The Production of Biofuels: Welfare and Environmental Consequences for Asia

The production of biofuels has been supported by many conservationists and environmentalists on the grounds that it reduces greenhouse gas emissions and is a renewable energy substitute for non-renewable fossil fuels, mainly oil. More recently the domestic production of biofuels (and the domestic supply of other forms of alternative energy) have been welcomed by several nations as ways to reduce their oil imports and increase their energy self-sufficiency, as for example, has happened in the United States. India also which is very dependent on oil imports has also begun to produce biofuels in Kerala and elsewhere. However, doubts have been raised about the effectiveness of biofuel use as a means to reduce the accumulation of greenhouse gases and elementary economics teaches us that it is likely to have opportunity costs. For example, increased cropping to provide biofuels can be at the expense of the production of food and natural fibres thereby adding to their prices. It may also increase the conversion of natural areas to agricultural use and consequently, add to biodiversity loss and an increase in greenhouse gas in the atmosphere. For example, in Borneo, forests are being converted to grow oil palm, partly used for biodiesel production in developing countries. These issues are discussed generally and their economic welfare implications are given particular attention in relation to Asian nations. Amongst the different situations examined from economic welfare and environmental points of view are the following: 1. Asian nations producing biofuels for their own use from home-grown crops, as is the case of India and China. 2. The external trade of Asian countries in feedstock for biofuels, such as palm oil in Indonesia and Malaysia and in biofuel itself. 3. Possible Asian ventures to grow crops for biofuels abroad or import biofuels. 4. The economic consequences for Asian countries of decisions by higher income countries, such as the United States (which also happens to be a major global exporter of food and natural fibre), to raise their production of biofuels. Analysis is provided that casts doubts on the likelihood that the introduction of biofuels will reduce greenhouse gas accumulation in the atmosphere.