Europe 2888

Butter Mountains

2009-06-22T09:20:00.001+01:00

New blog on Transport OCR

2009-06-14T13:06:00.002+01:00

There is a new blog on Transport - it matches the OCR syllabus: http://2885transport.blogspot.com/

No predictions as yet - these were pretty accurate.

You're actually in the exam....

2009-06-12T08:42:00.002+01:00

...in about 45 minutes - maybe less (15?)

Read through the questions BEFORE writing anything. Maybe there is ONE you cannot do. Keep it in your mind as you are answering the other questions. Something will occur to you.

Leave plenty of space between questions so you can add later.

Always refer to the case study

Do diagrams whenever you can as the marking schemes show 'give X marks if a diagram is drawn'.

This is the paper people tend to doi badly in so THINK. Use economic terms throughout.

'efficiency'
'failure'
'extension'
'increase'
'intervention'

One last tip on biofuels (10 June):

"Critics warn that the cultivation of palm trees to produce biodiesel is a threat to Colombia's indigenous groups and other minorities, including Afro-Colombians.

In rural areas, there is evidence that some people have been forcibly displaced to make way for biofuel production.

Last year, the United Nations stopped its investment in the sector in Colombia. "

Source: http://news.bbc.co.uk/1/hi/business/8084735.stm

OK must go - exams start in 10 minutes. Laptop off.....

GOOD LUCK EVERYONE. (Hundreds of new visitors from the Student Room - not one posted a 'thanks' - such is the world...)

Synoptic Knowledge

2009-06-11T23:57:00.000+01:00

This paper tests synoptic knowledge. Thus if you have a thorough grounding in the rest of the syllabus you should be prepared to answer in an Economic way. The key is to match the areas of the whole syllabus with aspects of the case study.

Thus:

Competitive markets and how they work:

This occurs:

Supply and demand of butter (Ex 1)
Impact of changes in price of inputs (Ex 1)
Impact on world oil prices on biofuels (Ex 4a)
Impact of increase in biofuel production (Ex 4a)
Rise in world food prices (Intro)
Emissions Trading Scheme (Ex 5)
Low carbon technology (Ex 5)

Market structures

Impact of monopoly on food prices (Ex 3)

Economic efficiency

Market mechanism to solve problems (Intro)

Market failure

Market instability as the basis of agricultural support (Ex 2, Ex 3, Ex 4b)
Carbon emission as an externality (Ex 4b, Ex 5)
External costs of biofuels (Ex 4b)
The market and equity (Ex 3)

Government intervention in markets

EU Intervention or Buffer Stocks of butter (Ex 2)
Maximum price controls in Russia (Ex 3)
A return to planned economies and central control (Ex 3)
Market regulation (Ex 3)
Set aside and CAP (Ex 4b)
Production subsidies (Ex 4b)
Pollution permits (Ex 5)
Welfare benefits to reduce the impact of inflation (Intro)
Government failure (Intro)

Macro economic performance

Measuring inflation (Intro)
Consequences of inflation (Intro)

Macro economic processes and policies

Transport Infrastructure (Ex 4b)

International trade and protection

Removal of tariffs (Ex 3)

So the important thing is to revise those key areas of the WHOLE syllabus

Commercial mocks/predictions

2009-06-11T21:27:00.001+01:00

Tutor2u:

1) Using Fig 1.3 and Fig 1.4 (Extract 1) compare the average price of fertilizer and the average price of feed wheat in the UK between October 2006 and October 2007. [6]

2) Analyse, using an appropriate supply and demand diagram, why food prices rose in the EU during 2007/08. [9] (Extract 2 and 3)

3) Comment upon the potential effectiveness of the price controls put forward by the EU and Russia governments to control food price inflation. [10] (Extract 3)

4) Discuss the economic consequences of the EU and US biofuels policy for the global economy [15] (Extract 4a and 4b)

5) Is EU intervention to reduce C02 emissions through the Emissions trading scheme always for the best? Discuss [20] (Extract 5)

APT Initiatives

1 (a) Using the data in Extract 1, compare the trend in the world wholesale price of butter

with that of the EU for the years 2006 and 2007.

(6 marks)

(b) Analyse the likely impact on butter prices of both the change in the price of

agricultural inputs and the end of the CAP intervention scheme for butter.

(9 marks)

2. Comment on the economic consequences of the different approaches to combating

food inflation described in Extract 3.

(10 marks)

3. Comment on the economic consequences of the production of energy crops to

produce biofuel.

(15 marks)

4. Discuss the benefits and drawbacks of tradable pollution permits to tackle the

problem of negative externalities.

(20 marks)

Our predictions:

1. Compare trends - world wholesale price for butter and the EU prices (3 mks)

Compare fig 1.3 and 1.4 (3 mks)

2. Russia: comment on the maximum price used by Russia when seeking to reduce the food price rises (9 mks)

3. Argue the case for subsidising the energy crops (15 mks)

4. Compare pollution permits with one other method, for tackling market failure. (20 mks)

Maybe none of the above are correct BUT if any of them come up you MUST make sure you know the answers in depth - as thousands of other students will....!

Discussion threads to follow

2009-06-11T20:55:00.000+01:00

The Student Room - 1

The Student Room - 2

The Student Room - 3

Questions to practice on during the long night ahead

2009-06-11T20:43:00.000+01:00

Some students said they were going to sleep until about 1 am and then coffee, Red Bull etc until the end of the exam.

We advised against but, their choice.

Here are some questions given out:

All questions are prefaced by a ’with reference to the case study…

1) Outline the factors contributing to the rise in food prices worldwide. (20 mks)

2) Evaluate carbon trading as a means of reducing pollution.

3) Explain, using a diagram, how carbon trading operates in principle and practice.

4) From extract 2 – why end the buffer stock system. Also (Jan 2009) why start it again?

5) Extract 3: outline the arguments against Soviet style central planning.

6) How do monopoly producers raise prices?

7) Long term supply of food. Ideally a supply response would come from the 450m small holders in developing countries. Why would this be desirable?

8) Who are the winners and losers from higher food prices?

9) Outline the social consequences from a rise in food prices.

10) Explain how CAP leads to higher food prices.

11) Direct income supplements have replaced guaranteed minimum prices – why is this?

12) Butter prices fell and yet they then rose. Why was this?

13) Contrast the different types of intervention to stabilize food prices mentioned in the passage.

14) @The action by the EC signals a belief in using the market mechanism to encourage industry to confront environmental damage.@ How so?

15) How are biofuels an example of government failure?

16) Why did Russia choose a price freeze over alternative policies?

17) Using a diagram explain how food price rises are a result of oil price rises?

18) “The ERU carbon trading scheme is an example of government failure@ Discuss

19) What are the main alternatives to carbon trading?

20) Compare carbon trading and carbon tax as a means of reducing pollution.

21) Using a diagram explain when EU surpluses of butter were released on the EU market the price of butter rose.

22) Explain whether you think that the EU was right to sell of their intervention stocks when the world price of butter was rising.

23) Is the reduction of cereal tariffs the most appropriate way of reducing food price inflation in the EU?

24) Why are the monetary authorities so concerned with the rising prices of food?

25) What is the link between CAP and the food prices for EU consumers?

26) Has the market intervention in the market for biofuels led to more problems than it has solved?

27) Identify from the various extracts in the stimulus materials possible examples of government failures.

28) Has the policy adapted by the UK and the US with regards to biofuels contributed to price inflation?

29) What strategies are available to the European Union if they want to reduce fuel consumption by cars and trucks?

30) Should biofuels be regarded as a merit good worthy of subsidy?

31) Using a diagram, outline set-aside policy.

32) Should the EU be cutting import tariffs on cereals when many of the poorest countries in the world are suffering from cereal shortages and high prices?

33) Using economic analysis, evaluate the case for biofuel production

34) ‘CAP is an example of government failure’ – discuss

35) Compare figs 1.3 and 1.4

36) Explain the divergence between the trends in world and EU prices of butter. Is the main reason the falling price of feed wheat?

37) Using diagrams explain why despite there being no big increase in demand in India and China for butter, prices still rise.

38) How was the buffer stock scheme justified when CAP was conceived?

39) Using economic analysis, argue the case against a buffer stock scheme.

40) How was CAP reform forced on the EU?

41) From paragraph 3 of the introduction, contrast the interest rate policy approach with the German welfare benefits scheme?

42) Evaluate the EU scheme to drop tariffs.

43) Why was the biofuel scheme promoted?

44) Using economic analysis evaluate the Crutzen case.

45) Comment on the economic consequences of the production of energy crops to produce biofuel.

More notes

2009-06-11T20:42:00.001+01:00

(In the main cut and pasted from elsewhere - the diagrams have not come out)

1) Should the EU be cutting import tariffs on cereals when many of the poorest countries in the world are suffering from cereal shortages and high prices?

The EU approach to the problem of food inflation was to reduce / eliminate the tariff on imports from the rest of the world. This would reduce prices by increasing supply. The additional supply would come not from domestic producers but from farmers outside the EU.

Thus you must draw a tariff diagram!

The EU approach, unlike the Russian approach, restores free market forces. It uses the price mechanisms rather than seeking to usurp the market. The Russian approach interferes with the market and leads to government failure, because of the significant unintended negative consequences. The EU approach leads to lower prices and increases in quantity. Moreover, by reducing protection for Europe’s agricultural industry it contributes to world trade by expanding rather than by diverting it.

2) Using economic analysis, evaluate the case for biofuel production

Paragraph 4 linking with extracts 4 (a) and 4 (b) introduces the notion of alternative uses for cereal crops. Given the farm surpluses that grew up under the CAP, biofuel crops were seen as useful in providing farmers with a new market for their cereal crops, while also making more productive use of their surplus capacity. At the same time, it was believed that biofuels will reduce the use of fossil fuel and, therefore, lead to a reduction in carbon emissions. Hence, biofuel production could be supported on environmental grounds.

Diagrams showing reduction of negative externalitieis

However, we learn in the second part of the extract that biofuels have contributed to the global rise in food prices and, at the same time, doubts have been expressed about the environmental benefits of these energy crops

Note that other crops (eg sugar cane) can be a more cost-effective source of bio-fuel, and provide a source of income for farmers in developing countries

3) ‘CAP is an example of government failure’ – discuss

CAP intervention in the market can be seen as an example of the law of unintended consequences, or of government failure.

Remember governments intervene to correct market failure but, equally, they can produce market failure. This is a situation where the actions of government lead to allocative inefficiency so that, instead of curing a problem, they add to a problem or, more likely, they correct one problem, only to create another.

In this case, the problem was instability of prices and the solution was buffer stock intervention in the market. This intervention led to the problem of allocative inefficiency through the overproduction of farm produce.

To correct the newly created problem, the EU then resorted to other measures such as milk quotas (to limit milk production) and set aside which provided farmers with an income for a proportion of their land which was left unused, that is farmers were paid not to produce certain crops in part of their land

4) Compare figs 1.3 and 1.4

Notice that these graphs refer to prices in the UK, but we assume that the trend in UK prices are replicated in the rest of the EU.

The former graph refers to the price of feed wheat in the UK. Feed wheat is not wheat sold to the consumer market but wheat sold as a farm input to feed cattle and other farm animals.

You can see that there is an upward trend in the curve in Figure 1.3. The rise is slow at first (and there are times when the price is stabilised and, even, falling), but it speeds up in the third quarter of 2007. Over the two years as a whole, the trend is upwards. This would be apparent if we smoothed out the curve by using moving averages to reveal the trend. But, notice that there is a distinct dip in prices in the closing months of 2007 (similar to the dip in EU butter prices at the same time).

Although it is not possible to be certain of the cause of the dip, we can assume that the price movement reflects changes in global supply and demand. Overall, the price of feed wheat has doubled over this period of nearly 2 years.

The lower graph refers to the price of another farm input – fertiliser but, again, in the UK. Fertiliser is important even in dairy farming since fertilisers are used to increase the yield per acre of grass which is a vital feed for dairy cattle. A similar trend to the one revealed with respect to feed wheat can be seen in the price of fertiliser. For much of the two year period the price is static but seems to rise steeply from March 2007. Over the two years as a whole, the price has risen from around £146 per tonne to £185 per tonne – a rise of around 27%. The only significant difference between Figures 1.3 and 1.4 is that in the latter graph, the price does not dip down at the end of the two year period.

