Fluctuating renewable fuel costs are a small price to pay for environmental benefits - new research finds

The UK’s biofuels policy has been quietly pushing up pump prices and making them more volatile, but the resulting environmental gains are found to outweigh the economic costs, despite the added cost to drivers.

Based on current government estimates for the social cost of carbon, for every additional £1 cost to consumers the RTFO has achieved an average £5.70 worth of carbon saving.

The findings are revealed in new analysis from the CAGE Research Centre at the University of Warwick.

Exploring the impact of the Government’s Renewable Transport Fuel Obligation on prices at the pump, the study, by Dr Nikhil Datta and Johannes Brinkmann, finds:

• Over the past five years, the Renewable Transport Fuel Obligation (RTFO) has added an average of 3.5 pence per litre to unleaded petrol and 6 pence per litre to diesel. An increase resulting from a combination of rising biofuel prices and escalating RTFO requirements.
• The RTFO has contributed significantly to volatility in fuel prices at the pump, causing price spikes of up to 8 pence per litre for unleaded petrol and 14 pence per litre for diesel, peaking in late 2021 and mid-2022. This heightened volatility is driven primarily by large swings in biofuel prices, which are closely linked to global food markets and sensitive to supply disruptions caused by major geopolitical events, such as the Russian invasion of Ukraine.
• Over the past decade, the RTFO has delivered substantial benefits by significantly reducing carbon emissions. Based on current government estimates for the cost to society of carbon emissions, for every additional £1 cost to consumers, the policy has generated an average carbon-related saving of £5.70. However, biofuel price volatility means this ratio has varied dramatically—ranging from a high of nearly £25 saved per £1 spent, to a low of just £1.37 saved.

In The Costs and Benefits of the Renewable Transport Fuel Obligation, the researchers also highlight indirect impacts on pump prices resulting from industry-standard wholesale pricing practices and suggest policy adjustments, such as better accounting for double-counted biofuels, to reduce price volatility. They compare the RTFO’s carbon savings costs against alternatives such as the UK's Emissions Trading System. Margins not accounted for are also discussed, such as decreased fuel consumption as prices rise, and efficiency losses in fuel economy from using biofuel blends like E10.

Dr Nikhil Datta, Assistant Professor of Economics at the University of Warwick said:

“We carried out this analysis to understand how the RTFO affects fuel prices at the pump for consumers and compare that to the benefits of the policy. The most striking finding was how volatile biofuel prices, especially biodiesel, has resulted in fluctuating prices for consumers. Despite that, given our current net-zero targets, the policy does provide a net-benefit to the UK.”

Johannes Brinkmann, PhD student in economics at the University of Warwick continued:

“We document that price swings in global biofuel markets have quite an impact on prices at UK fuel pumps as biofuel regulations became stricter over time.”

• Read the full report: The Cost and Benefits of the Renewable Transport Fuel Obligation by Johannes Brinkmann and Nikhil Datta