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With rising oil prices and the growing threat of global warming, biofuels are increasingly seen as a possible solution to high energy costs and concerns about greenhouse gases. Biofuels production could also offer new markets for farmers in both industrialized and developing countries.

Throughout Asia, Western Europe, and North and South America, countries are vigorously exploring the opportunities offered by biofuels. Australia is no exception. Efforts are underway to create a sustainable biofuels industry here, with the goal of producing 350 megalitres of biofuel by 2010. Current production stands at only 28 megalitres. The potential for biofuels to improve environmental conditions, spur economic development, and provide energy security is a driving force behind these efforts.

While promising, the development of biofuels also poses risks and difficult trade-offs. If arable land and water are increasingly turned over to the production of biofuels, will that exacerbate hunger in developing countries and lead to higher and less stable food prices? Or will it provide new opportunities for poor farmers? The answers are not clear-cut.

Many developing countries don’t have the natural resource base to justify significant production of bioenergy crops. For those that have the capacity, the diversion of land and water away from food production could lead to higher prices. While this would help farmers who produce more food than they eat, it could be detrimental to low-income consumers. Furthermore, since the poor typically spend a much larger share of their budgets on food than energy, the trade-off between lower energy prices and higher food prices offers them no benefit.

The environmental benefits are also in question: Since some biofuels use a great deal of energy in their production, there is doubt as to whether they significantly reduce carbon emissions.

While biofuels could spur both reductions in poverty and carbon emissions, market-based approaches alone will not achieve this and therefore requires careful management and public sector support.

The International Food Policy Research Institute (IFPRI) recommends four broad strategies to enhance the economic, environmental, and social benefits of bioenergy:

First, reduce the trade-offs between bioenergy crops and food production by:

• breeding crops that yield high amounts of energy per hectare or unit of water;
• developing methods to use by-products or waste from food crops to generate bioenergy;
• focusing on marginal rather than prime agricultural areas;
• investing in technologies that increase the productivity of food crops.

Second, encourage smaller-scale and rural-based production and processing in developing countries rather than large-scale, urban-based ones. This approach could benefit the poor, help meet rural energy needs, provide new markets to smallholder farmers, and reduce the energy needed to transport bulky bioenergy crops.

Third, overcome the high initial costs of producing and using biofuels, which requires massive and coordinated investments by farmers, processors, car manufacturers, consumers, and others. The public sector can support biofuel markets through tax and investment incentives, regulation, and direct public investment.

Fourth, enhance incentives (e.g., subsidies, publicly-funded research and development, intellectual property protection) to achieve greater environmental and social benefits and find ways to ensure that biofuels provide opportunities for poor farmers and consumers.

With oil prices more than US$75 a barrel, interest in biofuels is stronger than ever. To realize their full potential, both the public and private sectors, working as partners, must make long-term commitments and investments in innovation. If and when they do, bioenergy has the potential to both help the poor and improve the environment. A new opportunity for world agriculture is indeed emerging.

The International Food Policy Research Institute seeks sustainable solutions for ending hunger and poverty. IFPRI is one of 15 centers supported by the Consultative Group on International Agricultural Research, an alliance of 64 governments, private foundations, and international and regional organizations. Please visit our website at www.ifpri.org.