It should be noted that the written text of Extract 2 is dated 29th March 2007. This press release informs us that the 6,091 tonnes of butter held in the EU buffer stock scheme will be sold off and that EU purchase of butter under the intervention scheme, will cease. We can see the impact of the decision in Figure 2.1 below which shows the quantity of butter held as intervention stock. This fell from over 120,000 tonnes in the summer of 2007 to zero by July 2007.

The release of butter from the intervention stocks would have increased the supply of butter in EU markets and, other things being equal, might have contributed to the dip in EU wholesale butter prices that we detected in Figure 1.2 in February. At this stage we can analyse the causes of the movement of EU wholesale butter prices by combining conclusions from Extracts 1 and 2 as follows:

1. A rise in global demand for foodstuffs, including butter, led to the price rise (a rightward shift of the demand curve).
2. A rise in the price of farm inputs reduced willingness to supply, thus further pushing up food prices (a leftward shift of the supply curve).
3. But, the release of butter from the EU intervention (buffer) stocks led to a slight reduction in wholesale prices towards the end of the year. It is surprising that there was a 7 month time lag from March until Oct 07.

5) Explain the divergence between the trends in world and EU prices of butter. Is the main reason the falling price of feed wheat?

Extract 1 Figure 1.1 concerns the world wholesale price of butter. Notice that it is a wholesale price rather than the retail price that consumers pay when they buy butter from supermarkets. The lower curve refers to 2006 while the upper curve refers to 2007. (To make the distinction clearer it is advisable to use different coloured highlighter pens to distinguish between the two curves and avoid any confusion between the two). It might be puzzling to see the two curves depicting the two years shown one above the other. In effect, the upper (2007) curve should be tacked on to the end of the 2006 curve. Notice that both seem to begin at the same price. This is simply because after falling in the first half of 2006, the price returns to its January 2006 level.

We can interpret the graph as follows:

• In 2006 the world wholesale price of butter fell gradually in the first half of the year, but rose gradually in the second half of the year to return to its January level.
• In 2007 there was a continuous rise in prices (albeit at differing rates throughout the year).
• Over 2007 as a whole, the wholesale price rose from just under $2,500 per tonne to just under $4,500. This represents a rise of around 80% over the year.

The lower graph (Figure 1.2) shows the wholesale price of butter in the EU. Notice that the data is expressed in units which are different from the graph of world prices. The currency used is the euro rather than the dollar, and the unit of weight is kilograms rather than tonnes. Although the world and EU graphs are not comparing prices on exactly the same basis, the EU graph shows some similarity with the world graph but with one crucial difference.

We can interpret the EU graph as follows:

• Prices fell in the first half of 2006 but returned to around their January level by the end of the year.
• After a small first-month fall, prices rose in the first three quarters of 2007.
• The rise was steepest in the summer months of June, July and August.
• From January to October prices rose from just under 2.6 euros per kg to just under 4.2 euros per kg. This was a rise of around 62%.
• But, in the final quarter of the year the wholesale price of butter fell to 3.5 euros.

The divergence between the trends in world and EU prices of butter also needs to be explained. One possible explanation is the falling price of feed wheat in the Autumn of 2007. This is depicted in Figure 1.3 and, if we assume that it applies in the rest of the EU but not in the world outside the EU, then it might explain the Autumn 2007 dip in EU butter prices. However, the case - for this as the explanation - is weak because:

1. There is no evidence that the fall in feed wheat prices was EU wide, although a single market should produce a single price.
2. How do we explain the fact that feed wheat fell in price in the EU but not elsewhere?
3. The fall in the price of animal feed should have preceded the fall in the price of butter. It is unlikely that they would have occurred simultaneously.
4. We should bear in mind also that we do not know what proportion of butter prices reflects the cost of feed wheat.

A more likely explanation emerges in Extract 2.

6) Using diagrams explain why despite there being no big increase in demand in India and China for butter, prices still rise.

Logically, a rise in prices in a free and competitive market can be explained either by an increase in demand or by a decrease in supply, or a combination of the two (see Illustration 1 below).

Worldwide demand for food has increased as a result of:

1. rising population throughout the world.
2. rising living standards throughout much of the world.
3. industrialisation in developing countries, especially in India and China.
4. the resulting shift of resources to secondary and tertiary production.
5. a fall in the real price of food over many years, thanks to lower production costs arising from improved farm technology.

It might be argued that there is little or no Indian and Chinese demand for butter, but it should be realised that the development of these economies with their vast populations does increase the demand for land and other agricultural inputs and, therefore, has put upward pressure on prices.

The supply of butter to markets is affected by the weather (unplanned fluctuations in supply) and by the price of inputs. Adverse weather conditions will reduce supply and push up price. A rise in the price of inputs reduces the willingness of suppliers to supply the market at previous prices. The twin effect of rising demand and falling supply is shown in the diagram below thus pushing the price up from P to P1.

£
S1

S

P1

P
D1

D

Q

7) How was the buffer stock scheme justified when CAP was conceived?

The practice of buying up stocks of agricultural produce at EU intervention prices is an example of a buffer stock scheme and was justified when CAP was first conceived, in terms of:

1. price instability in agricultural markets. A combination of unplanned fluctuations in supply and inelastic demand leads to major price fluctuations.
2. the need for food security.
3. the social case for preserving the agricultural way of life.
4. the political power of the agricultural lobby in certain EU countries. This is a fact of life although it should not be seen as an economic argument for agricultural support.

Indeed, these features explain the reluctance among major EU countries for CAP reform, in spite of the unarguable welfare benefits.The system of buffer stock intervention in markets was designed to achieve price stability and ensure that farmers receive a price above the free market price for their produce.

Under the CAP there were three prices:

1. The market price - which was the result of the interplay of market forces.
2. The target price - which was the price that EU ministers and officials considered to be appropriate for farmers to receive to ensure a reasonable standard of living.
3. The intervention price - which was the price at which the EU would buy up surplus foodstuff to place in intervention or buffer stocks. The intervention price was set below the target price in the expectation that it would not lead to overproduction. However, it was set above the free market price which would have cleared the market of any surplus if it had been allowed to prevail.

To prevent prices falling too far the EU bought up surplus stock at the intervention price. This was added intervention or buffer stock. In years of shortage, produce would be released from the buffer stock. This would increase the supply of goods on the market, thus moderating price. So, in essence, buffer stock purchases occurred during years of surplus and buffer stock sales occurred during the years of shortage (see Illustration 2). If we assume that there was a rough balance between years of surpluses and shortage then:

• Produce would remain in stock for only short periods.
• Stocks would not grow over the long run.
• The scheme would be self financing, since money raised from buffer stock sales would balance the money raised from buffer stock purchase.
• Prices would be stabilised ensuring that farmers received a fair price for their produce and would have stability to plan ahead.
S2
£

S

P2 S1

Gvt sells stock Gvt buys up stock
P

P1

D

Q
Q2 Q Q1

8) Using economic analysis, argue the case against a buffer stock scheme.

Despite these theoretical benefits of buffer stock schemes they can be criticised from a number of angles.

Firstly, they can be criticised on grounds of equity. To ensure that farmers receive a price which provides them with a satisfactory standard of living, consumers are required to pay higher prices for farm produce. This would be the case in years of surplus.

The problem was intensified by the fact that under the Common Agricultural Policy, EU farmers were protected against competition from farmers abroad. This meant that EU consumers did not have access to lower world prices but had to pay higher EU prices. If, for instance, British consumers were forced to buy butter from mainland Europe rather than even cheaper butter from New Zealand, then the result would be trade diversion.

Remember, the conclusion from theory of customs unions is that trade creation increases economic welfare but trade diversion reduces it.

The second criticism of buffer stock schemes comes from the fact that such schemes stabilise prices but do not stabilise incomes. The income of farmers is a function of the price of produce and the quantity produced. If price is stabilised and there are no penalties for overproduction, then there is a direct incentive to overproduce. In fact this is what happened under the system of intervention prices.

Farmers increased their output in the full knowledge that any surplus would be bought up by the EU. So, rather than alternating between years of surplus and years of shortage, as implied by illustration 2, the system led to continuous surplus. This meant that the stocks built up over the long term leading to the infamous butter mountains and wine lakes. This unintended consequence was made worse by the slow but ongoing improvements in agricultural productivity. If intervention purchases become the norm, year after year, then rather than being self financing the scheme becomes a drain on the EU tax payer. In the 1970’s and 1980’s three quarters of the EU budget was spent on agricultural support to buy up produce that was not required by consumers. Moreover, as surplus became the norm, consumers were forced to pay higher prices than was justified. This system of overproduction of farm produce represented allocative inefficiency. Resources were used to produce goods for which there was no market.

9) How was CAP reform forced on the EU?

CAP reform has been a long time in coming because of the vested interests of European farmers but was forced on the EU by:

1. The continuing high cost of the system.
2. The increasing importance of other EU wide priorities.
3. The reluctance on the part of EU members to contribute more to the EU budget.
4. The continuing decline of agriculture as a share of EU output.
5. Resentment from the rest of the world to European protection.
6. The need to reduce farm protection in order to liberalise other aspects of world trade.
7. The entry of Poland and other Eastern European countries. With such a large agricultural population it was inevitable that there had to be a reduction in the system of farm support.

As part of the reform of CAP the buffer stock system for butter was ended. Not only were stocks released, but it was announced that intervention buying will now cease in the EU. This should be seen as a measure which restores the free market in butter, at least within the EU.

10) From paragraph 3 of the introduction, contrast the interest rate policy approach with the German welfare benefits scheme?

“German left wing politicians have called for an increase in welfare benefits so that people can cope with price rises”. This can be regarded as a coping strategy – it enables the less well off (ie the people who are hardest hit by food inflation) to cope with the problem. However, it merely masks the problem rather than tackling it and there is an opportunity cost involved. It is the equivalent of a pain-killer which deadens the pain but leaves the medical condition unchanged. The rise in welfare payments will benefit the less well off and, in this sense, it could be said to be targeted assistance. However, people other than benefit recipients derive no benefit from this measure and, in addition, might be adversely affected by a tax rise to pay for the higher level of benefits, or a shift in government priorities away from other programmes. Therefore, welfare benefits not only disguise the problem but redistribute income. The only positive aspect of the policy is that it is a targeted measure.

The introduction also refers to the use of interest rate policy to combat inflation (lines 14-15 of paragraph 3). We know that monetary policy, in the form of interest rate changes, are now the prime weapon in controlling inflation. But, this is inflation in general rather than food inflation. Food inflation is not caused by cost push or demand pull within the countries of Europe but, instead, is global. Food inflation is the result of global supply and demand and not just UK or EU supply and demand. If interest rate policy is used to combat an inflationary problem which is limited to food, then high interest rates will be inflicted on the economy as a whole. Not only would such measures be ineffective on global food prices, but also they would be damaging to the economy as a whole.

11) Evaluate the EU scheme to drop tariffs.

The CAP had two basic strands:

1. Buffer stock intervention in the market
2. Protection in the form of controls on the import of food.

The EU solution to food inflation is to “drop” import tariffs on certain foodstuffs. It is unclear from the extract if ‘drop’ means to reduce the level of the tariff, or whether it means to eliminate the tariff altogether. Either way, the graphical analysis of the move is the same and it is shown in Illustration 3b. What we have here is the standard analysis of tariffs, but we need to remember that rather than raising tariffs we are talking about reducing / eliminating them.

£
Domestic Supply

P1 World Supply plus tariff
Loss of Tax
d c Revenue b a
P2 World Price

Demand

Q1 Q2 Q3 Q4 Q
Reduction in domestic production

We start at price P1 which is the world price plus tariff. This means that food on the EU market sells at this price which is higher than the world price that would apply in the absence of import controls. The quantity sold at the artificial price is Q3 and this is made up of an element equal to Q2 (which is supplied by domestic producers) and an element equal to Q2-Q3 (which is imported). When we remove the tariff we find that:

1. Price drops to P2.
2. The quantity supplied and demanded extends to Q4.
3. Domestically produced supply falls from Q2 to Q1.
4. Imports rise from Q2-Q3 to Q1-Q4.

