its introduction, the report says: “We have concluded that there is a future for a sustainable biofuels industry but that feedstock production must avoid agricultural land that would otherwise be used for food production.

“This is because the displacement of existing agricultural production, due to biofuel demand, is accelerating land-use change and, if left unchecked, will reduce biodiversity and may even cause greenhouse gas emissions rather than savings.

“The introduction of biofuels should be significantly slowed until adequate controls to address displacement effects are implemented and are demonstrated to be effective.

“A slowdown will also reduce the impact of biofuels on food commodity prices, notably oil seeds, which have a detrimental effect upon the poorest people.”

“The evidence gathered in this review does not provide assurance of the sustainability of any particular level of target and the creation of a sustainable biofuels industry cannot be assured.

“The RFA (Renewable Fuels Agency) judgement, based upon the balance of evidence is that if all subsidies and other support for biofuels were removed entirely, this would reduce the capacity of the industry to respond to the challenges of transforming its supply chain and investing in advanced technologies.

“However, the rate of introduction of biofuels should be slowed until adequate controls are established.”

Ruth Kelly, Britain’s secretary of state for transport, signalled that the government would concede in a statement to the UK Parliament Monday: “I agree with Professor Gallagher that we should take a precautionary approach over the next few years, until we are clearer about their wider effects”.

She stopped short of accepting the report’s recommendations on a revision to the biofuels targets, but announced to MPs a consultation on lowering the targets.

The Gallagher report found that, although there was “probably” enough land to satisfy food and fuel demands to 2020, biofuels did make a small contribution to food price rises.

Professor Gallagher also recommended that the European Union lower its proposed target of deriving 10% of transport fuel from biofuels by 2020.

The review also recommended that a separate target be set for “second generation” biofuels, made from waste products such as straw.

The review found that biofuels would contribute about 15% to rises in the cost of grain in Europe by 2020, compared with 2006 prices, if current biofuels targets were followed through.

It said the US would suffer similar price rises, although developing countries would see a smaller increase and the price of other staple crops such as rice would be unaffected.

(But it seems to have ignored the drag through effect of the US commodity markets and specifically the way the US price of corn affects the prices of other grains in the US and around the world.) US corn is exported to China, Japan and Europe for use in the feed industry and that is another way higher prices are transmitted through the food chain.

The review also found that the price of vegetable oils and oilseed was vulnerable to competition from biofuels, and would rise by as much as 70% in the US by 2020, compared with 2006 prices, if biofuels targets were met.

That is already apparent in the way world canola (rapeseed) prices have risen strongly.

Canola is used extensively in biodiesel plants in Europe and Canada and in some other countries. But biofuel demand for canola (and at the margin for other oil seeds) has seen consumers who normally use canola for food industry purposes chase supplies of soy oil as a replacement. And that has seen soybean and oil prices hit successive records so far this year in US markets.

The review also suggested providing incentives for the production of biofuels from waste and fuels grown on marginal land that is not already used to grow food. To help create a market for more new technologies, the Gallagher review suggests that the EU could introduce an obligation to produce up to 2% of biofuels from these methods.

The report came a day after a working paper from the World Bank was leaked to the media in London. It looked at the relationship between biofuels and food prices and other factors.

Although the World Bank has said it is a ‘working paper’ and not secret, as claimed by the London media, the report did conclude: “Increased biofuel production has increased the demand for food crops and been the major cause of the increase in food prices.”

In that respect the Gallagher Review, although commissioned before the World Bank report became known, is a direct response to the growing concern about the impact of biofuels (mainly ethanol and biodiesel) in Europe.

It didn’t examine the US or Brazil in any detail.

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