Meeting the Mandate for Biofuels: Implications for Land Use, Food and Fuel Prices

Abstract

Biofuel production is being promoted through various policies such as mandates and tax credits. This paper uses a dynamic, spatially explicit, multi-market equilibrium model, Biofuel and Environmental Policy Analysis Model (BEPAM), to estimate the effects of these policies on allocation of land between food crops and fuel crops and for food and fuel prices and on the mix of biofuels from corn and various cellulosic feedstocks that are economically viable over the 2007-2022 period. We find that the biofuel mandate will expand cropland by 6%, increase corn price by 24% and reduce the price of gasoline by 8% in 2022 relative to Business As Usual (BAU). The benefits of the mandate to agricultural producers and fuel consumers outweigh the losses to agricultural consumers and gasoline producers and there is an increase in the net present value of social welfare by $122 B (0.7%) compared to the BAU. The provision of volumetric tax credits that accompany the mandate significantly changes the mix of biofuels produced in favor of cellulosic biofuels from high yielding grasses and leads to an expansion in biofuel production beyond the mandate by 8%. The share of corn ethanol in the cumulative volume of biofuels produced over the 2007-2022 period falls from 50% to 10%; this reduces the adverse impact of the mandate alone on crop prices while also reducing the price of biofuels for fuel consumers. These welfare gains are however smaller than the losses to agricultural producers and to tax payers. The tax credits, therefore, impose a welfare cost of $79 B compared to the mandate alone; the welfare cost per liter of incremental biofuel attributable to the tax credits is $0.83 per liter of biofuel. These results are found to be sensitive to the rate of growth of crop productivity over this period, the costs of production of bioenergy crops and the availability of marginal land for producing bioenergy crops. While the analysis does not consider the external environmental and energy security benefits of biofuels, it indicates how large these benefits would need to be to offset the economic welfare costs of the tax credits estimated here.