In essence, when the price falls the quantity bought and sold increases, but the increase takes the form of increased quantity from abroad and a reduced quantity from domestic producers.

We can extend our analysis by considering the areas indicated by lower case initials in the diagram:

• The area a+b+c+d is the increase in consumer surplus resulting from the cut in tariffs.
• Area d is the reduction in producer surplus resulting from a lower price and quantity. This surplus is captured by consumers.
• Area b represents the loss of tax revenue for the state (in this case, the state takes the form of the EU which receives all tariffs and levies on goods imported from outside the EU). This loss to the state is transferred to consumers as consumer surplus.

This demonstrates that the reduction in tariffs benefits the consumer (and indeed world producers) at the expense of the domestic producer and the state (EU).

Conclusion: A reduction in tariff protection reduces prices to consumers and, unlike maximum price controls, does not reduce the quantity available for consumers to purchase. As such, it increases consumer surplus. Admittedly, there is a price to be paid for the tariff reduction. That price is paid by the state (EU) in the form of a reduction in revenue, and by domestic producers in the form of a reduction in sales. A tariff reduction makes use of the market rather than seeking to interfere with the market mechanism.

12) Why was the biofuel scheme promoted?

Extract 4 introduces us to additional explanations for rising food prices. We are told in 4a that rising food prices are partly the result of rising demand, especially from India and China, and partly the result of extreme weather conditions which impact on the harvest, and partly production switches to bio-fuels. But, there is another and very different explanation, and this relates to world oil prices.

Extract 4a & Figure 4.1: Global Food Crisis and World Oil Prices

Figure 4.1 shows world oil prices rising significantly from Jan 2007 (when they stood at $50 per barrel) to nearly $90 per barrel in Nov of that year, a dramatic 80% increase. You may remember that, at that time, the UK price of petrol at the pump rose to significantly over £1 per litre of petrol.

But what has this to do with the price of agricultural products? The answer is that the high and rising price of oil provided an incentive for farmers to grow cereals, not for human or animal consumption, but to convert into so called biofuels. We can analyse this in terms of supply and demand as follows:

• The high price of oil increased the profits from converting cereals into biofuel.
• Farmers responded by increasing the supply of biofuel crops at the expense of crops for food, in other words, the market mechanism shifted resources away from food production towards biofuel production.
• This increased the supply of biofuels, but at the expense of cereals as a food product.
• The decrease in supply (shown in illustration 4a) pushed up the price of food.

£ S1

S

P1

P

Q

In essence farmers were busy producing “food for machines” rather than food for either humans or animals. You will remember that in Figure 1.3 in the stimulus material we saw a steady rise in the price of feed wheat. This might be explained in terms of the switch to bio-fuel.

It is interesting to note that, in agricultural markets, while there is normally a time lag between a price signal and the ability to respond with a change in supply leading to price volatility, the switch of the same product to bio-fuel use generates a comparatively quick supply switch response at harvest time.

It is important to realise that not all farmers are producing biofuel but there has been a significant shift towards cereals as biofuels. This is demonstrated by statistics included in Extract 4a. US farmers sold 14 million tonnes of maize as a biofuel for vehicles. This represents 20% of the total maize crop and took one million hectares out of food production. The USA is a major producer of maize and other cereals, but it is also a major consumer of such products. If American farmers are producing maize as a fuel for vehicles, then it is likely that the Americans would have to either reduce its food exports, or increase its food imports. Either way, it will distort the market and push the world price of maize up. Unfortunately, the people who would suffer most from the changes in the market are the poor consumers, particularly in developing countries; maize farmers in poorer countries and, indeed, some food farmers in poorer countries will have done quite well.
But surely biofuels are a “good thing”? Until recently the production of biofuels was considered desirable for two reasons:

1. Firstly, with an alternative use for surplus cereal crops, biofuels provided a useful outlet for farm production. The growing of wheat for much wanted biofuels was surely better than the EU buying up surplus stocks in the much criticised buffer stock system which produced grain mountains. It was also better than paying farmers not to produce crops under the set-aside system (below).

2. Secondly, there is grave concern over the environmental damage inflicted on the planet through carbon emissions from burning fossil fuels. If biofuels inflict less damage on the environment, then there is much to be said for switching to the production of biofuel crops.

This takes us into an analysis of negative externalities, which are the subject matter of 4b.

Extract 4b: EU Biofuels Policy

In essence, this statement deals with why and how the EU promotes the production and use of biofuels. Biofuel production is promoted in order to:

1. diversify fuel supply sources (which is a code for reducing Europe’s dependence on Middle Eastern oil and Russian gas).
2. diversify income and employment and thereby slow down depopulation in rural areas by creating another market for EU grain and other farm products.
3. develop a long term replacement for non renewal fossil fuels.
4. reduce greenhouse gas emission.
5. help fulfil the commitment under the Kyoto Protocol to reduce carbon dioxide emissions by 8% by the end of 2012.

In the past, the EU sought to promote the production of biofuels by allowing cultivation to occur on set-aside land. This was land, up to an authorised percentage, that was taken out of crop production to prevent over production. As we saw in relation to the butter mountain, what happened was that the EU bought up surplus cereals at intervention prices and placed the grain in a buffer stock. This encouraged farmers to overproduce in the knowledge that they could sell any surplus at a guaranteed intervention price. With growing grain mountains the EU was forced to take corrective action which, in the case of grain, took the form of land set-aside. This meant paying farmers not to produce certain crops on the land that was set aside. The ban on production on set aside land only applied to certain crops, but this meant that set aside land could be used for the growing of other crops, such as cereals for biofuels. Farmers received set aside money and could sell the produce from the land. For instance, they could plant oilseed on set aside land, provided it was used as a biofuel and was not used in food production, either for animal or human consumption.

In 2003 the EU decided to provide an increased incentive to farmers to grow biofuels. This involved the use of land other than set aside land. A subsidy of 45 euros per hectare was given to farmers who used non set aside land for the production of so-called energy crops. This is a straightforward subsidy which can be analysed by economists using the standard supply and demand analysis of subsidies (see illustration 4b).

£ S

S (with subsidy)

P1

P2

D

Q
Q1 Q2
The standard analysis of production subsidies is the reverse of that for the incidence of indirect taxation. The supply curve is shown as shifting to the right indicating that with a subsidy suppliers are willing to supply more at each price level. This increase in supply not only reduces the market price, but also causes the quantity bought and sold to rise from Q1 to Q2. The subsidy per hectare is represented by the vertical distance between the two supply curves

13) Using economic analysis evaluate the Crutzen case.

We know that the environmental case for this policy is based on the belief that biofuels produce substantially less carbon dioxide emissions than fossil fuels. We also know that the EU has a goal of replacing 20% of diesel and petrol by alternatives such as biofuels. This being the case, you would think that environmentalists would favour the development of biofuels. However, this is not the case according to George Monbiot the author of the article which is used in the lower box of Extract 4b. George Monbiot is a well known writer on environmental issues, but he is casting doubt on the idea that biofuels are environmentally friendly.

The second passage in Extract 4 (b) starts off by stating that “Biofuels offer a means of avoiding hard choices. They create the impression that government can cut carbon emissions and keep expanding the transport networks”. This will satisfy the business and motoring lobby and, at the same time, reduce carbon emissions. In other words, we can all do more motoring provided we switch from petrol and diesel to biofuels.

However, the second passage is headed the hidden costs of biofuels and in it we find that Paul Crutzen, a Nobel prize winning scientist, argues that the scientific analysis of biofuels fails to take into account all the environmental or external costs of the use of biofuels. You will notice that the scientific argument becomes quite involved and, as students of Economics, we are not equipped to argue the case on purely scientific grounds (especially with such an eminent scientist). However, we do need to understand the essence of the Crutzen case, and its economic implications.

Professor Crutzen’s case is that previous scientific analysis of the use of biofuels only considered the environmental impact of the burning of biofuels. It fails to take into account the environmental impact of producing biofuel crops and, in particular, the contribution to greenhouse gases of nitrogen fertiliser. He argues that these fertilisers generate a greenhouse gas (nitrous oxide) which is nearly 300 times as powerful as carbon dioxide. The total environmental impact from rapeseed oil (that is the production and burning of this biofuel) is 1 to 1.7 times the impact of diesel. The question arises as to how this compares with other bio-fuels eg maize? Are some bio-fuels still less damaging than oil based fuels?

This should remind you of the nature of cost-benefit analysis that you would have encountered early in the course. Remember, cost-benefit analysis compares total social benefits with total social costs, but one problem we face is in identifying and evaluating all the external costs and benefits.

Crutzen is arguing that previous studies failed to identify all the external costs associated with biofuel. If we are able to identify and measure all the costs involved we find that, rather than reducing environmental problems, the article alleges that bio-fuels actually add to it.

A parallel that can be drawn from this analysis concerns the importation by air of tropical and sub tropical fruits, out of season crops and flowers from countries such as Kenya, Morocco and Israel. Critics argue that the cost of importation should include the “food miles” involved and that if we want these tropical and ‘out of season’ crops we could grow them in greenhouses in Western Europe. We could have fresh tomatoes throughout the year without adding to global warming. But to use the phrase that headed the second passage, the hidden environmental cost of the greenhouse production of these crops in Europe is the environmental costs of heating greenhouses and using fertilisers.

As stated above, we are not in a position to argue the scientific case for and against biofuels, and you will not be required to do so in the examination. But, as economists we can analyse the economic case for and against biofuels. As this topic is primarily concerned with the economics of externalities it is essential that you include in your answer a sketch graph to show the impact of externalities (see Illustration 4c). This contrasts the conventional analysis (which suggests that biofuels are environmentally friendly) with the Crutzen analysis (which suggests that rather than producing less environmental harm, they produce more harm than conventional fuels). If this is the case, then the EU should reconsider the policy designed to promote the production of energy crops or biofuels.

Illustration 4c: The Welfare loss from Biofuels based on the Crutzen Analysis

£ S = Marginal social cost based on the
The welfare loss Crutzen view
from biofuels
S = Marginal social cost assuming that
external costs are zero or negligible

D = Marginal social benefit

Q

The case against biofuels is that:

1. They add to pressure on arable land and water supplies.
2. They push up food prices, thus reducing the living standards of poorer people in Europe and in the developing world.
3. There are hidden costs which, if taken into account, destroy the environmental case for the switch to these crops.

The case for biofuels is that:

1. They are an environmentally sound alternative to fossil fuels.
2. They provide a new market for EU’s farmers.
3. The production of energy crops is a superior alternative to setting land aside or stockpiling in grain mountains.

14) Comment on the economic consequences of the production of energy crops to produce biofuel.

Fossil fuels pump carbon dioxide into the atmosphere and, therefore, cause global warming. Economists analyse this in terms of the market failure resulting from external costs. These costs are inflicted on the community and such costs are not taken into account by the market. As a result, these goods are over-consumed and underpriced. Biofuels are said to cause less pollution and, therefore, will enable us to continue to drive without causing the environmental problems associated with motoring. At the same time, the growing of energy crops for biofuels provides a further outlet for farm produce and is preferable to both import controls under the CAP, and other inefficient systems of farm support such as buffer stocks and set-aside.

The case against biofuels is that the full cost of biofuels should take into account the external costs of producing inputs such as nitrogen based fertilisers. If, as is claimed, the carbon emissions associated with producing as well as burning biofuels exceed those of fossil fuels, then the environmental case for biofuels is destroyed. The pessimistic view of biofuel is that they reduce economic welfare to a greater extent than fossil fuels.

We can use the textbook sketch graph of production externalities to illustrate the economic consequences of the carbon emission.

The supply curve on the right is the market supply curve, which is based on calculations of purely private costs. We are assuming that there are no external costs and, therefore, the marginal social cost is equal to the marginal private cost. However, the assumption of zero external costs cannot be sustained in the real world – all production will have some external costs. If external costs are taken into account, then marginal social costs (private and external costs combined) would result in the supply curve to the left.

