COMMISSION OF THE EUROPEAN COMMUNITIES
Brussels, 11.12.1998 SEC(1998)2169
COMMISSION STAFF WORKING PAPER

WORKING DOCUMENT ON NON-FOOD CROPS
IN THE CONTEXT OF AGENDA 2000

1. THE MANDATE

The CAP reform proposed by Agenda 2000 does not foresee a "non-food policy"' as such. But by closing the gap between internal prices and world prices, it aims to put at the disposal of food/non-food industries more competitive raw materials.

Following the invitation of the Agriculture Council of 22-26 June 1998, the Commission undertook, "in the context of the Agenda 2000 reforms (...) to produce a report on the present state of the non-food and energy crop sectors and their future development, and if necessary to make appropriate proposals". The present working document is presented within this context.

2. PRESENT STATE OF NON-FOOD SECTOR IN THE EU

2.1. Land used to produce crops for non-food purposes

The production of crops for non-food purposes (referred to in the present document as "non-food crops") has a long tradition. Flax and cotton fibres for the textile industry, starch for various industrial uses, various vegetable oils for production of biofuels, paint or other chemical products, and the cultivation of medical plants are some examples. Their importance has increased due to external factors, and in particular concern for renewable energies including bio-energy produced on agricultural land. Increasing surpluses of cereals were an additional reason to look for alternative market outlets for agricultural raw materials.

But it should be underlined that the most important source for bio-energy was - and still is - forest which for centuries had had a key role as a primary energy source. The contribution of forests to the energy supply varies regionally In some Member States already 20% of total energy supply stems from wood based energy sources. At present only 70% of the annual food increment is used in the EU (of which some 15% for energy purposes). Links between agriculture and forestry have always existed and have been reinforced by afforestation programmes in the framework of the 1992 accompanying measures (Reg. EEC No 2080/92). The cultivation of short rotation forest trees such as poplar and willow for the production of energy on agricultural and in particular on set-aside land represents a further opportunity.

After rising to 2.3 million hectares in 1995/96, total non-food agricultural area in the EU-15 has returned to around 2 million ha in recent years, which represents about 1.5% of the utilised agricultural area. At present, oilseeds grown on set aside land represent the main energy crop with nearly 400 thousands ha in 1997/98. Fibre crops (cotton, flax and hemp) are more important with 666 thousands ha, around one third of non-food area. While cotton is exclusively grown in Greece and Spain, the main areas for flax fibre are in France and in Spain.

Maize, potatoes and wheat for non-food starch production together account for more than 600 thousands ha and are mainly produced in the large cereal producing regions of France, Germany, the Netherlands, Spain and the United Kingdom. The area of sugar beet for chemical use is much smaller, around thirty thousands ha. The production of medicinal plants covers only between 4,000 and 6,000 ha.

Table 1 :Agricultural non-food production area in the EU (000 ha)

Sources: DGVI
(1) without 5 years set aside scheme

2.2. Energy production based on agricultural raw materials and wood

As regards agricultural non-food uses, bioenergy is the sector which presently receives the broadest attention. Apart from direct combustion, which is of importance especially in Portugal and in the three new Member States, bioenergy has only a marginal share in the fuel mix. Extension of liquid biofuels is limited by high production costs and also by the availability of land which is in competition with other production uses. The energy balance in respect of liquid biofuels is generally positive ', but the issue of positive¹ environmental balance needs to be demonstrated on a case by case basis (ie. at a local level).

(In the White Paper on Renewable Sources of Energy- (Com (97) 599 final), it is stated that "biofuels have an overall positive energy balance, although this varies from crop to crop, and also depends on the crop replaced.")

Table 2: estimated costs for biofuels, off processing plant*, 1996.

Source: DG VI calculations, based on various sources
* Amounts under a situation with compulsory set-aside and tax exemption of biofuels

Solid biofuels for direct combustion are often better placed and can be produced close to competitive prices, especially in rural areas and for on farm uses.

2.3. Other uses of agricultural raw materials for non-food purposes

There is a broad variety of technical uses for biomass, some of which seem to be very promising (lubricants, biodegradable plastics, plant protection products, various compounds for the chemical industry) and which will add high value to raw materials. These markets could offer a higher price for the raw material, however, demand is often limited. In markets with greater demand, for example that for starch-based chemical products, processors can substitute raw materials following price changes. This limits the perspectives for higher agricultural raw material prices, even where higher value added products are produced. In the medium term, the best market perspectives are for plants with a high content of specific compounds such as special acids, for production lines which offer a high value-added for as many compounds as possible of the whole plant, and for production lines which are based on cheaper agricultural by-products.

