Lecture 17.
Economics of biofuels

What we want to learn about this topic

It is becoming increasingly clear that in the future agriculture will become a significant supplier of energy along with food. OECD countries (as well as many developing countries) are all setting ambitious targets for biofuels and reductions in carbon emissions. Biofuels are seen as attractive because they provide energy which is renewable and less carbon intensive than oil. Because they can be produced domestically by most countries, they also may contribute to energy security and to farm incomes. But the expansion of biofuels production also raises a number of concerns, such as the impact of expanded land use on the environment, the increase in food prices and its impact on the poor, and even whether there is a positive contribution to carbon mitigation.We investigate these claims in this module. In this lecture, we examine some of the 'positive', albeit still controversial, issues around biofuels:

What are the main technologies for the production of biofuels?
What is the economic viability of biofuel production, and how does this relate to oil and feedstock prices?
What are the main policies in place to promote biofuel production and consumption?
What will be the likely impact of expanded biofuel production on agricultural land use and agricultural markets?

In the next lecture, we examine some of the more normative issues in the debate on biofuels:

Are subsidies to biofuel production an efficient way of reducing carbon emissions?
Will expanded production of biofuels hurt the poor in developing countries?
What are the welfare impacts of trade policies in the biofuel sector?
How can be ensure that increased biofuel production is environmentally sustainable?

Short introduction to the issues

Reading suggestions

Surveys

Coyle, W., 2007. The Future of Biofuels: A global perspective, Amber Waves. November, US Department of Agriculture.
(short up to date overview of main feature of the biofuels market)

DG Agriculture, European Commission, 2006, Biofuels in the European Union: An Agricultural Perspective, Fact Sheet, Brussels.

Ford Runge, C. and Senauer, B., 2007. How Biofuels could Starve the Poor, Foreign Affairs, May/June 2007.
(although motivated by the 'fuel vs food' debate, this essay is a readable critique of the biofuels debate)

Bamière, L., Bureau, J.C., Guindé, L., Guyomard, H., Jacquet, F. and Tregeur, D., 2007, Prospects for Biofuels in the EU : Imports or Local Production ?, TradeAG Draft Working Paper 2007.

Doornbosch R. and Steenblik, R., 2007, Biofuels: Is the Cure Worse than the Disease, Paper prepared for the OECD Round Table on Sustainable Development SG/SD/RT(2007)3, Paris, OECD.
(sceptical view of the advantages of biofuels; Steenblik is associated with the Global Subsidies Initiative)

Styles, D. and Jones, M., 2007. Energy Crops in Ireland: An Assessment of their Potential Contribution to Sustainable Agriculture, Electricity and Heat Production, Wexford, Environmental Protection Agency.
(focuses on biomass crops for energy and heat production rather than biofuels, but brings together lots of relevant information)

Policies

Kraemer, A. and Schlegel, S., 2007, European Union Policy on Bioenergy, Policy Brief, German Marshall Fund of the United States, Washington, D.C.

Rajagopal, D. and Zilberman, D., 2007. Review of Environmental, Economic and Policy Aspects of Biofuels, Policy Research Working Paper 4341, World Bank, Washington, D.C.
(Chapter 4 has a discussion of the policies in place to promote biofuels in different countries)

Agricultural and food market impacts

Babcock, B., 2007. Impacts of increased corn-based ethanol production in the United States, Policy Brief produced by the German Marshall Fund.
(good intuitive understanding of the economic impacts on agricultural and food markets of increased bioethanol production in the US)

Schmidhuber, J., 2007, Impact of an increased biomass use on agricultural markets, prices and food security: a longer-term perspective, Paper prepared for Notre Europe, FAO.
(examines impact of rising demand for bioenergy on agricultural markets and prices)

OECD, 2006. Agricultural Market Impacts of Future Growth in the Production of Biofuels, AGR/CA/APM(2005)24, Paris.
(first half of this report describes the policy context, and can be skimmed if you are already familiar with this. Sections 5 and 6 discuss the agricultural market implications).

European Central Bank, 20007. See Box 4 'Euro Area food prices: recent developments and outlook' in its December Monthly Bulletin, Frankfurt. (NB large file)

Supplementary reading

Rajagopal, D. and Zilberman, D., 2007. Review of Environmental, Economic and Policy Aspects of Biofuels, Policy Research Working Paper 4341, World Bank, Washington, D.C.
(apart from Chapter 4, this report has a very up to date review of current literature on biofuel technologies, enviornmental impacts and economic studies on the impact of biofuels, but it is relatively lengthy)

Royal Society, 2008, Sustainable Biofuels: Prospects and Challenges, London
(concentrates on the potential for improving biofuels production with some limited discussion of policy)

Websites

EU Commission DG Energy webpage on bioenergy. It also has a specific page on biofuels with links to the member state progress reports towards the targets in the 2003 biofuels directive.

EU Commission DG Agri webpage on biofuels

US Department of Agriculture bioenergy website

Global Subsidies Initiative
(has completed a series of report on government support to biofuels in different OECD countries, including the EU, which can be access through this website)

Lecture 17. Economics of biofuels