Notice that the right hand supply curve (which ignores externalities) leads to increased output and lower prices, but at the expense of the community and the environment. The overproduction of goods results in a loss of economic welfare shown as the shaded triangle. But which of the two supply curves relates to biofuels? The optimistic view is that external cost of burning biofuels is negligible and, therefore, the right hand curve depicts the situation. The Crutzen view is that Biofuels involve a substantial external cost and, therefore, the left hand curve is a truer depiction of the situation. In fact, if biofuels produce more carbon emissions than the burning of fossil fuels, then the curve should be set to the left of that for fossil fuels. Policymakers would conclude from this analysis that rather than subsidising biofuels, they should be taxing them for the pollution done to the environment.

In addition to the environmental concerns there is the impact of the growing of energy crops on world food prices. The switch of resources to the growing of energy crops uses up vital water resources and adds to inflationary pressure on food prices. Hence, biofuels harm the least well off members of society, especially in poorer countries.

As economists, we can analyse the economic consequences of biofuels but have to be guided by scientists as to the environmental impact. If Crutzen is correct in his scientific analysis, then biofuels reduce economic welfare to a greater extent than fossil fuels. Even if he is not correct in his scientific analysis we should be concerned about the impact of biofuels on the price of food, especially in relation to poorer countries.

Efficiency and economic arguments
According to a study by Drs. Van Dyne and Raymer for the Tennessee Valley Authority, the average US farm consumes fuel at the rate of 82 litres per hectare (8.75 US gallons per acre) of land to produce one crop. However, average crops of rapeseed produce oil at an average rate of 1,029 L/ha (110 US gal/acre), and high-yield rapeseed fields produce about 1,356 L/ha (145 US gal/acre). The ratio of input to output in these cases is roughly 1:12.5 and 1:16.5. Photosynthesis is known to have an efficiency rate of about 3-6% of total solar radiation[62] and if the entire mass of a crop is utilized for energy production, the overall efficiency of this chain is currently about 1%[63] While this may compare unfavorably to solar cells combined with an electric drive train, biodiesel is less costly to deploy (solar cells cost approximately US$1,000 per square meter) and transport (electric vehicles require batteries which currently have a much lower energy density than liquid fuels).
However, these statistics by themselves are not enough to show whether such a change makes economic sense. Additional factors must be taken into account, such as: the fuel equivalent of the energy required for processing, the yield of fuel from raw oil, the return on cultivating food, the effect biodiesel will have on food prices and the relative cost of biodiesel versus petrodiesel.
The debate over the energy balance of biodiesel is ongoing. Transitioning fully to biofuels could require immense tracts of land if traditional food crops are used (although non food crops can be utilized). The problem would be especially severe for nations with large economies, since energy consumption scales with economic output.[64]
If using only traditional food plants, most such nations do not have sufficient arable land to produce biofuel for the nation's vehicles. Nations with smaller economies (hence less energy consumption) and more arable land may be in better situations, although many regions cannot afford to divert land away from food production.
For third world countries, biodiesel sources that use marginal land could make more sense, e.g. honge oil nuts[65] grown along roads or jatropha grown along rail lines.
In tropical regions, such as Malaysia and Indonesia, oil palm is being planted at a rapid pace to supply growing biodiesel demand in Europe and other markets. It has been estimated in Germany that palm oil biodiesel has less than 1/3 the production costs of rapeseed biodiesel.[66] The direct source of the energy content of biodiesel is solar energy captured by plants during photosynthesis. Regarding the positive energy balance of biodiesel[citation needed]:
When straw was left in the field, biodiesel production was strongly energy positive, yielding 1 GJ biodiesel for every 0.561 GJ of energy input (a yield/cost ratio of 1.78).
When straw was burned as fuel and oilseed rapemeal was used as a fertilizer, the yield/cost ratio for biodiesel production was even better (3.71). In other words, for every unit of energy input to produce biodiesel, the output was 3.71 units (the difference of 2.71 units would be from solar energy).
Biodiesel is becoming of interest to companies interested in commercial scale production as well as the more usual home brew biodiesel user and the user of straight vegetable oil or waste vegetable oil in diesel engines. Homemade biodiesel processors are many and varied.

Extra notes from the revision session

2009-06-11T20:38:00.000+01:00

1) Extract 3: outline the arguments against Soviet style central planning.

More important for us as students of Economics are the following statements:

1. Compared with the suggestion of German left wing politicians price controls are not targeted to the least well off.
2. It is seen as “a throwback to Soviet style central planning”.
3. It is the “widest reaching direct government intervention in the pricing system since central planning was abolished”.
4. Centralised controls are “not an appropriate way of dealing with food inflation”.

These points can be understood by referring to the role of the price mechanism. The price mechanism is the system by which changes in the relative prices of goods serve to allocate resources in a market economy. This is achieved through the three functions of the price mechanism:

1. The rationing function – Price rations the supply of goods and if it is not allowed to fulfil this function then some other mechanism must be used (eg first come, first served, or coupon rationing).
2. The signalling function – Rising prices signal the existence of excess demand for the product. If price is not allowed to fulfil this role then the excess demand will go unnoticed and will manifest itself in the form of black markets.
3. The incentive function – Higher prices leading to higher profits provide producers with an incentive to increase output. Price ceilings remove the incentive to increase output.

Conclusion: Price controls, even if imposed for the best of reasons, do not solve the problem and they undermine the price mechanism. The Russian government appears to justify price controls in terms of the abuse of monopoly power within the market (ie in terms of market failure), but the choice of this weapon will simply replace market failure by government failure. Remember, this is an example of the law of unintended consequences where even well intentioned policies can create more significant problems as they seek to solve others.

2) Long term supply of food. Ideally a supply response would come from the 450m small holders in developing countries. Why would this be desirable?

World food production needs to become less reliant upon large scale farms in America and Europe. Ideally a large part of the supply response would come from the world‟s 450m small holders in developing countries. Why would this be desirable?

1. Poverty reduction: Three quarters of those who get by on less than $1 per day live on small holdings in developing countries.

2. Environmental benefits: Small holders in developing economies manage a disproportionate share of the world‟s water and vegetation cover, so raising their productivity on existing land would be more environmentally friendly than cutting down the rain forest.

3. Returns on Investment: It would be easier to boost grain yields in Africa from two tones per hectare to four than it would be to raise yields in Europe from eight tones to ten. The opportunities are greater and the law of diminishing returns has not yet set in

3) Who are the winners and losers from higher food prices?

4) Outline the social consequences from a rise in food prices.

The social consequences of inflation refer to the impact of inflation, on various groups within society. This can be expressed in terms of a well known quotation: “When I first started working I used to dream of the day when I would be earning the salary that I’m starving on now” (Anon). We know that there are gainers and losers from inflation, and so it has the effect of producing an arbitrary redistribution of real income from:

1. lenders to borrowers (through a decline in the real value of debts).
2. savers to borrowers (through a decline in the real value of debts).
3. those on fixed incomes to those whose income rises ahead of inflation.
4. the private to the public sector (through fiscal drag).
5. non-union workers to those in strong trade unions (in terms of ability to secure wage increases).
6. the economically weak to the economically powerful.

Food inflation is especially harmful to those on the lowest income. Income elasticity of demand for food is low, so if we go down through the income levels we find that the proportion of income spent on food rises. We can deduce from the stimulus material that food inflation has outstripped inflation in general. There was a 40% increase in the price of butter in Germany (line 3 of paragraph 3) and yet the eurozone inflation rate was 2.1% rising to 2.6% and 3% (line 6 of paragraph 3). Consequently, food inflation is not only significantly higher than general inflation, but it impacts primarily on those sections of society that spend the highest proportion of their income on food, ie the less well off.

Combating Inflation

Paragraph 3 of the Introduction introduces us to four strategies designed to cope with the problem of food inflation. Two of the strategies can be dismissed quite quickly, but the remaining two strategies need more detailed attention - especially as they are the subject matter of Extract 3.

“German left wing politicians have called for an increase in welfare benefits so that people can cope with price rises”. This can be regarded as a coping strategy – it enables the less well off (ie the people who are hardest hit by food inflation) to cope with the problem. However, it merely masks the problem rather than tackling it and there is an opportunity cost involved. It is the equivalent of a pain-killer which deadens the pain but leaves the medical condition unchanged. The rise in welfare payments will benefit the less well off and, in this sense, it could be said to be targeted assistance. However, people other than benefit recipients derive no benefit from this measure and, in addition, might be adversely affected by a tax rise to pay for the higher level of benefits, or a shift in government priorities away from other programmes. Therefore, welfare benefits not only disguise the problem but redistribute income. The only positive aspect of the policy is that it is a targeted measure.

The introduction also refers to the use of interest rate policy to combat inflation (lines 14-15 of paragraph 3). We know that monetary policy, in the form of interest rate changes, are now the prime weapon in controlling inflation. But, this is inflation in general rather than food inflation. Food inflation is not caused by cost push or demand pull within the countries of Europe but, instead, is global. Food inflation is the result of global supply and demand and not just UK or EU supply and demand. If interest rate policy is used to combat an inflationary problem which is limited to food, then high interest rates will be inflicted on the economy as a whole. Not only would such measures be ineffective on global food prices, but also they would be damaging to the economy as a whole.

The implication that must be drawn from lines 14-15 is that the solution lies in microeconomic measures directed at the food market. Now we turn to Extract 3 which contrasts two such measures

5) Outline the factors contributing to the rise in food prices worldwide. (20 mks)

6) Evaluate carbon trading as a means of reducing pollution.

7) Explain, using a diagram, how carbon trading operates in principle and practice.

8) From extract 2 – why end the buffer stock system. Also (Jan 2009) why start it again?

The final two hours - mocks

2009-06-11T18:18:00.001+01:00

Mock ONE – 1 hour

PLAN: With reference to the case study, outline the case in favour of price intervention. Make sure you include at least one diagram. (15 mks)

PLAN: Explain how the price of butter rose owing to the forces of BOTH demand and supply. (10 mks)

PLAN: Explain, With reference to the case study, how it can be argued that the CAP is an example of government failure. (15 mks)

DO: Explain why, With reference to the case study, ‘rising inflation is not the only concern of European governments.’ (10 mks)

PLAN: Outline, With reference to the case study, the main arguments against the current system of farm support within the EU. (15 mks)

DO: Using a diagram, explain the case FOR Biofuel production. (10 mks)

Mock TWO – 1 hour

PLAN: With reference to the case study explain how CAP raises fundamental issues of efficiency and equity arising from different forms of intervention in markets for specific agricultural products. (15 mks)

PLAN: Outline, With reference to the case study, the approaches the |EU has taken to resolve environmental policies APART FROM carbon trading. (10 mks)

PLAN: With reference to the case study explain the externalities and market failure that occur in farming. (15 mks)

DO: With reference to the case study explain – with a diagram – why the Russian government is regulating market prices. (10 mks)

PLAN: Explain, With reference to the case study, how CAP has provided financial support for farmers – make sure you use diagrams. (15 mks)

DO: With reference to the case study and your own knowledge outline the reasons for the surge in global food price inflation. (10 mks)

Your final 2 hours of revision

2009-06-10T23:46:00.001+01:00

Tomorrow (Thursday) students are gathering in Oxford for the final two hours of heavy revision. They may then spend further hours, late at night and early morning for light revision, but 6-8 in the evening will be the intensive time.

The two hours will consist of a series of questions to PLAN and DO.

Their work will then be assessed by a team of teachers all of whom are Examiners or ex-Examiners, and the students will be given 1-1 feedback.

The questions will be posted here at 6pm.

Why not try them yourselves - and check with each other?

Exam question

2009-06-10T22:32:00.001+01:00

"Government and the European Commmunity are the biggest influences on what farmers produce in Britain."

Do you agree with this statement?

Give detailed reasons for your answer

An essential PDF

2009-06-10T22:29:00.001+01:00

CAP

absolutely essential!