3. AGRICULTURAL POLICY SUPPORTING NON-FOOD PRODUCTIONS

Agricultural non-food policy is split into several market organisations and refund schemes, such as the starch refund scheme the starch scheme for sugar in the chemical industry, the market organisations for cotton, flax and hemp. Moreover, a non-food set-aside scheme was introduced in the framework of the '92 CAP reform.

In addition, agricultural structural policy supports investments in the non-food sector. Important to this aim are horizontal measures of Objective 5a, regional measures of objectives 1 and 5b and the LEADER community initiative. Furthermore, two of the 1992 accompanying measures supported forest management and environmental friendly agricultural production.

Finally, the activities of Research and Development concerning renewable raw material production for destinations other than the human or animal consumption constitute an important objective for several EU research programmes such as, for example, ALTENER, FAIR, JOULE, and THERMIE.

3.1. Textile flax and hemp

Producers of textile flax and hemp receive a per ha payment, which is fixed annually and which takes the world market price for seeds and for fibres into account (Council Regulation (EEC) No 1308/70). Their cultivation has become relatively attractive especially since the reduction of cereals institutional prices. This and the adoption of less expensive harvesting methods can be seen as the most important reasons for the increase of textile flax production in Spain and in the UK in past years. In addition, it must be mentioned that the support scheme does not incorporate any ceiling or set-aside requirement.

3.2. Cotton

The main instrument to support cotton production is a system of "deficiency payment" covering the difference between the objective price set by the Council and world market price (Protocol No 4 of the accession act of Greece and Council Regulation (EEC) No 1553/95). This support scheme is limited by a maximum guaranteed quantity of 1.031 mio t divided between Greece and Spain.

3.3. Starch production refund scheme

The starch production refund scheme in its current form (Council Regulation (EEC) No 1009/S6) was introduced in 1986. The refund was conceived to bridge the gap between the higher EU- and the lower world market prices for the principal raw materials needed for starch production. The main objective of the scheme is thus to maintain the competitiveness of starch products. The refund is granted to the industrial end user, and not to the manufacturer of starch.

The Regulation defines the raw material as well as the end products which are eligible for a refund. Potatoes, wheat, maize and rice are eligible. In Finland and Sweden, oats and barley may also be used.

There is one single base refund for starch, which is based on maize as the raw material. Since the refund is for starch and not for the raw material a technical coefficient of 1.6 is applied (1.6t of maize equal 1t of starch).

Following the reductions in institutional prices of the '92 reform, the refunds for starch diminished substantially from approximately 130 ECU/t before the reform to the current level of 61 ECU/t. With declining institutional prices, the refund system has lost much of its importance and this evolution will continue with Agenda 2000 proposal. In order to keep the balance between the different starch production lines, the minimum price for starch potatoes has also been adjusted downwards.

3.4 Sugar for chemical industry (non-energy uses)

The refund scheme for sugar used in the chemical industry covers only a small percentage of EU sugar production (approx. 1.5%). Its aims are analogous to those associated with the starch scheme, i.e. to bridge the gap between the higher EU and the lower world market price level. The refund scheme is based on the Council Regulation (EEC) 1010/86.

In principle, all sugar which is on the EU market (i.e. A and B quota sugar) is eligible as a raw material. Eligible end products are restricted to the chemical sector (non-energy uses). It should be mentioned that there is some duplication of end product eligibility between the sugar and the starch schemes, so that differing levels of support may also have an influence on whether starch or sugar is chosen as raw material and a certain competition between the schemes on that level cannot be excluded.

Since the sugar refund scheme has not been affected by the 1992 CAP reform, EU sugar prices remained well above world market levels and the refund has remained fairly constant at around 375 ECU per ton.

3.5. Sugar beet for bio-ethanol

Farmers can grow sugar beet to be used as a raw material for bio-ethanol production. Its price is freely negotiated between farmers and processors. Processors benefit from raw materials bought at non regulated price and much lower than the institutional prices of sugar beet devoted to sugar production. Therefore production of bio-ethanol has not been supported by any specific support scheme. Conversely, although sugar beet for bioenergy can be grown on set-aside, it is not eligible to the set-aside premium.

3.6. The COP regime and the non-food set aside scheme

The '92 reform established crop specific per hectare payments to compensate the reduction or abolition of institutional prices. These payments are based on historic regional yields, and paid in general on the condition that producers set aside a defined percentage of the land for which aid was requested.

Small producers, i.e. producers for which compensatory payments do not exceed an area corresponding to 92 t of cereals in their "yield region" may benefit from a simplified scheme under which they are exempted from this obligation and get the cereal payment for all eligible COP areas (in this case the payment is non-crop specific). Under the general scheme farmers receive crop-specific payments including a set aside compensatory payment.

