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Executive Summary

The Asian Development Bank (ADB) granted the technical assistance (TA) project TA-7250 (IND): Cross-Sectoral Implications of Biofuel Production and Use with the objective of generating scientific information on biofuels to help the implementation of the biofuel policy in India. The broad objective of the TA project was to undertake a comprehensive analysis of the socioeconomic and environmental impacts of large-scale production and use of biofuels. The analyses include a review of (i) biofuel policy in India and an assessment of the adequacy of natural resources to support the national policy targets, (ii) supply chains and financial sustainability, (iii) economic viability, (iv) economy wide impacts, and (v) environmental and social impacts of large-scale biofuels production. The analyses were carried out using secondary data, and they mainly focused on first-generation biofuels and their use as transport fuels. This report provides a summary of the TA project findings.

Conclusions

India’s biofuel policy is comprehensive. Given the differences between bioethanol and biodiesel, future policy should deal with these two sectors separately.

Economic Viability

Molasses-based bioethanol is economically viable if molasses is not diverted from other uses. If oil prices increase, molasses-based bioethanol becomes economically more attractive. In contrast, the costs of sugarcane juice based bioethanol exceed the benefits. Higher oil prices do not change this. Alternative feedstocks, such as sweet sorghum or sugar beet, are not economically feasible at March 2010 oil prices.

The use of either jatropha or pongamia for producing biodiesel can provide acceptable economic returns, and an increase in the price of diesel makes biodiesel more attractive. Employment generation and avoided greenhouse gas emissions are also significant. Biodiesel production is economically justifiable, and this report recommends a support program for biodiesel (Box 1).

Box 1 20% Blending of Biodiesel

• Can generate about 18 million rural jobs

• Can avoid diesel imports worth of Rs656 billion per annum, at 2010 prices

• Can generate 1% incremental growth in the economy

• Will result in insignificant fiscal deficit

• Can significantly offset negative economic impacts of moderate oil price hikes

• Biodiesel plantations and blending can generate about 244 million certified carbon emission reductions and about Rs55 billion carbon revenue per annum

• Does not cause any major adverse effects on other sectors of the economy

• Does not compromise food production

Economy-Wide Impacts

The use of general equilibrium models shows that biodiesel could allow India to enhance economic growth and the wellbeing of rural populations through employment creation. Policies that encourage better efficiency in energy use and productivity in the agricultural sector would enhance these results. In contrast, 20% bioethanol blending does not add much value to the economy.

Financial Viability

Until July 2010, bioethanol producers faced an administratively determined price of Rs21.5 per liter. This price did not provide for sustainable financial operations. The August 2010 price revision to Rs27.0 per liter may provide adequate profits to the producers. Biodiesel production is not financially feasible under 2010 prices.

The Impact on Land

Simple natural resource accounting shows that 20% blending of bioethanol with petrol can be achieved by 2017, but only if arable land is diverted from food production to produce bioethanol. To meet a 20% blending target for biodiesel, about 32 million hectares of wasteland would be required for new crop cultivation, together with yield improvements. Bringing this much wasteland into cultivation together with the technological improvements and subsidiary industries are serious challenges.

The Impact on Water Resources

Sugarcane is a water-intensive crop, but if confined to existing lands or with molasses as an input, bioethanol production will not add to irrigation water demand. Biodiesel crops would not significantly increase the country’s water demand.

Food Security

At current levels of productivity, 20% blending of bioethanol cannot be achieved without affecting the food sector. Sugarcane, sweet sorghum, and sugar beet all compete with food crops for land and water. Molasses-based bioethanol would not permit a 20% blending, but lower levels (up to 5%) might be accomplished without impacting food security. If confined to wastelands, and with limited irrigation during the beginning phase of the crops, biodiesel production would not have major adverse impacts on the food sector. However, there is a possibility of biodiesel cultivations expanding into arable lands under high profitability scenarios, and additional policy measures may be required for preventing such adverse impacts.

Environmental Impacts

Available data suggest that biodiesel crops would have positive environmental impacts—especially in the provision of tree cover for wastelands. Possible negative impacts of both bioethanol and biodiesel can be mitigated using available technology and regulatory measures.

Recommendations

Based on the findings of the TA project, the report identifies the following recommendations:

(i)	Separate policies for bioethanol and biodiesel. Separate policies for bioethanol and biodiesel would serve the two sectors better given the difference in performance and issues.
(ii)	Focus on molasses-based ethanol. Ethanol blending should be limited to molasses-based ethanol.
(iii)	Research on second-generation biofuel. There is limited scope for first-generation bioethanol in India. However, there seems to be a large potential for second-generation bioethanol. Therefore, research efforts on second-generation bioethanol should continue.
(iv)	Public sector support for biodiesel. The main focus of public support, at this point in time, should be for biodiesel. The following are the specific areas that require immediate attention:
	(a)	land use mapping and land allocation study and initiating the necessary legal, institutional, and other provisions to make wasteland available for biodiesel production;
	(b)	revision of biodiesel and oil seed prices and provision of a stable policy environment for the biodiesel sector to develop;
	(c)	an accelerated research program on agronomy, selection and breeding, pest and diseases control, other management practices, and the propagation of high-yielding planting materials for plantation development;
	(d)	incentive packages for the private sector to mobilize private investment resources for the development of the biodiesel sector;
	(e)	further studies to examine the potential synergy between India’s rural development programs and biodiesel sector development, particularly focusing on the long gestation period of biodiesel crops; and
	(f)	establishment of a national agency with branches in relevant states to design and implement the above-stated public support program, oversee and monitor the biodiesel industry, periodically review the cost of production and prices, and design and recommend subsidies and taxes based on changes in oil prices.
(v)	Further studies on the incentive packages for biodiesel. It is necessary to design a combination of tax, subsidy, and regulatory measures to ensure that the incentives given to the biodiesel sector do not lead to expansion of biodiesel cultivation into arable lands.