Welfare and Equity Implications of Commercial Biofuel

New sources and uses of biofuel energy offer the prospect of climate change mitigation and less reliance on fossil fuels. At the same time, biofuel represents an unusual precedent in economics, the possibility of substitution between two essential but very different commodities, food and energy. The first characteristic has dramatically heightened interest in biofuel production around the world, but particularly in high-income economies, whose expenditure patterns are most energy-intensive. Rising concerns about the need for climate stabilization and rapid innovation to reduce greenhouse gas (GHG) emission have stimulated visions of a booming new agribusiness energy industry, with pervasive induced effects on transportation and related sectors. At the same time, diversion of agricultural resources to energy production has implications for food markets that are only beginning to be fully understood, but are of special concern to poor countries whose expenditure patterns are mostly food-intensive. Both commodities are essential to human well-being, and their prices are important determinants of real living standards. In this paper, we assess the consequences of energy and food price uncertainty for the poor, using a variety of empirical assessment techniques. Beginning with traditional poverty indicators, we appraise the effect of energy and food price vulnerability on the existing burden of poverty, providing concrete indications for policy makers about distributional incidence. A second approach decomposes energy and food price effects across the economy, showing how the embodied costs of these basic commodities affect overall household purchasing power. Finally, we use a general equilibrium framework to elucidate the complex pathways through which energy and food prices interact to affect both household incomes and the cost of living. Each approach offers different insights that can support better foresight and more effective policy responses, but a few general patterns emerge. It is clear from this analysis, for example, that a North−South dichotomy between relative energy and food dependence, respectively, may lead to persistent contention regarding the use of agricultural resources for energy production. In particular, food price vulnerability is strongly regressive across income distributions, while energy price vulnerability is strongly progressive. This conclusion reaffirms productivity oriented, and intensive rather than extensive approaches to biofuel development.