Table 3 : Level of compensatory payment

* Possible adjustment each marketing year to take into account the difference between the reference price and the observed price (with an 8% franchise)

The reference rate for set-aside is currently 17.5% but the applied set-aside rates, as shown in table 4, has been adapted each year taking into account the forecast market development.

Table 4 : Non-food production area on set-aside in the EU (000 ha)

Source: DGVI
NB: Italic figures are DGVI estimates

Furthermore farmers are allowed flexibility in the management of their set aside obligation:

They may use the set-aside land to grow non-food crops, i.e. crops whose final destination is non-food/non-feed use, and still receive the corresponding compensatory payments (except for sugar beet). Oilseeds are the main raw materials concerned by this scheme (for chemical uses and bio-fuels). The Blair House Agreement of 1992 requires that the quantity of oilseed by-products produced on set-aside land and destined for feed/food use does not exceed 1 million tonnes of soyameal equivalent.

In the regions concerned, producers may also take part in long-term set-aside of agricultural land for environmental reasons (Council Regulation (EEC) No 2078/92) or the afforestation scheme (Council Regulation (EEC) No 2080/92). They then receive payments according to the conditions laid down in these regulations which, however cannot be higher than the normal set-aside compensation.

In order to ensure that raw materials grown on set-aside land are really processed into non-food end products, the area sown and the yields obtained have to be monitored and controlled. This is particularly important since most raw materials are eligible for-non-food set-aside can be processed into food/feed and/or non-food end products, Regulation (EC) No 1586/97 stipulates that at least 51% of the economic value of all end products must be non-food products. The remainder may be used in the food/feed sector.

The eligibility of raw materials is specified in two positive lists. The first list covers raw materials which have potential for use in food/feed markets. Rapeseed and sunflower are by far the most important ones. Sugar beet may be planted on set-aside land but the land does not benefit from a set-aside premium. The second list contains raw materials which can in no way be used for food or feed (for example short rotation trees). The eligible end products are specified in a third list.

For all products on the first list of raw materials, the EU Regulations foresee a rigorous control mechanism. In particular, producers and first buyers have to sign contracts before sowing, approved by the national authorities. Apart from control, the contract system ensures that supply cannot exceed demand, which would lead to speculation and pressure on non-food markets.

4. AGENDA 2000 AND NON-FOOD CROPS

The strategy paper on enlargement presented by the Commission at the Madrid summit in 1995 put emphasis, as general goals for the future orientation of the CAP, on making EU agriculture more competitive, on achieving an integrated policy for rural areas and on simplifying the existing mechanisms and procedures.

This strategy was confirmed in the Agenda 2000 communication of July 1997 and the related legislative proposals of March 1998. Based on the outcome of the 1992 reform and on the long-term prospects for agricultural markets, the Commission laid down a number of objectives to be met by a further reformed agricultural policy. Among other goals, the Commission reaffirmed the need to improve the competitiveness of European agriculture, while allowing for on- and off-farm diversification. Rural development policy becomes the second pillar of the CAP. An integrated policy of this type will strengthen the sustainable development of agriculture and rural areas, meeting environmental concerns.

Non-food production and non-food policy should therefore be regarded within this general framework and it should be asked in which ways non-food production might contribute to these objectives. In the July 1997 document the production of raw materials for non-food uses was referred to as a possible "new opportunity" for agriculture and forestry, and a contribution to diversification.

Within Agenda 2000, there is no specific proposal for a non-food policy as such. Nevertheless, several proposals entail provisions relating to non-food. They are briefly mentioned below and will be further analysed in subsequent sections:

The proposal on support for producers of arable crops. The reference rate for compulsory set-aside is fixed at 0%. Nevertheless, the cultivation of non-food crops under the voluntary set-aside scheme will still remain possible. Member States shall apply appropriate environmental measures which correspond to the specific situation of the land set aside.

The proposal on rural development. The development of non-food production falls within the scope of an integrated rural development strategy. Therefore non-food is eligible for support within this framework, in particular.

- When establishing their development plans, national competent authorities can decide to put emphasis on this sector.

- the "accompanying measures" of the 1992 reform are to be fully integrated in the general rural development policy. Two of them could be helpful for non-food: the afforestation and the agri-environmental measures. The eligibility of environmental friendly non-food production under the agri-environmental scheme is widened in Agenda 2000.

Combined with increased importance and resources for this scheme, this offers further possibility for non-food provided that the schemes go beyond Good Agriculture Practice and result in environmental benefits well suited to local conditions. Afforestation measures are now part of a comprehensive support scheme in favour of forestry.

The Common Market Organisation for Wine, the reform of which is part of the Agenda 2000, also contains provisions on non-food uses of wine alcohol. Presently, the alcohol produced through compulsory distillation has to be disposed of outside the potable alcohol sector. As the market for wine is expected to remain globally balanced, it is proposed to suppress the compulsory distillation of table wines and, instead, to introduce a crisis distillation focused on regions or wines for which there is a surplus. As a result the disposal of wine alcohol outside the potable alcohol sector would be limited, coming mainly from the distillation of by-products (which is maintained).