Carbon tax/trade

2009-06-07T23:11:00.001+01:00

Global food prices

2009-06-07T23:06:00.002+01:00

The implications...

Winners and losers...

Who is to blame?

Winners and losers

Economic case for biofuels- and against

2009-06-07T10:15:00.003+01:00

Link 1

Link 2

Link 3

Link 4

Link 5

Biofuels - a response

2009-06-07T09:52:00.000+01:00

Carbon

2009-06-05T00:35:00.000+01:00

From the BBC

Butter Mountains

2009-06-04T18:03:00.003+01:00

Here are some links that will help you investigate why subsidies were introduced:

Link 1

Link 2

Link 3 - EU subsidies

Link 4: Return of the mountain

Link 5 - BBC explanation

Link 6: Irish Times

Link 7: a looooong article

Link 8 the why

Link 9 more why

CAP

2009-06-04T16:44:00.000+01:00

Farm Reform

a. CAP system of farm support has been contentious issue for years
b. The Common Agricultural Policy is regarded by some as one of the EU’s most successful policies, and by others as a scandalous waste of money.
c. EU spends about £34bn annually on the CAP; about 88% of it in direct aid. The rest is market price support - public purchases to protect farmers from a drop in world prices. 7.7bn euros is spent on rural development.
d. 20% of CAP funds go to France; the UK gets 9% of total EU farm support
e. New EU member states began receiving CAP subsidies in 2004, but at only 25% of the rate they are paid to the older member states.
f. Many attempts at reform over the years
g. CAP is crucial and controversial in terms of EU’s trading relationships with many developing countries
h. For the UK farming accounts for less than 1% of GDP (by value added)
i. Share of GDP is higher for new EU members e.g. Bulgaria and Poland
Past failures of CAP (this is government failure in action!)

1. Production inefficiency and surplus: Intervention prices encouraged excess production which led to a misallocation of scarce resources.
2. Big business ‘factory farming’ has led to problems with food safety and animal welfare and has contributed to deforestation / reliance on imports of cheap soya
3. Huge financial cost for the EU Budget - still > 40% of total spending – subsidies that could have been better spent elsewhere
4. Damage to the environment as farmers searched for higher production yields
5. Consumer welfare hit by higher food prices (trade diversion) regressive effect on lower income families where food is a higher % of total spending
6. Damage to export industries of many LDCs – e.g. dumping / EU export subsidies
7. Many farm support programmes benefited larger scale wealthier farmers most

Key reforms
1. Set-aside: Designed initially to reduce surpluses and protect the environment
2. Decoupling: A single farm payment independent from production
3. Reductions in guaranteed prices (e.g. 36% cut in guaranteed price for sugar) and an end to intervention buffer-stock schemes for products such as butter
4. Farm income payments conditional on EU farmers meeting agreed standards of environmental care, food safety & animal welfare (known as cross compliance).
5. Reduction in payments to bigger farms (known as “modulation” and “digression”) to help transfer funds to EU rural development programmes
6. Incentives to encourage farmers to switch towards organic farming
7. Incentives for farmers to move away from food production and diversify
8. Move to allow food prices to be set by global forces of supply and demand.

Source: www.tutor2u.net

Food prices

2009-06-04T01:20:00.001+01:00

Read the article

Biofuels

2009-06-01T04:06:00.001+01:00

Links from tutor2u:

Bio-fuel curse and cure
Economic cost of fuel subsidies
Money Programme: Green Fuel Gamble
MPs call for an end to biofuels subsidy
Sewage - The Fuel of the Future?
Video case study - biofuel farmers feel the pressure

Here is a selection of the coverage of the new EU Renewable Transport Fuel Obligation

Independent:
Biofuel - the burning question:

The Guardian:
Biofuels - the big picture

BBC news video:
Bio-fuels - a hidden cost?

EU rethinks biofuel strategy

Food prices

2009-05-29T15:21:00.001+01:00

Rising food prices causes and consequences

Demand for food quality in rural China

Biofuels

2009-05-29T15:20:00.001+01:00

Western appetite for biofuels...

European Union biofuels policy

Food hunger

2009-05-29T14:31:00.000+01:00

...interesting article

Food prices

2009-05-27T22:43:00.003+01:00

Food prices to go up again, says report

27 May 2009

Prompted by the rise in fuel prices and threats like climate change, food prices will increase again, says a new UN report. To avert another crisis in Asia and the Pacific, it recommends farmers to adopt sustainable agricultural practices and avoid over-intensive cultivation.

Johannesburg: Food prices will rise again by 2015, when economies are expected to have recovered from the global recession, pushing up demand once more, says a recent UN report

: Food prices are still high in many developing countries/ Photo credit: IRIN

2008 is seen as the year of food crises, prompted in part by high fuel prices, but these started declining as the global recession got underway in late 2008 and eventually returned to 2006 levels, though food prices in many developing countries are still higher than they were then.

"This has been a temporary respite," said the report, Sustainable Agriculture and Food Security in Asia and the Pacific, by the UN Economic and Social Commission for Asia and the Pacific (ESCAP).

Citing the International Energy Agency's Energy Outlook 2008, which projected that the price of crude oil would average US$100 per barrel in the 2008-2015 period, and rise again to $120 in 2030, the report predicted that "food prices will rise again, too", partly because of resurgent demand, but also as a result of threats to sustainable agriculture, including climate change.

"Sustainable agriculture involved stewardship of both natural and human resources"

The report warned that unless farmers looked at ways to produce food more efficiently, the food security outlook would be "bleak"; sustainable agriculture involved stewardship of both natural and human resources - maintaining, regenerating or enhancing the natural environment, and ensuring the health of producers by offering them a decent income and working conditions.

Land degradation, brought on partly by over-intensive cultivation, and the use of mineral fertilisers to feed a growing population, was one of the biggest threats to agriculture.

From 1992 to 2002, countries such as India, Laos, Myanmar, the Philippines, Sri Lanka, Thailand and Vietnam increased their use of mineral fertilisers by as much as 90% , the ESCAP report noted.

In South and South-East Asia, around 74% of agricultural land has been severely affected by wind or water erosion, or chemical pollution. "If this process continues at its current rate over the next 50 years, crop output in northeastern China could fall by as much as 40%," the authors estimated

The problems are particularly severe in Central Asia, said the ESCAP report: in Kazakhstan alone, around 66 percent of the total land area has been desertified. Over-intensive livestock-keeping has also put pressure on rangeland

Forests provide critical ecosystem services to the agricultural sector, including pollination and watershed protection, and support to river fisheries. Between 1990 and 2005, deforestation accelerated in the Russian Federation, Cambodia, Vietnam and Papua New Guinea, partly prompted by the high fuel price crisis, which drove poor people to take more wood from the forests.

Water resources are also drying up, partly as a result of greater pressure being placed on agriculture by the increased demand for food. Globally, 15% to 35% of total water withdrawals for irrigated agriculture are estimated to be unsustainable – "that is, the use of water exceeds the renewable supply," the report commented.

In Asia and the Pacific region, this intensive withdrawal has depleted aquifers, particularly in South Asia and China, and has even reduced the flow of major waterways like the Ganges and Yellow rivers.

Source

"The data showed that food prices rose 5.6 per cent in April, a higher rate than the 4.2 per cent reported a year earlier, but slower than the 7.3 per cent rise reported in March, and well below the massive 8.6 per cent jump recorded last August.

Prices of soft commodities like wheat, corn and soy almost trebled between 2006 and the market peak in early 2008, as growing consumer wealth in developing economies led to soaring demand. Between 2001 and 2007, China and other emerging economies accounted for a 26m metric tonne average annual increase in consumption of major food stocks."

Source

"There were several explanations of why prices peaked as they did last year. One was that general economic activity forced up oil prices, which increased the costs of fertiliser and harvesting. Another was that rising living standards encouraged more people to buy meat products, and the diversion of cereal crops to animal feed imposed stresses on supply. Another argument involved biofuels, although I think that that debate got a little out of hand. Nevertheless, certainly in the United States, biofuel production took maize away from food production without delivering a great benefit in terms of fuel. Of course, there were also climate change factors—water shortages, desert conditions and crop failures for climatic reasons—and population growth pressures that contributed to what happened last year.

This year, some of those factors still exist, but additional ones have crept in. For example, the effect of the downturn has meant that many of the poorest people in the poorest countries have suffered a massive downturn in income, particularly due to the loss of remittances. That means that many of those people are poorer than they were before. Even though prices have come down from the peak, they are still historically high at a time when incomes are historically low. To a substantial degree, that is why the WFP is saying that it needs more this year than last year to address the needs and pressures that it faces."

House of Commons Debates

Interactive BBC site on food prices

Podcasts on food - worth listening to

More podcasts on food

"It is a viewpoint shared by Oxfam's Barbara Stocking, who told the BBC News website: "It takes the same amount of grain to fill an SUV with ethanol as it does to feed a person. We don't want any more subsidies for biofuels. This rush to biofuels is absolutely dreadful."

Food

The setting of food prices

Butter mountains are back

2009-05-27T19:26:00.000+01:00

Telegraph article

NY Times

Biofuels

2009-05-27T19:24:00.001+01:00

Some essential links

Biofuels

More on biofuels

Biofuel subsidies must stop

Objectives of firms

2009-05-26T01:52:00.001+01:00

Link to youtube

Cobweb theorem

2009-05-26T01:50:00.000+01:00

Link to youtube...

Butter prices rose - why?

2009-05-26T01:47:00.000+01:00

One reason:

Green taxes?

2009-05-24T11:03:00.001+01:00

"Clean energy companies, which had been flying high on the back of soaring oil prices, tumbled to earth in the last few months of 2008. The boom in renewable and low-carbon alternatives to fossil fuels looked by November to have suffered a sudden bust.

The WilderHill New Energy Global Innovation Index, which tracks the performance of 88 clean energy stocks worldwide, plunged almost 70 per cent between the start of the year and November, with 84 out of the 88 companies seeing their share price fall. This was in sharp contrast to the previous year, when the index rose 58 per cent.

Clean energy sectors suffered particularly as the markets punished companies with high capital needs, and as investors sought safe havens in longer-established businesses, according to an analysis by New Energy Finance, a research specialist.

But against the backdrop of the World Future Energy Summit 2009 in Abu Dhabi, supporters of the sector warn against writing off clean energy just yet. Although this year will be difficult, prospects remain bright.

Michael Liebreich, chief executive of New Energy Finance, says: “2008 was a bruising year for clean energy shares. There was a point when [the WilderHill index] was at a level we haven’t seen since September 2003, before the ratification of the Kyoto protocol ... That’s plainly absurd, even in the light of the unsustainable surge in valuations in 2006 and 2007. The growth prospects for clean energy investment remain exciting.”

The arguments in favour of clean energy are becoming familiar to most businesspeople. Energy security is now a pressing concern for importers of oil and gas – the dispute between Russia and Ukraine in early January proved a jolting reminder to Europe of the problem of over-reliance on any single energy supplier. The US is equally wary of relying on politically unstable regions such as the Middle East for its fuel imports.

The soaring price of energy in recent years has intensified these worries, forcing governments and businesses to explore alternatives to oil and gas. Added to this has been another growing concern about oil: finding new sources of supply as the most easily tapped resources are depleted, and attention shifts to unconventional sources, such as oil sands, which are more expensive to exploit.

If “peak oil” theorists are correct, this problem will worsen markedly in the next two decades, and prices will rise further.

Climate change is the other reason to switch away from fossil fuels. Rising concentrations of greenhouse gases have outstripped scientific predictions, bringing us closer to what climate experts warn is the brink of a catastrophic degree of global warming.

Scientific evidence has been piling up, and the world is now less than a year away from a conference aimed at forging a new global deal on emissions.

Added to these pressures, pollution has prompted rapidly industrialising countries to seek cuts in their consumption of dirty fuels such as coal and oil.

Governments have sought to respond with fresh regulations. Europe has led the way with its greenhouse gas emissions trading scheme, but other countries have taken steps to set up their own trading systems: Japan, Australia and several US states have all embarked on carbon trading.

