Economic Impact of Biofuel Investment in Ethiopia: A Review

Abstract

Ethiopia is a developing nation which depends entirely on the import of fuels from the oil producing countries. This import of fuel constitutes about 60% of the total imports with every single year. As in the rest of the world, the rise of oil prices is increasingly becoming a big challenge for the economy of the country. The share of fuel in import currency has been increase steadily in recent years, and it is expected to grow even sharper following higher demand due to economic growth. This takes up the lion share of the country’s foreign exchange earnings. In recent years attempts have been made by the Government of Ethiopia to facilitate policies that encourage the reduction of petroleum consumption by shifting to biofuels.

Biofuels are seeing large-scale production worldwide in recent years. The IEA (2004) projections that annual global production of ethanol will increase to 120 billion liters by 2020, more than two folds from the 50 billion liters produced in 2005 (Banse et al., 2007). Production of biodiesel is expected to increase to 12 billion liters from its level of 1.8 billion liters in 2004(IEA, 2004).Many countries have high targets of expanding biofuels. The EU, for example, aims to blend 10% of its transport fuel consumption by biofuels as of 2020 while India plans to meet 20% by 2017 and Brazil is planning to expand its biofuel exports. Ethiopia has entered in to a 10% blend of bio-ethanol.

There are various underlying reasons for the big attention biofuels are enjoying today. Biofuels are claimed to provide a “triple solution” to the problems of poverty, climate change and energy security. Biofuels have arguably low greenhouse gas emissions which make them preferable over other polluting petroleum fuels. They also provide high economic gains by offering an alternative to fossil fuels whose prices are rising rapidly, while, in the production side, enabling rural job creation. Besides, relying on biofuels enhances energy security, reduces oil imports and improves domestic supply (Addisu, 2008).

Addisu (2008) argues that rising oil prices, increasing global energy demand and technological improvements are expected to further facilitate biofuel production by improving the commercial feasibility of producing and transporting biofuels around the world. The advent of bioengineering and other technologies is expected to make the future prospect of biofuels even more promising. On the other hand, there is skepticism with concerns that biofuels will open a ‘Pandora’s box’ of environmental, social and economic problems (Mayat, 2007). It is argued that the sustainability of biofuel production and the socio-economic impacts of expanded biofuel production are not definitely known. Such literature reviewed is important to have an understanding about the impact of bio-fuel investment in Ethiopian condition.