As far as fibre crops are concerned, amendments have recently been adopted for hemp, and changes are under examination for cotton as requested by the Agriculture Council of June 1998. In the framework of the existing market organisation for cotton, there is little scope for increasing production, due above all to the limits which have been put on the support spent on this sector.

Following the request of the Agricultural Council of June 1998, the present report focuses on the prospects for non-food and energy crop sectors in the context of Agenda 2000 proposals. Crops grown under the set-aside scheme are mainly used for energy purposes. Given this link with set-aside, a first part of the analysis deals with the effects of the proposals in the arable crops sector. In the second part the impact of non-food crops on rural development and on the environment is examined.

4.1. Effect of the proposals for arable crops on the relative competitiveness of food and non- food outlets

Two main elements of the proposals for arable crops concern non-food crops :

A 20% cut in support prices for cereals and a non-crop specific direct aid of 66 ECU/t for cereals, oilseeds and for voluntary set-aside. This aid is converted into a per hectare payment on the basis of historical regional yields for cereals.

A reference rate for compulsory set-aside fixed at O%.

These elements have an effect on the relative profitability of food and non-food crops and between non-food crops. As rapeseed used in the biodiesel sector covers around half of the non-food area under the set-aside scheme, special emphasis will be placed on this crop as a key energy crop.

4.1.1. Non-crop specific aid and cut in prices for cereals

Changes in the level of direct aid for arable crops and for the set aside payment are indicated in table 5:

Table 5 : Level of direct payments under Agenda 2000

Under Agenda 2000, the level of direct payments is the same for cereals, oilseeds and for set-aside. Given that the cultivation of non-food crops under the set-aside scheme remains possible, food and non-food crops are put on an equal footing. The slight reduction of set aside payments under Agenda 2000 will not, as such, have any effect. The determinant factor is the relative profit margin.

A non-crop specific aid implies that the relative profitability of different crops is given by the respective gaps between market prices and production costs. However, agronomic constraints also play an important role, in particular for the rotation between oilseeds and cereals.

Under Agenda 2000, the decrease in direct aid for oilseeds is linked to the price cut for cereals. Fears have been expressed as to the possible negative impact on oilseeds production in the EU. Various simulations have shown that, for an oilseeds price between 220 and 230 ECU/t, these readjustments would not significantly modify the relative profitability of cereals against oilseeds. Thus, on the whole, the EU production of oilseeds should not substantially change. But, it is admitted that, in some specific regions, the equalisation of the premium for oilseeds, cereals and set aside could modify the relative profitability of these options.

In the biofuel sector, the price cut for wheat could increase its attractiveness to be used for ethanol production compared to oilseeds for diester production. Presently, as previously shown in table 2, the gap between the production costs of biofuel and competing mineral fuel is much wider for ethanol than for diester. For wheat-based ethanol, this is partly due to higher processing costs, which will not be fully offset by lower prices of wheat under Agenda 2000. In other words ethanol would still be less competitive than diester.

In recent years, total production costs of diester have fallen, despite a progressive increase in the price paid for rapeseed. This decreasing trend in diester production costs is expected to continue. In the medium term, technical progress should lead to cost reductions throughout the production chain of diester. These reductions could be more significant for diester than for ethanol.

4.1.2 Compulsory set-aside

a) Compulsory set-aside above 0%

As long as the rate of compulsory set-aside is above 0%, for example 5 or 10%, little will change as compared to the present situation. Producers subject to the set aside obligation will have in principle a choice between two possibilities: setting land aside or growing crops for non-food uses on it. A key factor determining their choice will be the income they expect from each of the two alternatives.

In the case of set-aside the income is given by the difference between the regional set aside payment per hectare and the cost of maintaining the land set aside.

In the case of crop production for non-food uses they will receive in addition to the set aside payment a market revenue for the crop cultivated. On the other side they have the costs of producing the crop. Since land and in general also machinery are available, these costs will normally be the variable costs of production.

Market revenue will depend on the quantities produced per hectare and on the price that can be obtained from the crop when it is sold for non-food uses.

In the case of a number of "niche" markets, in particular for specific uses in the chemical and pharmaceutical industry, prices are in general high enough to make the production of crops for these uses attractive without any additional incentive. Farmers who are subject to the set aside obligation and who have the possibility to grow crops under contract for these niche markets can therefore normally be expected to do so. However although it is growing, the absorption capacity of these niche markets still remains quite limited.

