Potential Future Impacts of Increased Biofuels Use

This entry is part of a series of posts written by members of the Environment and Energy team of the World Bank's Research Group on economic and policy issues involving energy and climate change mitigation.

Ongoing controversy has surrounded production of crop-based biofuels, ostensibly for the purposes of increase renewable energy use and reducing carbon dioxide (CO2) emissions that causes global warming.   To illustrate, a recent report on price volatility in food and agricultural markets prepared by numerous international organizations, including the World Bank, at the request of G20 Governments recommended elimination of current national policies that subsidize or mandate biofuels production or consumption. Some international non-governmental organizations, such as Action Aid strongly supported the recommendation, while some other organizations, such as Renewable Fuel Association opposed it. The June meeting of G20 agriculture ministers did not make any decision in favor or against biofuels, deciding instead to have further analysis.

The basic issues raised by policies supporting crop based biofuels are (a) impacts on the magnitude and volatility of crop and food prices; (b) the economic costs of increased biofuel utilization; (c) the size of the net contribution of crop-based biofuels to curbing CO2 emissions; (d) potential impacts on the local environment and agricultural practices of increasing biofuels production; and (e) the potential contribution of increased biofuels production to reducing vulnerability of the economy to oil price shocks, as well as improving rural livelihoods.  In this blog I summarize findings from a major study that I led on the long-term economic, social and environmental impacts of expansion of biofuels to meet the biofuel mandates or voluntary targets.  Such goals or requirements have been announced by 40 plus countries around the world. 

The results presented here reflect comparisons of scenarios with increased biofuel use to a baseline scenario in which it is assumed that the current pace continues in economic development, population growth and biofuel development, but there are no additional policy mandates.  [For those familiar with the technical details of this kind of research, the study was based largely on use of a global computable general equilibrium model covering 25 countries or regions through 2020, in order to simulate the impacts on economic output (GDP), international trade, commodity prices, land-use changes, food vs. fuel conflicts, and climate change mitigation.]  The results indicate that biofuel mandates can have negative economic impacts in certain countries, though some other countries could gain; certain groups (farmers, some under-employed workers) also could benefit.  Food prices likely would rise, though relatively moderately.  Environmental impacts are ambiguous, but there could be net increases in CO2 as well as negative impacts on land use.  Biofuels policies thus need to be designed based on balancing costs and opportunities in specific countries, taking into account as well the impacts on global CO2 emissions.

Economic and Agricultural Impacts

The analysis indicates that expansion of biofuels over the next decade to meet the various national targets would have significantly different economic impacts across countries. Major biofuel-exporting countries, such as Brazil, Argentina and Indonesia, would benefit on balance as higher global demand boosts their exports of biofuels and feedstocks. But other countries, which have ambitious targets for biofuels but limited domestic production capacity, could end up allocating a significant amount of domestic food crop production to biofuels, while increasing the quantity and cost of their agricultural imports.  At the globally aggregated level the expansion of biofuels causes only a minor reduction in GDP – 0.02% in 2020.

The expansion of biofuels would push up prices for many food staples; prices for corn and other major grains could rise by as much as 3 percent and the price of sugar by 8 percent. Although the aggregate impacts of biofuels on food supply were found to be small, a drop on supply together with increase in prices of basic staples could be especially burdensome for poor urban households, particularly in South Asia and sub-Saharan Africa.  A significant reallocation of land would be induced as land devoted to feedstock crops (such as sugar crops, corn, wheat, oilseeds) increases at the expense of lands used for non-feedstock production.
 
 Production of global biofuels increased almost 150 percent increase between 2004 and 2010, from 42 billion liters to 104 billion liters. Nevertheless, biofuels are a small share of total fuel use, around 3 percent of the total liquid fuel for global road transportation. If the stated national targets and mandates are met, the share would exceed 8 percent by 2020. Although the posited expansion of biofuels over the next 10 years would have small effects on global petroleum markets, larger increases over time in world oil prices would induce greater substitution of biofuels for petroleum based fuels.  In such a situation, phasing out costly biofuels subsidies and mandates could be undertaken more easily.

There could be other economic benefits from increasing biofuels production, aside from those enjoyed by major biofuel exporters.  There could be incentives to better utilize otherwise idle land, for example in a number of countries in Sub-Saharan Africa.  Expansion of biofuels would create jobs for rural and relatively unskilled workers in the labor force.  Rural households also can benefit from higher prices for agricultural commodities.  Finally, while biofuels would cost more than fossil fuel alternatives, they can reduce macro-economic exposure to volatility in payments for imported petroleum products in countries that can expand domestic biofuels production.  However, the increased use of domestic biofuels will have only a limited effect on the domestic price of liquid fuels, as oil prices are set in a global market and the price of biofuels would be bid up to the extent that demand can move relatively quickly from petroleum fuels to biofuels.  That substitution possibility in turn will depend on the vehicle stock, and the capacity of the domestic fuel distribution system to deliver additional biofuels. 

Environmental and Land Use Impacts

Expansion of biofuels also has the potential to increase deforestation if the increased demand for land to grow biofuel feedstocks is supplied by incursion into existing forest lands.  If significant deforestation does occur, the expansion of biofuels would cause a net increase in  greenhouse gas emissions released to the atmosphere for a time period that could extend several decades. This would result from release of carbon stored in both the forest biomass and the soil.  However, this adverse effect on the global carbon balance is largely avoided if producers primarily convert existing pasture lands to increase biofuels production, while intensifying the use of remaining pasture lands (increased livestock per unit area).  
 
Future Technology Possibilities and Challenges

So-called second generation biofuels are derived from biomass that is not used for food (such as agriculture residues, or non-crop plants such as switch grass).  These feedstocks are expected to put less pressure on the global food supply because their feedstocks do not directly compete with food supply. Moreover, they likely will require lower amounts of land due to higher biofuel yield as compared to the first generation feedstocks, and they can be grown on lower quality lands. However, currently available information about the economics of second generation biofuels indicates that large-scale commercial production would not be economically viable until significant technological advances occur.  These advances are likely to require a number of years of further innovation.  Thus, second generation biofuels are unlikely to play a significant role in the overall supply of fuels in the near and medium term, unless potentially costly support policies specific to these technologies are implemented.

Further Reading:

FAO, IFAD, IMF, OECD, UNCTAD, WFP, WTO, World Bank.  June 2011. Price Volatility in Food and Agricultural Markets:  A Policy Report to the G20.

DECRG research on biofuels.