A Dynamic General Equilibrium Analysis of U.S. Biofuels Production

With rising global interest in energy security and climate change mitigation, biofuels have gained prominent attention from researchers and policy makers. The U.S. has emerged as the leading producer of biofuels and has set a target of 36 billion gallons by 2022 under its updated renewable fuels standard (RFS2) policy. In this paper, we study the longer-term global implications of the U.S. RFS2 policy. We utilize the GTAP v7.1 data base and introduce a detailed breakdown of agricultural crops, first and second generation biofuels, and key byproducts. We adapt a recursive dynamic version of the Applied Dynamic Analysis of Global Economy (ADAGE) model developed by Ross (2009) and introduce agriculture, biofuels, and land use linkages. We construct dynamic baseline projections from 2010 through 2050. The dynamics in the model comes from growth in GDP, population, capital accumulation, labor productivity, growth in natural resource stocks, and technological changes in the energy intensive and agricultural sectors. We implement the RFS2 policy scenario in the U.S for 2025, using two alternative approaches: (i) RFS permits approach – which assumes biofuels and petroleum fuels are perfect substitutes, and (ii) Target share of biofuels in transportation fuels approach – which treats biofuels and petroleum fuels as imperfect substitutes. Because the share approach keeps the biofuels share fixed in the non-implementing regions, it does not result in dramatic changes in the rest of the world. In the permits approach, the regions with no implementation of permits will reduce or stop producing biofuels if they are not cost-competitive compared to other transportation fuels, an effect exacerbated by large-scale adoption of biofuels in countries with policies reducing the global demand for petroleum and prices of petroleum products. This rebound effect partially offsets gains associated with biofuels policies.