In the case of liquid biofuels, the absorption capacity of the market is much bigger, but the prices processors are prepared to pay to farmers are much lower. In fact, these prices are based on the price of competing mineral fuels and would not be attractive without any additional support measures. Partial or total tax exemption of liquid biofuels is a measure which is often applied in this context. It allows processors to pay a sufficiently high price to farmers to make this option attractive on compulsory set aside.

b) Compulsory set-aside above 0%

Although compulsory set aside rates above 0% are still possible under Agenda 2000, they are intended to be more an exception than the general rule. If longer-term market developments take place as expected, the compulsory set aside rate should come down to 0%.

In such a scenario, farmers no longer have to choose between compulsory set-aside and crop production for non-food uses on it. Their main choice is now between crop production for food and feed uses or crop production for non-food uses. In addition they still have the possibility to keep (marginal) land they do not want to cultivate under voluntary set aside.

In cases where the same crop can be used for food and non-food uses the costs of production will in principle be the same. Farmers will grow the crop and sell it at the best price. They will have no interest to supply the non-food sector if the price paid in this sector is lower than in the food sector.

To illustrate the point, take the example of rapeseed. With a compulsory set-aside rate fixed at O%, farmers will have no more reason to grow and sell rapeseed for diester production at lower prices. They will make their production decisions according to prices expected on the dominant market, i.e. food and feed market. When selling rapeseed to the crusher, the farmer will not accept a lower price than the one he expects for the food and feed market.

The question is how far the processor - in our example the producer of diester - will be able to pay such a price. This will depend on the price he can get for his product - diester - on the fuel market as well as on his own production costs.

As far as the price on the fuel market is concerned, tax exemption or detaxation of bio-fuels remains a key issue for the foreseeable future, except where there would be a general obligation to add a certain percentage of bio-fuels to mineral fuels (e.g. up to 3%).

As far as the processing costs are concerned, the experience with diester seems to indicate that, once a stage of industrial production is reached, costs tend to fall over time due to technical progress. In the case of diester this trend of decreasing production costs is expected to continue also in the future. But for the years to come it will by far not be sufficient to make the non-food use of rapeseed a competitive alternative to its food and feed uses. The European Biodiesel Board (EBB) has even questioned its very survival if the present proposals under Agenda 2000 remain unchanged. In particular, the EBB has asked for a "scheme whereby biodiesel producers would purchase raw materials at open market conditions and receive a compensation to offset the additional production costs"².

Similar concerns have been raised by COPA/COGECA.

4. 1.3. Concluding remarks on liquid biofuels

In Member States producing biofuels these benefit from tax exemption. Together with the opportunity provided for by the compulsory set-aside, this explains the existence of production as it provides for a certain margin of profit.

More than the opportunity provided by compulsory set aside scheme, tax exemption is a key condition for the relative profitability of liquid biofuels. In the absence of compulsory set- aside this condition becomes even more important.

Tax exemption is an essential way of promoting biofuels. The advantage of biofuels go well beyond the agricultural sector. It is a matter of public interest for which global policy instruments should be considered. Fiscal instruments are one amongst them; other actions could be considered on the demand side, like specifications for the quality of fuels. The commission has already tabled a series of proposals along these lines.

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² Letter of EBB sent to the Commission.
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POLITICAL CONTEXT OF RENEWABLE ENERGY

Increasing emissions of "man made" green-house gases and their possible impact on the world climate is a reason for growing concern, which has already led to a number of political commitments and considerations with the aim to reduce the overall emissions of green-house gases and especially of C0₂. In the context of the Rio Conference and the Kyoto Protocol the EU has committed itself to reduce C0₂ emissions by the year 2000 by 8.1% in relation to the level of 1990.

The White book on "Energy Policy for the European Union" of 1996 states that, despite increasing energy efficiency, energy consumption in the EU and dependency on imported energy will increase in the next decades. Nevertheless, world oil reserves are not expected to be exhausted, with the result that energy prices would remain relatively stable in real terms.

If these assumptions on the development of energy demand have to be brought in line with the commitments made concerning C0₂ emissions, bioenergy needs to play a larger role in the fuel mix. The utilisation of biomass releases only as much C0₂ to the atmosphere as has been bound by the plants while growing. This is why, apart from the energy which is used for processing and transport, the sustainable utilisation of biomass represents a C0₂ neutral option for the production of energy and other products. The use of biofuels offers other environmental benefits, for example in improving the lubricating characteristics of low-sulphur diesel fuels.