Some developing countries have also pursued lower-carbon strategies – China has stiff laws on car fuel economy, India has a national plan on carbon, and Mexico has pledged to halve emissions by 2050.

But these were the policies and realities of the boom. Last year’s financial crisis was accompanied by a precipitous fall in oil prices, and vociferous calls for a loosening of environmental regulations that would raise fuel prices.

The economics of alternative energy have reversed sharply: high energy prices made still-costly alternatives such as wind and solar power much more attractive, but as conventional energy prices have dropped, so has the impetus behind renewables. T Boone Pickens, the legendary Texas oilman, signalled the sudden change last year, when he drastically scaled down plans to invest in US wind power.

The lack of credit is also braking the growth of renewables, says Neil Suslak, managing director of Braemar Energy Ventures, a clean energy investor: “The current financial crisis will continue to slow the deployment of new renewable projects in the US in 2009 due to lack of capital available for projects generally, and a reduction in demand for currently more expensive renewable energy by energy users.”

Governments have also grown more wary of strengthening environmental regulations that could push up costs to hard-pressed businesses and consumers. European companies succeeded in wringing key concessions last year on the extension of the emissions trading scheme.

On the face of it, then, the recession and financial crisis spell disaster for clean energy as investors take fright and the economics of energy swing back in favour of oil. But as the recession takes hold, a new argument is gaining currency. The need for an economic stimulus, funded from the public purse, is now accepted by governments across the world. The US, Europe, Asia and others are all engaged in reigniting their economies by bringing forward public investments. Some governments are now suggesting this stimulus should be green – that investments should be directed towards creating an infrastructure for energy that would shift economies on to a low-carbon footing."

A lesson on Biofuels (Guardian)

2009-05-24T11:01:00.000+01:00

Biofuels are a great classroom subject. Not only will this issue develop students' global awareness and understanding of the science of biofuels, but it can help them to develop an independent point of view on a vital issue.

Not a new phenomenon

Biofuels are nothing new. Rudolf Diesel, inventor of the diesel engine predicted the future importance of biofuels and used one in his diesel engine at the Paris World Fair in 1900. Diesel used peanut oil, but the term biofuels can refer to any organic material that can be rapidly replenished.

Introduce the topic by accessing the Guardian's Q&A section on biofuels (guardian.co.uk/environment/2008/jan/21/biofuels.alternativeenergy). Print it out, chop up into questions and answers, then challenge students to match them up. Differentiate by varying the number of questions.

Biofuels are a worldwide commodity: sugar cane and maize from the Americas; biodiesel, rapeseed and sugar beet from Europe; palm oil from south-east Asia. Provide students with a world map (eduplace.com/ss/maps/world.html) then ask them to plot the world's main biofuel producers with the help of Planet Ark (www.planetark.com/dailynewsstory.cfm/newsid/31182/story.htm), labelled with relevant facts and figures.

The UK, like other governments, is taking biofuels very seriously. The introduction of the Renewable Transport Fuel Obligation (RTFO) in April means that petrol and diesel should now contain at least 2.5% biofuel, rising to 5% by 2010. The US, with a view to reducing its dependence on other oil-producing countries, has a target of replacing 75% of oil imports with biofuel by 2025.

The world leader in biofuel motoring is Brazil, where all the cars run on ethanol or an ethanol mix. Use Brazil as a case study for students to explore. A BBC news report and video makes a good start for their investigation (http://news.bbc.co.uk/2/hi/business/4715332.stm). Ask them to produce a display or a PowerPoint presentation describing Brazil's experiences.

Show students a short film from The One Show showing how some individuals, including the footballer David James, are adopting biofuels in the UK (bbc.co.uk/theoneshow/article/2007/11/ls_biofuels.shtml). As they watch, ask students to list the different ways biofuels are being used and why people are using them, before discussing whether they think biofuels are a viable option for car users.

Biofuels are theoretically carbon neutral, as the carbon released by burning them is balanced by the carbon absorbed by plant growth. However, there is considerable alarm about the sudden rise in biofuel production, including the environmental costs of land clearance for growing biofuel crops. The overriding concern, however, is that using land normally used for food production has led to food shortages and high food prices. A recent World Bank report estimates that prices have soared by 75% - far higher than anticipated, and a rate that has forced 100 million people across the world into poverty. Challenge students to read this news report (guardian.co.uk/environment/2008/jul/03/biofuels.renewableenergy) and to translate it into a TV news report to present to the class.

Are algae the answer?

A new generation of biofuels may hold the answer. Show students an interactive presentation on the use of algae, which grows fast and is oil-rich (guardian.co.uk/environment/interactive/2008/jun/26/algae). They can research further at http://science.howstuffworks.com/algae-biodiesel.htm, before producing a cartoon strip or flowchart showing how it works.

You can sum up the study on biofuels in one of two ways. Science upd8 has an excellent lesson on biodiesel. Ask students to create a game for younger children on the pros and cons of biodiesel (upd8.org.uk/activity/256/Biodiesel.html). Alternatively, hold a trial with biofuels in the dock. Create teams for defence and prosecution, plus a jury and witnesses. The defence and prosecution must build up evidence and prepare witnesses to support their case. Is either side capable of winning, or will it leave a hung jury?

Biofuels

2009-05-24T10:54:00.002+01:00

"Why did we stop using biofuels?

Cheap crude oil, especially from the Middle East, diverted interest and research away from biofuels. Oil's low price gave it dominance in the market.

So why is there renewed interest?

Growing concerns over climate change, rising oil prices and insecurity of supply mean that governments and industry are desperately searching for alternative fuels. George Bush's drive to reduce dependence on foreign oil led him to decree that by 2025, the US should replace 75% of imported oil with biofuel. The EU embraced biofuels as a key factor in a low-carbon future, and set a target that 10% of transport fuel will be biofuel by 2020."

Questions on biofuels

"The report, Sustainable biofuels: prospects and challenges, from the Royal Society, found that climate change mitigation, energy security, rising oil prices and economic objectives are encouraging "strong interest" in the development of biofuels for the transport sector.

Biofuels - derived from food crops including corn, sugar cane, palm oil and oilseed rape - are one of the few technologies with the potential to displace oil as a fuel for transport and are seen as a way to cut greenhouse gas emissions and boost energy security.

But the report warned that biofuels risk failing to deliver significant reductions in transport emissions and could even be environmentally damaging unless the government implements the right policies.

It said directives such as the UK's Renewable Transport Fuel Obligation (RTFO), the UK's implementation of the EU biofuels directive which comes into force in April 2008, does not necessarily encourage the use of the types of biofuels with the best greenhouse gas savings.

Although the policy requires fuel suppliers to ensure that 5% of all UK fuels sold are from a renewable source by 2010, it does not contain a target to reduce greenhouse gas emissions. As a result, the report says, it will do more for economic development and energy security than combating climate change."

Benefits of biofuels

"The latest controversy over biofuels backs up Oxfam's report published last week. Profit, pressure from industry and farm subsidies show that there is more behind this enthusiasm for the crops than a desire to stop climate change.

If politicians want to reduce emissions and stop global warming, biofuels are not the solution. Recent research suggests that biofuels may increase greenhouse gas emissions rather than reduce them. And by pushing up demand for agricultural land, they're causing farming to expand into other areas that store carbon – such as wetlands and forests – releasing way more carbon than is saved through biofuels."

Time to put the brakes on biofuels

"Using plant-based materials for fuel in cars and trucks was until recently heralded as the answer to the need to reduce carbon emissions from petrol and diesel fuels.

But the alarm expressed yesterday by Professor Robert Watson, the government's highest-ranking environment scientist, that the headlong pursuit of biofuels could accelerate climate change, is the latest in a series of comments from senior figures that have shaken Whitehall.

Both Watson and the former chief scientific officer, Sir David King, have joined the chorus of those calling for a key "sustainability" clause to be introduced to ensure biofuels do not compound the problem by competing for land with staple food crops and speeding up deforestation.

Speaking on Radio 4's Today programme, Watson said: "It would obviously be insane if we had a policy to try and reduce greenhouse gas emissions through the use of biofuels that's actually leading to an increase in the greenhouse gases from biofuels."

The comments are controversial because the government has committed the UK from April 1 to ensuring that at least 2.5% of all petrol and diesel for vehicles comes from biofuels, with that figure moving up to 5% by 2010. Meanwhile, the EU is aiming for 10% of power for transport being provided by crops from 2020."

Source: Guardian

"The government's scheme to introduce biofuels as a way to cut carbon emissions from road transport has led to extra emissions equivalent to putting 500,000 more cars on UK roads, according to environmentalists.

A new study shows that producing the amount of biofuels required to meet the government's targets in the past year could have inadvertently doubled the overall emissions of CO2 compared with the standard fossil fuels they have replaced. The extra emissions come from forest destruction tied indirectly to growing energy crops.

Biofuels are, in theory, carbon neutral because they only release the carbon dioxide absorbed from the atmosphere by a plant as it grows. But many recent studies have suggested that the indirect effects of producing biofuels can have a negative overall impact.

In several parts of the world, for example, growing biofuel crops such as soy competes for land with food crops, which are then often displaced on to land that has been cleared of forests. A new analysis, carried out for Friends of the Earth (FoE) by environmental consultants Scott Wilson, has estimated the amount of CO2 emitted as a result of this deforestation.

The researchers calculated that the overall carbon cost of clearing forests for biofuels was equivalent to an extra 1.3m tonnes of CO2 emitted into the atmosphere since April last year. That was when the government's Renewable Transport Fuels Obligation (RTFO) was introduced, which mandated fuel suppliers to include at least 2.5% biofuel in their petrol or diesel. Today that requirement rises to 3.3%.

"Until ministers can do their sums properly and can prove that biofuels are actually saving emissions, they do need to put them on hold," said Nick Davies, a biofuels campaigner at FoE.

Soy crops from the US, Argentina and Brazil are used in the most common UK biodiesels and all contribute to the deforestation problem. The FoE study assumed that 10% of the food crops displaced by biofuels would be pushed on to land created by clearing forests.

The researchers allocated this additional land to various agricultural uses and calculated the resulting amount of extra emissions using established models. For example, clearing one hectare of the Amazonian rainforest can release up to 1,000 tonnes of CO2 into the atmosphere, according to the UN's Intergovernmental Panel on Climate Change.

The FoE's concerns were also raised in a government-sponsored review of biofuels published by Ed Gallagher last year. In the study, he recommended that the introduction of biofuels to the UK should be slowed until more effective controls were in place to prevent the inadvertent rise in greenhouse gas emissions caused if, for example, forests are cleared to make way for biofuel production.

Gallagher's report said that if these displacements are left unchecked, current targets for biofuel production could cause a global rise in greenhouse gas emissions and an increase in poverty in the poorest countries by 2020.

His main recommendation, accepted by the government at the time, was to slow down the introduction of the RTFO so that, starting from a base of 2.5% biofuel mixed into petrol and diesel in 2008-09, manufacturers had to increase the proportion by only 0.5% per year. He further added that anything beyond 5% biofuel after 2013-14 should only be agreed by governments if the fuels are demonstrated as sustainable, including avoiding indirect effects such as change in land use.

"Gallagher has slowed down the rate of increase but we don't think that's an adequate response," said Davies. "He raised some serious concerns and, at the moment, they're not being addressed."

A spokeswoman for the Department for Transport acknowledged that the evidence around biofuels was still evolving. "What is not in dispute is the need to develop new, cleaner fuels and break our dependence on oil if we are to tackle climate change," she said.

"Some biofuels have the potential to help us achieve this. So whilst there is no case for pushing forward indiscriminately on those that may do more harm than good, it would be foolish to ignore any potential they do have.

"We have always been clear that biofuels can only make a useful contribution to mitigating climate change if they are sustainably produced. That is why we commissioned an independent review and following its recommendation we agreed to continue to proceed but to do so more cautiously until we are clearer about their wider effects on the environment.

"We believe this strikes a balanced approach based on the best possible science and evidence as it currently stands."

Davies said that, instead of focusing on ramping up biofuels, the government should encourage more proven methods to reduce transport emissions. "They should be investing in first-class public transport systems and smarter cars that actually save on fuel, and more provision for cyclists and pedestrians.

