Will Biofuel Mandates Raise Food Prices? Ujjayant Chakravorty, Marie-Hélène Hubert, Michel Moreaux and Linda Nøstbakken University of Alberta, University of Rennes and TSE Berkeley Bioeconomy Conference, March 2011

US biofuel mandate

INTRODUCTION MANY STUDIES HAVE SHOWN THAT BIOFUEL MANDATES MAY LEAD TO A LARGE INCREASE IN FOOD PRICES 30-60% PRICE RISE PREDICTED WE DEVELOP A MODEL THAT HAS THE FOLLOWING FEATURES

EXOGENOUS CHANGES IN INCOME DRIVE CHANGES IN THE DEMAND FOR VEGETABLES AND MEAT AND DAIRY PRODUCTS PER CAPITA MEAT AND DAIRY CONSUMPTION IN DEVELOPED COUNTRIES IS 4 TIMES THAT IN LDCS 3 KG CEREALS = 1 KG OF PORK 5 KG CEREALS = 1 KG OF BEEF

Vegetable consumption in developing and developed economies Source: FAO 2003

Meat and dairy consumption in developing and developed economies Source: FAO 2003

RICARDIAN LAND QUALITY (YIELDS AND PRODUCTION COSTS) CONVERSION COSTS OF MARGINAL LANDS RISING PRICE OF CRUDE OIL – A CONVEX COST FUNCTION FOR OIL

US BIOFUEL MANDATE: 10 TO 36 BLN GALLONS BY 2022 EU MANDATE: 2.5% TO 10% OF TRANSPORT FUELS

ELEMENTS OF THE MODEL WE HAVE 3 CONSUMPTION GOODS: MEAT AND DAIRY VEGETABLES TRANSPORT ENERGY DEMAND IS INDEPENDENT AND COBB-DOUGLAS

INCOME ELASTICITIES ARE PRODUCT AND REGION SPECIFIC THEY DECLINE WITH GDP/CAPITA IN LDCS BUT ARE CONSTANT IN RICH NATIONS

REGIONAL PER CAPITA GDP AND POPULATION GROW EXOGENOUSLY (UN POPULATION DIVISION, NORDHAUS AND BOYER)

Distribution of land quality

HALF THE LAND IN HICS IS CLASS 1 A THIRD IN MICS AND LICS IS CLASS 1 CLASSES 2 AND 3 ARE MARGINAL LANDS, ALL IN MICS AND LICS 25% OF ALL MARGINAL LANDS ARE IN BRAZIL

CONVERSION COSTS OF MARGINAL LANDS IS RISING AND CONVEX (SOHNGEN AND MENDELSOHN) FOOD PRODUCTION IS CRTS FOR EACH LAND CLASS ALL REGIONS EXHIBIT INCREASES IN AG PRODUCTIVITY AT DIFFERENTIAL RATES PRODUCTION COSTS ARE CONVEX AS CULTIVATION EXPANDS INTO LOWER QUALITY LANDS

TRANSPORT FUEL IS PRODUCED FROM GASOLINE AND BIOFUELS BY MEANS OF A CES FUNCTION THE ELASTICITY OF SUBSTITUTION IS HIGHER IN HICS BATHTUB WORLD OIL MARKET

REPRESENTATIVE BIOFUEL FOR EACH REGION: US: CORN ETHANOL EU: RAPESEED BIODIESEL BRAZIL/MICS: SUGARCANE ETHANOL LICS: CASSAVA PRODUCTION COSTS DECLINE OVER TIME

WE INCLUDE US AND EU TAX CREDITS SECOND GEN BIOFUELS ARE MODELED AS CELLULOSIC ETHANOL IN THE US AND BTL IN THE EU NO SECOND GEN IN OTHER REGIONS SECOND GEN SUBSIDY INCLUDED

THE MAXIMIZATION PROBLEM IS

World weighted food prices

(a) First Gen biofuel use in US(b) Second Gen biofuel use in US

Welfare impacts of US and EU mandates: Change in total surplus relative to baseline

Implicit biofuel subsidies in the US and EU ($/gallon)

SENSITIVITY ANALYSIS WE PERFORM SENSITIVITY WITH RESPECT TO 20% LOWER OIL RESERVES (INCREASE IN PRICE OF OIL) 50% HIGHER COST OF LAND CONVERSION NO TARIFFS FOR BIOFUELS 15% LOWER COST OF SECOND GEN FUELS (IEA 15% HIGHER YIELDS FROM BIOTECHNOLOGY CHINA AND INDIA IMPOSE EU-LIKE MANDATES CONSTANT CRUDE OIL PRICES NO PREFERENCE FOR MEAT AND DAIRY PRODUCTS

CONCLUDING REMARKS SIGNIFICANT LAND CONVERSION FOOD PRICES ARE QUITE ROBUST TO MANDATES INCLUDING IN CHINA AND INDIA (ALTHOUGH MAY AFFECT POORER CONSUMERS AND FOOD SECURITY) ABUNDANT OIL IMPLIES LOWER IMPACTS ON FOOD PRICES AND LARGER DIRECT EMISSIONS SCARCE OIL IMPLIES LARGER INDIRECT EMISSIONS

LIMITATIONS OF THE STUDY STRATEGIC IMPACTS BETTER MODELING OF FOOD CONSUMPTION CHOICES FOOD SECURITY