The White Paper for Renewable Energy resources adopted in November 1997 sets an indicative target of doubling from 6% to 12% the share of renewable energy resources in the total energy consumption of the EU by 2010. Indicative contributions from each renewable energy source have been estimated. "According to the particular scenario outlined, the main contribution (...) could come from the biomass, tripling the current level of this source." Of the 90 Mtoe³ additional energy expected to be obtained from biomass, "the contribution for bioenergy from crops is estimated at 45 Mtoe. Of this, 18 Mtoe could be in the form of liquid biofuels (including however liquid biofuels from non-energy crops such as wood residues, used vegetable oils, or biogas used as motor fuel) and 27 Mtoe as biomass for heat and/or power, under one particular scenario." Moreover, it is estimated that 30 Mtoe can be obtained from wood and agricultural residues and 15 Mtoe from biogas. In 1995 non-renewable energy production accounted for more than 90% of greenhouse emissions⁴.

Beyond environmental benefits, a range of other factors argue for greater exploitation of bio-energy resources. They include the reduction of import dependency, the potential contribution to employment and regional development, the creation of new niche markets in renewable technologies and the wide public support they command. However, capacity to meet demand for renewable energy is currently constrained by input and transformation costs in comparison with non-renewable resources.

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³ Mtoe = million tonnes of oil equivalent
⁴ Second communication from the European Community under the UN Framework Convention on climate change.
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Market prices for non-renewable fuels do not necessarily reflect their full social cost, particularly in relation to environmental externalities. Since the beginning of the 1990s, the EU and the Member States have initiated a number of fiscal and regulatory proposals in order to support a sustainable energy policy, which respects the environmental targets and the international commitments of the EU. Bioenergies are directly or indirectly affected by these measures.

These include the Council Directive restructuring the Community Framework for Taxation of Energy Products⁵. This proposal enlarges the scope of the Community minimum rate system beyond mineral oils to cover all energy products use as heating or motor fuel or for electricity generation. The proposal provides Member States with a number of options to pursue more ambitious environmental policies such as emissions and energy taxes, excise duties and exemptions. There are specific provisions for biofuels. Analysis suggests that the proposal will result in a reduction in C0₂ emissions between 0.5-1.5% from the year 2005 compared to the business as usual scenario⁶. Minimum standards or fuel specifications are also likely to encourage the use of biofuels.

The reduction of the costs of renewable energies will also depend on the development and dissemination of new technologies for production, transformation and energy generation. Renewable energy technologies are likely to have longer payback periods than conventional energy technologies. This may be compounded by a lack of certainty about commercial viability and risk. A range of initiatives at the Community level under the ALTENER, JOULE, THERMIE and the Community's RTD framework programmes have been undertaken to promote research and development in the field of renewable energy.

Estimates suggest that to meet the 12% renewable energy target, a total investment of ECU 165 billion will need to be made in the sector between 1997 and 2010 (ECU 84 billion in biomass)⁷. The annual energy technologies market for renewables could reach ECU 40 billion by 2020 from the current ECU 5 billion⁸. The scale of investment by the private sector will depend largely on the development and dissemination of appropriate technologies and processes and the certainty of demand for energy from renewable sources.

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⁵COM (97) 30 final.
⁶ Second communication from the European Community under the UN Framework Convention on Climate change.
⁷ COM (97) 599 final (White Paper On Renewable Energies)
⁸Second communication, from the European Community under the UN Framework Convention on Climate Change.
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Instruments on the agricultural supply side cannot ensure, on their own, the development of biofuels,

The possibility of growing non-food crops under the compulsory set-aside scheme was an opportunity for the non-food sector, but is not an appropriate instrument to promote non-food production. The sustainable development of non-food cannot be based on a set-aside rate which varies from year to year according to the market situation for food commodities. One has to recall that compulsory set aside is a supply-management instrument conceived to deal with cereal surplus situations. Considering the improvement in the market situation following the 1992 reform as well as the prospects of increased demand for grains, it is proposed to fix the rate of set-aside at 0% and to cut the price of cereals in order to reduce the gap with world prices. Prices for oilseeds are already at world market levels. Where there is a demand for non-food - even if initiated by public action in the case of biofuels - the corresponding raw agricultural material will be supplied by farmers.

An alternative would be the introduction of a permanent specific subsidy for non-food crops on set-aside land, to reduce the price of raw materials for the processing industry. This is not an appropriate measure. A permanent aid for non-food crops, higher than the non-crop specific aid, could question the underlying logic of Agenda 2000. It would appear difficult to justify a permanent additional direct aid for non-food crops on set-aside land in order to stimulate the cultivation of oilseeds, while in the EU there is a deficit for food/feed oilseeds. Finally, an additional direct aid for non-food crops grown on set-aside land, including oilseeds, would bring the EC back under Blair House constraint.

However, some Member States, taking into account the difficulties of existing industry, favour the possible implementation of a degressive support scheme.

