Deepak Rajagopal

Review of Environmental, Economic and Policy Aspects of Biofuels

The world is witnessing a sudden growth in production of biofuels, especially those suited for replacing oil like ethanol and biodiesel. This paper synthesizes what the environmental, economic, and policy literature predicts about the possible effects of these types of biofuels. Another motivation is to identify gaps in understanding and recommend areas for future work. The analysis finds three key conclusions. First, the current generation of biofuels, which is derived from food crops, is intensive in land, water, energy, and chemical inputs. Second, the environmental literature is dominated by a discussion of net carbon offset and net energy gain, while indicators relating to impact on human health, soil quality, biodiversity, water depletion, etc., have received much less attention. Third, there is a fast expanding economic and policy literature that analyzes the various effects of biofuels from both micro and macro perspectives, but there are several gaps. A bewildering array of policies - including energy, transportation, agricultural, trade, and environmental policies - is influencing the evolution of biofuels. But the policies and the level of subsidies do not reflect the marginal impact on welfare or the environment. In summary, all biofuels are not created equal. They exhibit considerable spatial and temporal heterogeneity in production. The impact of biofuels will also be heterogeneous, creating winners and losers. The findings of the paper suggest the importance of the role biomass plays in rural areas of developing countries. Furthermore, the use of biomass for producing fuel for cars can affect access to energy and fodder and not just access to food.

Challenge of biofuel: filling the tank without emptying the stomach?

Biofuels have become a leading alternative to fossil fuel because they can be produced domestically by many countries, require only minimal changes to retail distribution and end-use technologies, are a partial response to global climate change, and because they have the potential to spur rural development. Production of biofuel has increased most rapidly for corn ethanol, in part because of government subsidies; yet, corn ethanol offers at most a modest contribution to society’s climate change goals and only a marginally positive net energy balance. Current biofuels pose long-run consequences for the provision of food and environmental amenities. In the short run, however, when gasoline supply and demand are inelastic, they serve as a buffer supply of energy, helping to reduce prices. Employing a conceptual model and with back-of-the-envelope estimates of wealth transfers resulting from biofuel production, we find that ethanol subsidies pay for themselves. Adoption of second-generation technologies may make biofuels more beneficial to society. The large-scale production of new types of crops dedicated to energy is likely to induce structural change in agriculture and change the sources, levels, and variability of farm incomes. The socio-economic impact of biofuel production will largely depend on how well the process of technology adoption by farmers and processors is understood and managed. The confluence of agricultural policy with environmental and energy policies is expected.

The role of inventory adjustments in quantifying factors causing food price inflation

The food commodity price increases beginning in 2001 and culminating in the food crisis of 2007/08 reflected a combination of several factors, including economic growth, biofuel expansion, exchange rate fluctuations, and energy price inflation. To quantify these influences, the authors developed an empirical model that also included crop inventory adjustments. The study shows that, if inventory effects are not taken into account, the impacts of the various factors on food commodity price inflation would be overestimated. If the analysis ignores crop inventory adjustments, it indicates that prices of corn, soybean, rapeseed, rice, and wheat would have been, respectively, 42, 38, 52, and 45 percent lower than the corresponding observed prices in 2007. If inventories are properly taken into account, the contributions of the above mentioned factors to those commodity prices are 36, 26, 26, and 35 percent, respectively. Those four factors, taken together, explain 70 percent of the price increase for corn, 55 percent for soybean, 54 percent for wheat, and 47 percent for rice during the 2001-2007 period. Other factors, such as speculation, trade policy, and weather shocks, which are not included in the analysis, might be responsible for the remaining contribution to the food commodity price increases.

The Effect of Biofuels on the International Oil Market

This paper derives a method to quantify the impact of biofuels on fuel markets, assuming that these markets are dominated by a cartel of oil-rich countries and that fuel prices in these countries are significantly lower than those in the rest of the world. We identify large differences between the effects of introducing biofuels using the proposed method (denoted the cartel-of-nations [CON] model), in contrast to the competitive or the standard cartel models. When compared with the CON model, the competitive model overestimates the reduction in fuel prices and underestimates the reduction in fuel consumption, and therefore the impact of biofuels on greenhouse gases. Copyright 2011, Oxford University Press.

Environmental, Economic and Policy Aspects of Biofuels

This review provides a timely summary of the current understanding of the various impacts and contributes positively to the policy debate. We have several key conclusions: (1) Biofuels are diverse and evolving; (2) Greenhouse gas (GHG) benefits vary significantly across various types of biofuels and are dependent on market conditions and policy situation; (3) Increase in income in the developing world would increase the demand for both food and fuel; (4) A diverse set of policies, which has been introduced or proposed, impacts biofuels directly; and (5) Much of the impact assessments of biofuels thus far are ex-ante estimates based on either optimization or equilibrium models. The short-term economic impacts of biofuels will depend on a variety of factors such as the harvest in any given year, the oil price, economic growth, strength of the dollar, and level of inventory. The long-term impacts will depend on factors such as investment in technological change, population and economic growth, climate change, and long-term policies toward energy, agriculture, and the environment. The biofuel policy debate is likely to be an ongoing one in the near future.

Consequential Life Cycle Assessment of Policy Vulnerability to Price Effects

The application of life cycle assessment (LCA) in a policy context highlights the need for a “consequential” LCA (CLCA), which differs from an “attributional” LCA (ALCA). Although CLCA offers some advantages over ALCA, such as a capacity to account for emissions resulting from both substitution and price effects, it entails additional assumptions and cost and may yield estimates that are more uncertain (e.g., estimates of impact of biofuel policies on greenhouse gas [GHG] emissions). We illustrate how a CLCA that relies on simple partial equilibrium models could provide important insights on the direction and magnitude of price effects while limiting the complexity of CLCA. We describe how such a CLCA, when applied early in the policy life cycle, could help identify policy formulations that reduce the magnitude of adverse price effects relative to the beneficial substitution effect on emissions because - as the experience with biofuel regulations indicates - regulating price effects is costly and controversial. We conclude that the salient contribution of CLCA in the policy process might lie in warning policy makers about the vulnerabilities in a policy with regard to environmental impact and to help modify potentially counterproductive formulations rather than in deriving the precise estimates for uncertain variables, such as the life cycle GHG intensity of product or average indirect emissions.

Sustainability of food, energy and environment with biofuels

Growing reliance on food-based biofuels has created considerable controversy about its impact on food prices and the environment and led to scepticism about its sustainability. This review describes the concept of sustainability in the context of biofuels and then discusses the factors affecting the economic viability of current and next-generation biofuels and their environmental and social sustainability. Cellulosic biofuels from dedicated energy crops offer considerable promise for reducing the competition for land and avoiding many of the negative environmental impacts associated with corn-ethanol. But the production of any type of biofuel is likely to involve trade-offs among the multi-dimensional aspects of sustainability. Technological innovation and policy incentives are needed to develop more sustainable biofuels and to guide the mix of feedstocks, their methods and locations of production.

The fuel market effects of biofuel policies and implications for regulations based on lifecycle emissions

The absence of a globally-consistent and binding commitment to reducing greenhouse emissions provides a rationale for partial policies, such as renewable energy mandates, product emission standards, etc to target lifecycle emissions of the regulated products or services. While appealing in principle, regulation of lifecycle emissions presents several practical challenges. Using biofuels as an illustrative example, we highlight some outstanding issues in the design and implementation of life cycle-based policies and discuss potential remedies. We review the literature on emissions due to price effects in fuel markets, which are akin to emissions due to indirect land use change, but are, unlike the latter, ignored under all current life cycle emissions-based regulations. We distinguish the current approaches to regulating indirect emissions into hard and soft approaches and discuss their implications.

A Step Towards a General Framework for Consequential Life Cycle Assessment

Summary At the core of consequential life cycle assessment (CLCA) is a model of the economic system of which the activity that motivates the CLCA is a part. While there are several applications of CLCA in the literature, there does not appear to exist a formal, general mathematical framework. To address this gap, this article presents a general multi-market equilibrium framework, which could be adapted to an arbitrary level of complexity depending on the context and data availability. A general expression for total pollution (of a given type) is derived, which highlights different factors that determine the impact on emissions. It is then illustrated how microeconomic theory can help predict the direction of price and quantity changes for each commodity within the modeled system simply based on an activitys relationship to the ultimate activity or service, which motivates the CLCA. The steps involved in converting the multi-market framework to general equilibrium are also discussed.

On mitigating emissions leakage under biofuel policies

A reason for much pessimism about the environmental benefits of todays biofuels, essentially corn and sugarcane ethanol, is the so‐called indirect land‐use change (ILUC) emissions associated with expanding biofuel production. While there exist several simulation‐based estimates of indirect emissions, the empirical basis underlying key input parameters to such simulations is not beyond doubt, while empirical verification of indirect emissions is hard. Regardless, regulators have adopted global warming intensity ratings for biofuels based on those simulations and in some case are holding regulated firms accountable for (some forms of) leakage. Suffice to say that both the estimates of and the approach to regulating leakage are controversial. The objective of this study is therefore to review a wider economic in order to identify a broader set of policy options for mitigating emissions leakage. We find that controlling leakage by affixing responsibility to regulated firms lacks support in the broader literature, which emphasizes alternative approaches.