Case Study: China

biofuels china case study

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Key Findings: Biofuels and Poverty in China

Though preliminary, our simulation results indicate that biofuel expansion in major biofuel producing countries will have pronounced impacts on China’s agriculture and poverty. Agricultural prices, food production, composition of food trade, regional agriculture patterns, farmers’ income, and regional income inequity will all be affected. China’s biofuel development will have little impacts on global food prices. In contrast, within China there will be substantial impacts on domestic regional production, composition of food trade, domestic prices of crops that are less traded (cassava and sweet potato), and farmers’ income and food expenditure of different farmer groups. Domestic food security and self-sufficiency will be moderately impacted.

Rising food prices due to biofuel expansion in other countries should be considered an opportunity to stimulate the rural economy. Chinese farmers will benefit, as a whole, from biofuel development; however the impacts across different regions and farmer groups are different. Feedstock and crop producers will reap benefits; livestock producers and consumers will be hurt by biofuel development. Poor farmers may actually benefit more from biofuel market growth than other farmers. Development of the biofuels has potential to help reduce poverty and inequity among regions and farmer groups.

Topics for further research include accounting for the effects of technological advances for biofuels, and land tenure system.

Why do we talk about China in this discussion?

China’s burgeoning economic growth since its political and structural reforms during the 1970’s and 1980’s has precipitated an increase in the nation’s energy demand and consequentially impacted world energy markets. Once a net oil exporter, China is now the third largest oil importer behind the United States and Japan (EIA 2009). Between 2008 and 2010 China is expected to increase its oil demand by nearly 400,000 billion barrels per day, or rather the equivalent of 31% of the anticipated oil demand growth for non-OECD nations during these two years (EIA 2009). Most remarkably, China’s oil demand growth will likely not be mollified with an increase in the nation’s domestic oil production and will depend more heavily on world resources and domestic solutions (Ibid 2009).

Such economic progression and demand for fuel have ignited China’s search for renewable energy resources. Bioenergy, seen as a feasible option during the beginning of the twenty-first century, became a priority for the Chinese government, and by 2007 China was the third largest bioethanol producer in the world after the United States and Brazil with an annual production of 1.35 million tons.

The increase in China’s energy demand and biofuel production has important implications for energy and food commodity markets. If China willed its political and financial resources to full-scale bioenergy production, there would be significant increases in demand for biofuel feedstocks. If China were to expand its biofuel production as it had intended before 2007, China’s bioethanol facilities would require nearly three times as much maize. Impacts of such growth would likely be felt around the world. Currently, China has not maximized its bioenergy production due to domestic concerns over food security, but China’s potential to drastically contribute to world biofuel development underscores the importance of its study.

What major policies in China supported bioethanol production prior to 2007?

Before policy shifts in 2007, China’s biofuel industry expanded rapidly. To facilitate bioethanol production and marketization, China set up a series of supporting measures after the turn of the century. Under the “Special Development Plan for Denatured Fuel Ethanol and Bioethanol Gasoline for Automobiles,” significant resources were directed towards research and development of modern biofuel technology. National standards for bioethanol gasoline were formulated soon thereafter, and by 2003 a ten percent ethanol blend for automobile transportation was mandated in five provinces and 27 cities. In 2004, bioethanol targets for automobile use were set at 1.02 million tons.

The Chinese government also financially supported biofuel production during this time and forbid the entrance of private enterprise into the market. The government waived a 5% consumption tax and annually refunded a value-added tax (typically 17%) for bioethanol producers. Until 2005 the Chinese government transferred grains from national reserve stocks to bioethanol production facilities and ensured financial security for these plants with a minimum profit guarantee. That is, if any bioethanol plant were to record a loss in the production and marketing of bioethanol, the government would pay plants an amount equal to profits that could have been made from alternative investments. Following 2005 bioethanol plants were given a fixed subsidy instead of a profit guarantee and were more dependent upon grain markets for sourcing inputs.

From 2005 to 2007 Chinese legislation emphasized the nation’s long-term renewable energy intentions. The “Renewable Energy Law” and its “Middle and Long Term Development Plan” targeted China’s bioethanol and biodiesel production at 10 and 2 million tons by 2020, respectively. Financial safety net policies were organized to ameliorate oil market price volatility and stabilize bioenergy production.

However, due to increasing concern over food security in 2007 the government prohibited bioethanol production from using maize and wheat as feedstocks, except for four plants that were allowed to maintain their output but not expand.

What characterizes biofuel production in China?

As Figure 3 details, China uses a variety of feedstocks to produce its bioenergy. By far, maize is the most important of these crops for biofuel production in China. It is estimated that about 2% of China’s total maize crop in 2007 went to bioethanol production. In 2001 four large-scale state-owned bioethanol plants in Heilongjiang, Jilin, Henan, and Anhui provinces were constructed to produce the majority of the nation’s bioethanol using mainly maize as a feedstock (See Figure 3). The total annual bioethanol production capacity for these four plants is 1.5 million tons.

China has also been a producer of biodiesel, though the total production has remained small. By the end of 2007, China had 10 biodiesel plants in operation, most of which used industrial waste oil and cooking oil as inputs. When combined, China’s total annual biodiesel production amounted to less than 0.2 million tons in 2007. Because the production of biodiesel in China has never been large there is not a national standard for biodiesel, and most of the nation’s biodiesel has only been used in local transport sectors.