It should be recalled that there are many other outlets than bio-energy for non-food crops, for example:

- The production of lubricants based on plant oils. 40% of the oilseeds grown on set-aside land are used in the sector of oleo-chemistry. These outlets are more competitive than biofuels and there is a higher profitability;

- Specific products for the chemical and pharmaceutical industry, which are currently less important in quantitative terms, but may develop positively and increase the diversification of agricultural production which is also an aspect of competitiveness. For these specific products, for which there is no competing food use and value-added niche markets, a relatively high price could be paid to farmers.

Their quality of being more easily biodegradable is a major argument in favour of these products and more constraining environmental legislation may increase their market share.

4.1.4. Opportunities for non-food crops under the voluntary set-aside scheme

The production of non-food crops under voluntary set-aside, that is to say with the non-crop specific direct aid of 66 ECU/t still offers an opportunity for a wide range of non-food crops. The voluntary set aside scheme is clearly of interest for crops other than cereals, oilseeds and protein crops, as they would not be eligible for the aid outside of this scheme. This applies for instance to some medicinal plants.

Moreover, the voluntary set-aside scheme could constitute an appropriate framework for multiannual crops devoted to biomass production. The Agenda 2000 proposal already offers the possibility to grant the voluntary set-aside payment on a multiannual basis for a period up to five years. Furthermore, the proposal of March 1998 could be amended to be in line with the possibility already introduced in the arable crops regime in June 1998 for multiannual crops devoted to biomass production. Here Member States are authorised to grant national aids up 50% of the establishment costs for these crops. If adopted, these conditions are appropriate for Short Rotation Coppices.

In addition, the proposal for rural development foresees a similar possibility for wood production for a duration up to twenty years. Nevertheless as stated in the recent "Forestry strategy for the European Union" (COM (98) 649) "although short rotation for energy production can contribute to a slowing of the rise in atmospheric carbon dioxide concentrations, care should be taken to ensure that this does not have adverse affects on the environment".

5. RURAL DEVELOPMENT AND ENVIRONMENT

The production of non-food raw materials can have an impact on the development of rural areas, especially if investments in the upstream and downstream sector can be achieved, if new jobs can be provided and regional economic circuits can be strengthened.

Up to now, apart from textile fibre production (cotton, flax and hemp), non-food production has been mainly a domain of the big cereal and oilseed producing regions in the North Western parts of the EU. The production of non-food raw materials in these regions represents generally just an additional option among others. Opportunities for the Mediterranean regions or for less favoured areas have been rather limited.

Interesting developments with a positive impact on rural economies as a whole can be expected first of all with the production, processing and marketing of high value added niche products, like medicinal or aromatic plants or with multi-purpose plants, which offer interesting market outlets for all main- and by-products and especially if processing capacities can be established within the region of production.

In the energy sector, which has the largest market potential, expectations are limited. There is a major difference between solid and liquid biofuels as far as their utilisation is concerned and they also address different markets.

Solid fuels use the whole energy content of the plant. They can mainly be used for the production of heating energy directly on the farm or for the energy supply of rural communities and industries. Due to the fact that the gap in profitability between solid biofuels and the competing fossil energies is relatively small and the energy and CO₂ balance is favourable, this option may become increasingly interesting, especially in regions with a high supply of residual biomass, such as straw, or in areas with a high forest coverage. The production of solid fuels in short rotation plantations, which (except in specific cases) up to now has not gone beyond the level of research and demonstration projects, is subject to higher investment costs, but may develop positively if the economic and technical aspects can be improved.

Liquid biofuels use only part of the energy which is contained in the plant and need further processing before utilisation. Their main employment is in the motor fuel market. Under present market conditions liquid biofuels need high levels of public support. Their energy balance as well as the C0₂ balance is still positive but less attractive than solid biofuels. If used as oxygen additives in motor fuels, biofuels can reduce the CO₂ emissions of motor vehicles and have a positive impact on air quality, especially in regions suffering from a high level of air pollution.

Another important issue is the development and cultivation of environmentally friendly low input crops, like the oil producing plant 'camelina sativa', or starch containing plants such as 'quinoa', requiring only low applications of fertilisers and pesticides. In this context, it has to be taken into account that the development of new agricultural production for traditional market outlets will displace - at least to some extent - traditional raw materials, so that the full potential of the positive impact would not be reached.

Especially in environmentally sensitive areas, these opportunities may gain momentum. For the future development of new non-food production lines further investigations on the market side will be necessary, and improvement of the profitability of the production lines will be needed to increase their positive impact on rural development.

Moreover, the impact of production and processing of non-food in rural areas will be first of all in the downstream activities. The direct impact of cultivation on agricultural employment is limited, since agricultural area will not increase and labour intensity for most of the non-food raw materials is not higher than for other arable crops. If processing facilities for niche markets can be established, this may have a positive impact on local employment. But existing studies on the impact of non-food on rural employment are not significant enough to quantify the impact of different non-food options on this development.