"They are proven to work and don't have the negative side-effects in terms of raising food prices and chopping down the rainforest. We need to put the biofuels obligation on hold until they can show biofuels are actually saving emissions.""

Source: Guardian

Carbon Trading

2009-05-24T10:42:00.002+01:00

Links

Letter in the FT

"The prices paid for permits to produce carbon under the European Union’s emissions trading scheme suffered precipitous falls last December and in the early part of this year, tumbling from about €30 (£27) last summer to €15 in December before a fresh plunge to only about €8 in mid-February."

FT article

"

Prices for EU permits are nearly €14 ($18.4), up from a low of about €8 in February. Traders have priced in the effects of the recession driving down industrial production, and companies have largely stopped selling off permits to raise cash.

But volumes in the other main part of the market, the trade in carbon credits issued by the United Nations – 9 per cent of the market by value – fell about a third.

Trading in this market has been affected by uncertainty over what will replace the Kyoto protocol. The UN issues credits to carbon-cutting projects under the protocol, and these can be used by companies in the EU scheme to top up quotas.

The stream of finance for such projects is drying up, according to New Carbon Finance: the last new carbon fund, of $95m, was set up last year and no new money was raised in the first quarter of 2009.

The company forecast the carbon market would be worth about $120bn by the end of the year, broadly on a par with last year."

Article in FT

Guy Turner, director of New Carbon Finance, said: "In spite of the recession, a decline in carbon prices and uncertainty over what will happen after 2012 [when the current provisions of the Kyoto protocol expire], traders are taking this market seriously and trading more actively."

The bulk of the international market - about 84 per cent by value - is the European Union's emissions trading scheme, under which energy-intensive companies are issued a quota of carbon permits they may trade with one another. Trading in this market rose by 54 per cent, compared with the last quarter of 2008.

But volumes in the other main part of the market, the trade in carbon credits issued by the United Nations - 9 per cent of the market by value - fell about a third"

FT article

The current low prices for carbon dioxide mean that the value of the market is likely to drop by nearly one-third, from €92bn ($117bn) last year to €63bn this year, according to Point Carbon, a market analysis group part-owned by financial and industrial interests.

Falling emissions, resulting from lower activity in the recession, mean that companies need fewer permits under the European Union’s emissions trading scheme, the biggest section of the carbon market.

Prices for permits have fallen precipitously in recent weeks, reaching a low of €8.20 before bouncing back to stand at just less than €10 on Tuesday.

Last summer, the permits traded at more than €20.

Carbon credits are also issued by the United Nations to development projects that aim to cut pollution, particularly from energy generation in developing countries.

These could include wind farms or solar power plants that cut greenhouse gas emissions.

FT Article

"

Brussels lambasted the US and Australia yesterday for their inaction in cutting carbon dioxide emissions and stressed Europe's leading role in the battle against global warming. "Only EU leadership can break this impasse on a global agreement [post-Kyoto] to overcome climate change," Stavros Dimas, the EU's environment commissioner, told scientists from the UN's intergovernmental panel on climate change. The body is due to publish a report this week in Brussels on the impact of global warming.

What Mr Dimas knew - but did not tell the scientists, apparently - is that the EU's programme for cutting carbon, its two-year-old emissions trading scheme (ETS), remains in disarray.

The Democrats, who are now the majority party in the US Congress, and California's Republican governor, Arnold Schwarzenegger, are drafting plans for an American version of the carbon "cap-and-trade" scheme.

However, preliminary data on the scheme's performance last year - its second year of operation - showed that 93%, or about 9,000 of the 10,000 heavy industrial plants covered by the EU's trading scheme, emitted less carbon than their quota of free permits. The resulting 1%-1.5% rise in emissions was not as great as in 2005 but the spot price of a tonne of carbon fell by about a quarter to €1 (68p), at one point collapsing to just 92 cents.

Only a handful of countries shored up the market by issuing fewer emissions quotas than industry wanted. These included: Britain - where Drax, Europe's biggest coal-fired power plant, emitted 5m tonnes more than its 15.5m tonnes permit - Denmark, Ireland, Italy and Spain. The trading mechanism is designed to create scarcity, forcing up the price of carbon and prompting industries such as steel and power generation to invest in cleaner, greener technologies, such as renewable, carbon-free energy and, eventually, carbon capture and storage. So far, it is manifestly not working as planned"

Read more in the Guardian

"

Asked by MPs on the committee whether the European Emissions Trading scheme was insufficient to meet these targets, Humphrey Cadoux-Hudson, managing director of new nuclear build at EDF, agreed. "As currently framed today that is the case. What is needed are rules that will create a market that will allow us to create low-carbon technology."

"The thing that drives the price of something is certainty. The recording and verification of emissions creates uncertainty, as does the entry of new countries into the system."

Cadoux-Hudson said market "rules" are required because putting a value on carbon was difficult. "It's not something you can dig out of the ground."

Carbon trading is the key mechanism for reducing emissions and is likely to be central to discussions at the UN climate change summit in Copenhagen later this year.

"It may be that Copenhagen gives us a ray of light that we can trust long term prices but we haven't seen that in a sustainable price – we need a price signal right across the EU," he said.

Lord Nicholas Stern, who wrote the UK government's 2006 Stern review into the economics of climate change, has said that carbon markets are an essential element of climate change mitigation policy. But he has called for a floor price to be set to stabilise the market. Others have been scathing about the market mechanism though. The environmentalist James Lovelock has referred to them as a "scam"."

Food prices debate

2009-05-24T10:34:00.000+01:00

Soft commodities are hardening. Corn, wheat, cocoa and coffee prices have all risen strongly in recent months, suggesting consumers will face an extended period of more expensive food prices.

Can poorer farmers hope to benefit from the rising demand for food? How will the rise in global food prices affect consumers? And can the world continue to feed its expanding population?

Read the debate in the Financial Times here

Questions about food prices

2009-05-24T10:33:00.000+01:00

Food prices are rising. Rice is just the latest staple to soar through record levels as increasing demand and lagging supply on global markets prompt exporters to restrict their sales to quell food price inflation at home.

Similar moves by major wheat and soyabean exporters announced earlier this year have helped keep prices near record levels, while record corn prices continue to be underpinned by rising demand from China and from the biofuels industry.

Are staple foods poised to reach luxury prices, or is the current surge in agricultural commodities a bubble waiting to burst?

Read more here

Food crisis and China

2009-05-24T10:31:00.000+01:00

For the Group of Eight ministers of agriculture meeting for the first time on Saturday 9there will be no greater example of the dilemma faced in feeding a growing population than China.

The world's largest agricultural economy makes the ministers wary because of its huge and expanding food needs: but also curious at Beijing's success in weathering last year's global food crisis better than most emerging economies.

Ever since China entered its phase of high economic growth 30 years ago it has faced apocalyptic warnings that its increasing demand for food would lead to shortages worldwide.

By and large, these warnings have turned out to be wide of the mark.

Yet in spite of its success in coping with last year's crisis, Beijing still has to feed its population with limited fertile land, scarce water and the threat of climate change.

Given China's size, if these problems are not addressed they will have huge effects on global agricultural markets as Beijing will have to import large amounts of food, tightening markets and sending prices higher.

At a time of heightened concerns about food security, illustrated by the G8 meeting, Beijing's challenge is a concern both at home and beyond. The G8 has warned that, without a doubling of spending by 2050, the global food crisis "will become structural".

China's response to the global and domestic challenge has won praise.

Read more here

Food price drivers

2009-05-24T10:29:00.002+01:00

"So was the great global food shortage and the agriculture supercycle all a mirage? Not so, says Richard Warburton, head of agribusiness at Bidwells, a specialist consultancy. “The main drivers remain pretty much intact,” he says, adding “there’s quite a lot of confusion over the impact of the financial crisis.”

The main drivers he refers to are population increases, dietary shift and the growth of biofuels. Only the dietary shift – increasing demand for meat as large numbers of people get richer – is likely to be affected by a global slowdown.

“There were vast numbers of people going through the two dollars a day barrier and starting to eat more meat,” says Mr Warburton. “That may slow, but not much.”

Read more here

Why are food prices rising?

2009-05-24T10:29:00.001+01:00

Food prices have been rising steadily in the past few months and the effects are being felt globally. As agricultural commodities such as wheat and dairy trade at record highs, some governments, such as Russia, are implementing price controls on selected types of bread, cheese, milk, eggs and vegetable oil.

But why is food getting more expensive? What role do biofuels play and how has the weather affected crop yields this year? How does the cost of oil factor into the price of food?

More here from the excellent Financial Times

Japanese jitters and food security

2009-05-24T10:27:00.000+01:00

"The Japanese government is drawing up plans to finance investments in agricultural production in developing countries, in the latest sign of nervousness about food security among countries that import agricultural commodities.

Tokyo is looking to identify regions that could benefit from Japanese investment and assistance to increase food production, according to the country’s agriculture ministry.

The investment plans are, nonetheless, of a different nature from those of countries such as South Korea and Saudi Arabia, which are investing in farmland in order to export back the crops to feed their own population. Tokyo is planning to sell crops on the global food market, according to experts and diplomats familiar with Japan’s agriculture policy.

Munemitsu Hirano, director for international trade policy negotiations at the Ministry of Agriculture, Forestry and Fisheries, said Japan might not be guaranteed stable food supplies as a result of its investment efforts. But he told the Financial Times: “If [food] production increases worldwide that will help Japan to import.”

Tokyo has long supported ventures into agriculture by Japan’s trading houses – particularly in soya bean production in Latin America after it was spooked by its large dependency on the US during the brief US soya bean embargo of 1973. Itochu and Marubeni, two of the country’s trading houses, have said in the past year they wanted to boost their agricultural production and have signed deals with China to supply Beijing with agricultural commodities, particularly soya."

Read more here

Food prices

2009-05-24T10:26:00.000+01:00

The UN’s Food and Agriculture Organisation’s findings show that poor countries continue to suffer the impact of high food prices. The blow was now compounded by sharply lower economic growth and remittances, said food aid officials.

“The food crisis has not gone away. In fact, it is coming back,” said Christopher Delgado, a policy adviser in agriculture at the World Bank, at a recent conference, who justified its warning on high local prices.

Food aid officials attribute the disconnect between local and international food prices to time lags, poor harvests in developing countries and in some cases to the difficulties of importing agricultural commodities due to the lack of trade finance.

The FAO will unveil on Thursday a tool to monitor about 800 monthly domestic retail and wholesale prices of main foods consumed in 55 developing countries. Until now, information on local prices was patchy.

Food price inflation hits the poor hardest, as the share of food in their total expenditure is much higher than that of wealthier populations, according to the FAO. Food represents about 10-20 per cent of consumer spending in industrialised nations, but as much as 60-80 per cent in developing countries, many of which are net-food-importers.

Although the price of corn, wheat, rice and other food staples in international markets has tumbled between 60 and 40 per cent from the all-time highs of last year, local food prices in most sub-Saharan African countries are today higher than a year ago, the FAO data show.

Retail rice in Malawi was quoted at 210 kwacha ($1.50, €1.11, £1.05) a kilogram, almost double that of a year ago. In Zambia, white maize, the main staple, cost in local markets 28,185 kwacha ($4.97, €3.69, £3.48) per 20kg, up from 17,500 kwacha a year ago.

Read more here

Food prices

2009-05-24T10:25:00.000+01:00

Argentina is the world’s second biggest exporter of agricultural commodities and sales of soya and corn are critical to importers such as China, who turn to Argentina and Brazil until US harvests become available.

The farmers were protesting at about 60 points in northern and central Argentina and have staged roadblocks, occasionally forcing truckers to dump loads.

Strike fears helped push soya prices in Chicago nearly 8 per cent higher last week. Wheat, corn and meat prices also rose.

“The stand-off between Argentine farmers and their government is worsening, threatening further drawdown of an already tight US soyabean carry over,” said Richard Feltes, head of commodities research at MF Global, a brokerage in Chicago.

The US Department of Agriculture sees US soyabean inventories falling this season to a five-year low of 5m tonnes, from 15.6m in 2006-07.

