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Subsidies for burning wood having perverse outcomes

Human kind has used wood for fuel for as long as fire was discovered. Even in recent times, there have been estimates that of all the wood used in the world, 50% is used as fuel, often in small, low-tech communities to stay warm and cook food.

In 2009 the European Union set itself a target of getting 20% of its energy from renewable sources. The trouble is, the other renewable candidates (wind and solar) haven't got a hope-in-heck of making a big enough contribution to meet this target. Enter woody biomass.

Massive subsidies are being offered in the UK and Europe to convert thermal power stations from burning exclusively coal to burning wood pellets. Sufficient cost-effective wood pellets cannot be sourced locally so many are imported from the southern states of the USA and British Columbia. This is stimulating massive investment in pellet plants; Wood Resources International reports 14 new plant/plant expansion projects expected to be completed in the US South this year. It also reports North American sales of wood pellets to Europe increasing from US$40 million in 2004 to almost US$400million in 2012 (some 3.2 million tons).

Conversion of thermal power stations to use wood pellets is driven by seeking to meet green house gas emission reduction targets. One would also hope that they result in an overall net reduction in greenhouse gasses over the whole supply chain associated with the activity. Regrettably, the latter does not appear to be happening. And the subsidies are creating major distortions in other markets.

The Economist reports of a subsidy paid to a large coal-fired electricity generator worth the equivalent of NZ$80 per megawatt hour (MWh) paid on top of the market price for electricity. The total annual subsidy is 280% more than the firm's total annual pre-tax profit!

Low grade and wood residue prices are "going through the roof". This is putting huge cost pressure on pulp and paper producers who are facing reducing demand for their product. Panel manufacturers are being similarly affected, causing mill shut-downs.

Wood pellets have the potential to provide society with a sustainable, low-emission fuel. Ill-founded subsidies and incentives, however, are creating unintended and unwelcome consequences.

Perhaps this collateral damage would be worthwhile if it was part of a rational evolution to a green-house gas constrained economy. This is not the case. The Economist points out that once the carbon emissions in the wood supply chain are taken into account, and based on the above NZ$80/MWh subsidy, it costs the equivalent of NZ$340 to save one tonne of CO2 by changing from coal to wood. Further, research from Princeton University calculates that if whole trees are used to produce energy, as they sometimes are, they increase carbon emissions compared to coal (the dirtiest fuel) by 79% over 20 years and 49% over 40 years; there is no net carbon reduction until 100 years have passed – [we assume this is based on slow-growing species and may differ with faster growing species].

Whilst initiatives to move toward more sustainable and renewable energy sources should be applauded, one has to question both the economic and environmental logic when such initiatives cause significant market distortions and increase costs and green house gas emissions when looking at the whole supply chain.