Concerning environment the impact of biomass production does not differ from that of agricultural production in general. Intensive crops like sugar beet or potatoes can be more critical, especially if crop rotation cycles are short. The processing of agricultural raw materials, especially potato starch and sugar, can have some negative effects on environment. Utilisation and disposal of products based on agricultural raw materials, for example biodegradable plastics and lubricants, generally offer advantages over competing products, which are often based on petrochemicals. The C0₂ reduction potential and the energy yield for liquid biofuels are relatively low, which diminishes their environmental benefits. From that point of view, the direct combustion of biomass would be the preferred option. The overall environmental balance has to take into account all these contrasted impacts at their respective levels. Encouragement of non-food crops does not necessarily lead to real environmental improvements.

6. CONCLUSIONS FOR A DEBATE

Within Agenda 2000, there is no specific proposal for a non-food policy as such. Nevertheless, several proposals entail provisions relating to non-food:

The proposal on support for producers of arable crops. The reference rate for compulsory set-aside is fixed at 0%. Nevertheless, the growing of non-food crops under the voluntary set-aside scheme will still remain possible. Member States shall apply appropriate environmental measures which correspond to the specific situation of the land set aside.

The proposal on rural development. The development of non-food production falls within the scope of an integrated rural development strategy. Therefore non-food is eligible for support within this framework, in particular :

- When establishing their development plans, national competent authorities can decide to put emphasis on this sector, given the important possibilities offered by the rural development proposal to Member States in defining their priorities themselves.

- The "accompanying measures" of the 1992, reform are to be fully integrated in the general rural development policy. Two of them could be helpful for non-food crops: the afforestation and the agri-environmental measures, provided they respect in full the environmental requirements within these measures.

These Agenda 2000 proposals provide various types of opportunities and support for non-food crops.

As far as crops allowed on set aside are concerned, the most promising outlook seems to be for specific products for the pharmaceutical and chemical industries. including the production of lubricants based on plant oils.

For environmentally friendly non-food crops, support can be granted under agri-environmental measures. As already stated in the White Paper "Renewable sources of energy", agri-environmental schemes where energy crops are produced using reduced water supply, low inputs, by organic methods or harvested in the way to promote biodiversity etc could attract a premium. The Commission could envisage (...) to support energy crops respecting the fact that priorities for programmes would continue to be set by regional needs and potentials."

The voluntary set-aside scheme could constitute an appropriate framework for multiannual crops devoted to biomass production. Special provisions are already proposed in this respect: national aid is authorised and the set aside payment can be granted on a multiannual basis for 5 years. The possible extension of this period is an issue which has been raised by several Member States, in particular to take account of the long pay-back period for investments in this sector and the role of long term contracts in ensuring supply of raw materials.

Moreover, the forestry measures of the rural development proposal foresee a support for afforestation of agricultural land up to a maximum of 20 years, which can also be granted, under certain conditions related to the protection of environment, to short rotation coppices.

As far as energy crops are concerned, the solid biofuel option may become increasingly attractive, especially in regions with a high supply of residual biomass, such as straw, or in areas with a high forest coverage.

For liquid biofuels, the whole context is different. If the compulsory set aside is fixed at O%, farmers will not accept any discrimination in prices or administrative requirements based on the final uses of the products.

Some important questions have to be answered as regards liquid biofuels. These concern their potential advantages and the most efficient policy instruments to deal with them. The advantages offered by biofuels have to be considered at levels well beyond the agricultural sector, it is a matter of public interest, for which global economic policy instruments are to be applied.

The sustainable development of biofuels cannot be ensured solely by instruments on the agricultural supply side. Fiscal installments are one amongst them and tax exemption has proven to be an effective approach. Other actions could be considered on the demand side, such as specifications for the quality of fuels (low sulphur content, oxygen components). The Commission has already tabled some proposals along these lines.

Taxation and legal obligations linked to international commitments of the Member States and the Union are key issues. Already now, in Member States producing biofuels, these benefit from tax exemption, and this explains the existence of production.

Conversely, a supplementary direct aid for non-food crops, grown on set aside land, including oilseeds, would bring the EC back under Blair House constraint. Furthermore, it could question the overall thinking which has guided the Agenda 2000 proposals for agriculture. However, some Member States, taking into account the difficulties of existing industry, favour the possible implementation of a degressive support scheme. The Agenda 2000 proposals represent a significant move to a major decoupling of the support to arable crops. Farmers will receive an identical payment whether they produce cereals, oilseeds or a whole set of non-food crops. In the final analysis, their choice of crop will depend on markets opportunities and agronomic constraints

Finally care needs to ensure that, where non-food crops are to be promoted for their beneficial contribution to the carbon cycle, the concept of bioenergy should be inseparably linked to environmental enhancement.