Though farming is Argentina’s top export earner, the country has become increasingly unreliable in world markets. Farmers have used halting of overseas sales as the main bargaining tool since the confrontation over export tariffs began a year ago, and the government at times bans corn, wheat and beef exports to protect local supplies and prices.

Farmers see the plan to share 30 per cent of the soya tariffs as a bid to buy the support of governors.

Read more here

Common Agricultural policy

2009-05-24T10:17:00.002+01:00

To maintain price the government intervenes and buys up the excess supply of 20 units at £3 each, and stores the unsold produce. Intervention costs £3 x 20 units plus the cost of storage. This theory is behind the operation of the EU Common Agricultural Policy (CAP).

Note the impact of minimum price depends on:

The difference between the market and minimum price
The price elasticity of supply and demand for the product

Use elasticities to quantify effects. A similar diagram is used to illustrate the effect of EU wide minimum wage legislation. NB: Minimum price has no impact if the equilibrium price is higher than the minimum

Other points to note:

CAP has ensured adequate supplies but it has incentivised farmers to produce more
CAP is the single biggest item in the EU budget and is costly to administer
CAP is a significant obstacle to WTO negotiations to reduce world wide tariffs

The Common Agricultural Policy (CAP) encourages output maximisation. Farmers adopt intensive farming techniques which see traditional small holdings merged into large super fames with the loss of hedgerows and natural habitats for wild animals.

Agricultural economist, Jules Pretty (University of Essex) estimates that the annual external cost of intensive farming in the UK is £2.3 billion on an ex post basis for cleaning up pollution & repairing habitats.

The above is an extract from here. Click here to read the full post.

Food prices in Britain

2009-05-24T10:16:00.000+01:00

"Shoppers in Camberwell, a short bus ride from Dulwich and among the most deprived wards in the country, also said food prices were increasing.

“I don’t eat as much meat as I used to because it is so expensive. At the end of the week, you think, ‘Oh crikey’,” said Becky Smith, 33, a student. “I have noticed prices have gone up a lot. I try to budget shop, but there are lots of queues and they have gotten longer in the last few months.”

Jane Taylor, 50, a housewife, agreed: “The main things I buy are mince meat, sausages and a joint for Sunday, and from the beginning of the year they went up.” She was unimpressed with supermarket discounts. “They try and con you in shops by saying they’ve got offers, but you’re still paying for it one way or another.”

Residents also complained that their utility and housing costs were rising.

“Electricity has gone up – you put £10 ($15) in the electricity meter and it’s gone immediately. Rents have also gone up, nothing has gone down,” said Charlie Adams, 22, who is unemployed.

Carol Fodili, 53, a childminder, said rents had risen: “The electricity and gas bills have also gone up, but they’re saying they’ll be reduced again in April.”

Teresa Brown, 52, a care worker living in social housing, said: “Apparently my rent from the council hasn’t gone up, but I think electricity has gone up a little bit.”

Read more here

US Food Stamp Aid Hits Record

2009-05-24T10:15:00.001+01:00

"The number of US citizens receiving food stamps jumped in January to a record 32.2m, up 400,000 from December, the US government said on Thursday, in a sign that rising unemployment and persistently high food prices are hurting consumers.

The programme is the US’s biggest domestic anti-hunger scheme, providing about $112 (€83, £76) a month per recipient or about $250 per household to buy food.

In the last year alone, the number of recipients of food stamps has risen by 16 per cent, according to statistics from the US Department of Agriculture, which manages the scheme. Since 2000, the number has rocketed from 17m to more than 32.2m. The increase of 15.2m is equal to the population of the Netherlands.

The US spent $37.6bn on the scheme in 2008. As part of President Barack Obama’s economic stimulus package, those who received food stamps will see a 13 per cent increase in their monthly support in April – equal to about $80 per household.

The previous peak was reached in 1994, after the economic crisis of 1991-92, when the number of people on food stamps reached 27m."

Read more here

Diagrams to learn

2009-05-24T10:14:00.000+01:00

Economic Integration and the Single Market
Trade creation from having free trade within a customs union
Trade diversion – impact of a tariff
Trade and the PPF, trade and economies of scale
Labour market diagrams
Competition within the single market – contestable market diagrams
Fiscal harmonisation – effects of different taxes incl. indirect taxes, Laffer curve

European Monetary Union
AD-AS analysis of external economic shocks, changes in interest rates
Economic cycle diagram, trend growth and the output gap
Optimal currency area illustration
Phillips Curve – changing relationship between inflation and unemployment
Supply and demand in the currency market
Economic effects of unemployment on the EU economy
Crowding out from high budget deficit (market for loanable funds)

Living standards
Lorenz Curve e.g. for showing income and wealth inequality

EU Enlargement
AD-AS effects arising from increased trade, foreign direct investment
Labour market diagrams related to migration flows, e.g. changes in labour supply
Diagrams to show changes in unemployment, natural rate, NAIRU etc

CAP and Fishing
Government intervention in farming markets e.g. price support, set aside, quotas
Environmental impact of farming and fishing – externalities diagrams
Supply and demand diagrams to illustrate changes in global food prices

Environmental policy and transport
Market failure diagrams including externalities from pollution and waste
Diagrams showing carbon trading markets
Diagrams showing the effects of carbon taxes and government subsidies

Competition policy inside the EU
Monopoly and economic welfare
Contestable markets
Price discrimination
Costs, prices, profits – economies and diseconomies of scale
Oligopoly – economics of collusion, cartel behaviour
Oligopoly – kinked demand curve
Game theory – Prisoner’s Dilemma example

Criticising the data for 2888

2009-05-24T10:12:00.000+01:00

Data criticism

1/ Check to see the source of the data and when the data was published, you might be able to criticise it for being out of date, or perhaps for being incomplete (you might be able to suggest extra data that would give you a firmer basis for making reasoned conclusions).

2/ You are most likely to find a degree of bias within the written extracts even when the information appears to come from official sources.

3/ Don’t leave all of the data criticism to the end, it is best to spread it through your answer and integrate it into each section.

Data sources / reliability / bias

OECD: International economics organisation providing reliable data
IMF: Likewise – check to see whether the info is up to date or partial
Euro Stat: Official EU stats agency bound by law to provide accurate data
European Commission: Harder to judge, some statements from EU Commissioners will contain the “official EU view” on certain policy issues, e.g. you would expect the EU Commissioner for Enlargement to be (broadly speaking) in favour of continued enlargement of the EU

Economist: Opposed to tax harmonisation
Critical of the performance of the European Central Bank
Generally critical of the single European currency
Favour tax reductions / liberalisation of trade between countries
Suspicious of most government intervention (neo-liberal)

Migration-Watch Right wing group opposed to free flowing labour migration
Telegraph: Euro sceptic, opposed to UK joining Euro / tax harmonisation
Bruges Group Anti-EU pressure group, wants UK to leave the EU
The Times Euro sceptic especially on further integration / pushing for structural reforms to the European economy
Britain in Europe: Pro EU integration pressure group
Guardian /Observer Centre left, pro Europe normally, believes in active government intervention, but strongly in favour of reforms, especially to the CAP and to EU trade policies with developing countries

Adapted from here

Good enough to eat?

2009-05-24T10:09:00.000+01:00

"When I heard peanut products were being contaminated earlier this year, I immediately thought of my seven-year-old daughter Sasha, who has peanut butter sandwiches for lunch probably three times a week,” he told the nation in one of his weekly addresses from the White House. “No parent should have to worry that their child is going to get sick from their lunch.”

Citing the “troubling trend” that had seen the average number of disease outbreaks due to food contamination rise to some 350 a year, up from just 100 or so in the early 1990s, Mr Obama announced he was setting up a working group on food safety made up of cabinet secretaries and senior officials. He also promised to overhaul America’s “underfunded and understaffed” Food and Drug Administration."

Read the rest here

Food price volatility

2009-05-24T10:06:00.002+01:00

Why may food prices start rising again raising fresh fears of high food price inflation? The key is to understand the reactions of farmers to changes in prices and the decisions they make about whether to plant new crops on marginally productive land.

"If inflation comes roaring back, the first place many people feel the pinch may be in food prices. The cost of corn, soya and wheat has fallen sharply from the levels they reached last summer at the height of the commodity boom. But lower prices mean lower returns per acre, so farmers are cutting plantings of marginally productive land to maximise profits.

European farmers cut plantings of winter wheat 2 per cent this year. In the US, which supplies half the world’s corn and a fifth of its wheat, officials expect plantings of those crops to decline 1.2 per cent and 7 per cent respectively. The US Department of Agriculture says aggregate 2009 plantings of the eight biggest grains could fall the largest amount in 20 years.

This is precisely the set-up investors who worry about a rapid return of inflation fear: low prices lead to underinvestment and cuts in productive capacity. When the economy picks up, prices soar because suppliers – in this case, farms – cannot keep up with renewed demand.

Food prices might rise even in the absence of an economic recovery. Export stockpiles are tight. That has not been a big problem in recent years thanks to an unusually long spate of good weather. At some point, that lucky streak will end.

Such concerns help explain why food prices have not fallen as far as those of other commodities. Prices for corn, wheat, soya and rice have dropped nearly half from their 2008 peaks, but they are still trading at about double their average prices of the past 10 years. Corn, at $4 a bushel, costs the same as it did in 2007. Aluminium, by contrast, is trading at levels not seen since 2003. Natural gas prices have not been so low since 2002. Food prices are unlikely to fall into line with those of other commodities. Indeed, they may not have anywhere to go but up."

(1) How could you illustrate the process described above with supply and demand diagrams?

(2) Explain why price elasticity of demand and price elasticity of supply is relevant in explaining food price volatility

(3) What do you understand by the term ‘marginally productive land’?

Revision

2009-05-24T10:01:00.000+01:00

When revising for the OCR 2888 Economics of Europe paper be sure to really focus on these areas.

Competitive markets and how they work
Different market structures
Economic efficiency within market structures
Market imperfections and market failure
Role of government intervention in markets
Macroeconomic performance of the economy
Processes and policies in macroeconomics
International trade and protection

these topics are covered by all students regardless of the module covered, for example, students taking either development or the UK economy cover international trade and protection

Economists have a particular way of looking at the world. They draw on a toolkit of concepts and techniques to help to analyse and evaluate problems and potential policy solutions. As John Maynard Keynes put it Economics is an attitude of mind, a technique of thinking which helps its possessor to draw the right conclusions

The highest marks in economics exams are reserved for students who think like economists ie who select the appropriate tool from the toolkit to analyse and evaluat.

Source: http://rapidrevision.co.uk/

Carbon trading

2009-05-24T09:54:00.000+01:00

“When we emit greenhouse gases we damage the prospects for others and, unless appropriate policy is in place, we do not bear the costs of the damage. Markets then fail in the sense that their main co-ordinating mechanism – prices – give the wrong signals.”
Professor Nick Stern (Blueprint for a cleaner planet)

Revision on Carbon Trading:

Europe 2888

Butter Mountains

New blog on Transport OCR

You're actually in the exam....

Synoptic Knowledge

Commercial mocks/predictions

Discussion threads to follow

Questions to practice on during the long night ahead

More notes

Extra notes from the revision session

The final two hours - mocks

Your final 2 hours of revision

Exam question

An essential PDF

Carbon tax/trade

Global food prices

Economic case for biofuels- and against

Biofuels - a response

Carbon

Butter Mountains

CAP

Food prices

More links...

Biofuels

Food prices

Biofuels

Food hunger

Food prices

Food prices to go up again, says report

Butter mountains are back

Biofuels

Objectives of firms

Cobweb theorem

Butter prices rose - why?

Green taxes?

A lesson on Biofuels (Guardian)

Biofuels

Carbon Trading

Food prices debate

Questions about food prices

Food crisis and China

Food price drivers

Why are food prices rising?

Japanese jitters and food security

Food prices

Food prices

Common Agricultural policy

Food prices in Britain

US Food Stamp Aid Hits Record

Diagrams to learn

Criticising the data for 2888

Good enough to eat?

Food price volatility

Revision

Carbon trading