Despite these industrial capacities, in 2007 China drastically reformatted its biofuel production intentions explicitly because of concerns over domestic food security. Prices of wheat, rice, and maize rose over 100% in China from 2005 to 2008, and the Chinese government decided to strictly restrict its biofuel expansion that depended upon the supply of staple crops—crops that otherwise could be used for human consumption.2 Starting in 2007 bioenergy took a backseat to food security as a priority for the Chinese government, and only biofuel production that did not compete for land, food, or feed was maintained.2

China is still a major world producer of biofuel even though expansion plans using first generation feedstocks have been interrupted. Although staple grains are no longer permissible feedstock options in China, China is investigating the potential to use alternative resources to increase its biofuel sector.

Why did China restrict its biofuel expansion?

Discussions of the socioeconomic trade-off between food and fuel in developing nations must surely reference China’s recent biofuel policy U-turn. Prior to halting additional bioenergy expansion, policy makers in China had to weigh the costs and benefits of decreased food and energy security.

China consumed nearly 7.8 million barrels of oil per day in 2008, making it the second largest oil consumer in the world (EIA). Of this amount, just over half, or 4.0 million barrels per day, were domestically produced. (EIA) Most importantly, bioethanol production was only about 1% of total domestic oil production per year in China at its height in 2007.

China perceived that it would have to increase food imports if it continued along a path of bioenergy expansion. This dependency on foreign markets for food would come at a greater cost for China than domestically producing just slightly less oil (about 1%) and importing the difference in energy markets. Given the country’s extensive agricultural sector, China can produce more of a share of its domestic staple grain demand than of its oil demand. Hence, Chinese policy makers quickly choose to protect food security.

At the time bioethanol production reached its peak in China, food prices were dramatically increasing around the globe. In China prices for cereals used as bioethanol production feedstocks increased the most, and these domestic prices would have likely risen even more if bioenergy plants had expanded to reach 2020 production targets.1,2 China’s food commodity imports would have likely been more expensive for both the government and consumers as a result, which would have increased stress for lower income households.

If China wishes to expand bioethanol production in the future under contemporary crop restrictions, what are the appropriate feedstock crops to be used?

In the post 2007 era where food and energy concerns have competed for political attention in China, first generation biofuel expansion using staple grains such as maize will not be prioritized. However, significant research has been dedicated in China to the feasibility of using alternative feedstock crops for bioenergy production.

Among non-grain crops, sweet sorghum is regarded as the most viable bioethanol feedstock in China. In 2006 China produced a very small amount of sweet sorghum relative to maize, wheat, and rice, (Figure 2) but this number is expected to increase due to sweet sorghum’s drought and water logging resilience.

Cassava is also a popular feedstock alternative because of its high yield and ethanol conversion rates. In fact, there is currently a cassava-based bioethanol plant in Guangxi province with a targeted output of two hundred thousand tons of ethanol per year (Figure 3). Sweet potato and sugarcane have also received attention in China, but the conversion of these crops into bioethanol remains very small.

What are limitations to expanding biofuel production in China?

Production of bioethanol using alternative feedstocks in China is limited due to current technological ceilings and market prices. Studies have shown that sugarcane and sweet sorghum can produce the most ethanol per hectare, but changing prices in the future may make these crops less economical for the production of ethanol.

In addition to prohibiting the use of grain for biofuel production in 2007, China has also emphasized that alternative crops must be produced on marginal lands. However, China has limited arable land resources to increase its domestic biofuel supply. China’s Ministry of Land and Resources estimates that there are about 6.7 million hectares of arable land potentially suitable for crop cultivation, but the productiveness of these lands is not well known. Accounting for environmental protection, urbanization, and the compatibility for energy crop production, one report estimates that 20% (1.29 million hectares) and 50% (3.2 million hectares) of the arable, marginal lands could be suitable for crop production in 2012 and 2020, respectively.1 The conversion of these lands would require significant investment and cost.

Researchers from the Center for Chinese Agricultural Policy report that accounting for this information, China could produce a maximum of 5 million tons of ethanol by 2012 and 12 million tons of ethanol by 2020 using non-grain feedstocks. These numbers would satisfy China’s pre 2007 bioethanol targets.

How will biofuel policies affect domestic poverty in China?

Considering recent biofuel policies, there may be important implications for low-income citizens in China who may react to changes in food prices. Research suggests that considering China in isolation, the shift in grain-based bioethanol expansion will not largely affect crop prices and poverty in China.

However, the nature of China’s global market integration exposes the country’s domestic markets to international volatility. Largely because of World Trade Organization concessions in 2001, China has open trade policies for agricultural commodities that allow for the transfer of high international prices to increased domestic food prices.2

Because of this incorporation, global biofuel development around the world that affects food markets will have important consequences for Chinese citizens. To the extent that prices for agricultural commodities rise globally, consumers and producers in China will face higher prices. Because of higher prices, China will likely export more of the crops for which it has a competitive share of the market, and conversely, China will import less of more expensive foods coming from foreign countries. Domestic production of feedstock crops will likely increase if prices rise globally.

Higher food costs are concerning for low-income residents, but China uniquely may benefit from higher prices because the majority of its poor residents are rural landholders. Biofuel expansion and its precipitated higher food prices may provide opportunities for rural income growth in China. However, higher prices will adversely affect urban consumers and farmers who do not have access to the production of feedstocks.

Country Statistics

Population: 1,338,612,968 (July 2009 est.)
GDP: (purchasing power parity): $7.8 trillion (2008 est.)

Energy Production and Consumption
 
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Primary Energy Production (Quadrillion (10 15) Btu)
37.974
36.668
35.715
35.026
38.531
42.231
48.908
56.449
63.004
67.738
Primary Energy Consumption (Quadrillion (10 15) Btu)
37.907
37.322
37.233
37.179
39.438
43.295
50.620
59.987
66.803
73.808

Current Biofuels Policies

China’s biofuel policy is being guided by several objectives, including: