Will Biofuel Mandates Raise Food Prices?

1. 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

2. US biofuel mandate

3. 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

4. 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

5. Vegetableconsumption in developing and developedeconomies Source: FAO 2003

6. Meat and dairyconsumption in developingand developedeconomies Source: FAO 2003

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

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

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

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

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

14. Distribution of land quality

16. 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

17. 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

18. 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

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

21. 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

22. THE MAXIMIZATION PROBLEM IS

24. World weighted food prices

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

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

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

32. 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

33. 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

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