Use of General Equilibrium Models in Evaluating Biofuels Policies

This paper reviews the use of computable general equilibrium (CGE) models, especially GTAP based models, in the evaluation of biofuels policies. In this particular area of research, CGE models have been used in several different ways – estimating the induced land use change (ILUC) and associated greenhouse gas (GHG) emissions caused by increases in biofuels production; estimating the impacts of biofuels production on crop and food production and prices; estimating the economic or welfare impacts of policies aimed at stimulating biofuel production; and evaluating the interactions between biofuels and livestock production. Clearly the area that has gotten the most attention is the ILUC area. The California Air Resources Board (CARB) used GTAP to estimate the carbon scores in used in its Low Carbon Fuel Standard (LCFS). The European Commission reported estimates for ILUC provided by IFPRI and the MIRAGE model. The second major area to be covered concerns the evaluation of food-fuel tradeoffs. Biofuels have been criticized for causing food price increases. Here we will explore the literature in this area, which sometimes is quite contradictory. The third area to be covered is economic and welfare impacts of biofuels. In general, the studies conclude that mandating or subsidizing biofuels is welfare reducing because they are more expensive than fossil fuels. Most of the analyses do not estimate the societal benefits of GHG reduction due to biofuels, so there is no balancing of the pure economic losses with the environmental gains. The fourth grouping concerns the impacts of biofuel programs on the global livestock sector. Since ethanol has an animal feed co-product, and oilseed biodiesel involves production of oilseed meals used as animal feed, there is a close linkage between biofuels and the livestock sector. We conclude with a discussion of possible future directions for research on this topic.