Biofuels and Rural Economic Development in Latin America and the Caribbean

Biofuel expansion is seen as a way to reduce dependence on fossil fuels, as an alternative energy source for transportation and other uses, as a way to reduce Green House Gases, and as way to revitalize the agricultural sector. Very little discussions have been focused on Latin America, except for Brazil. Potential negative impacts re-enforce the need of performing more in depth analysis of the potential impact of biofuels expansion in Latin America and the Caribbean (LAC). Paper estimates biofuels production potential based on current production situation and develops a forward-looking analysis of the long-term impact of biofuels expansion in Latin America and its effects on prices, trade, food security, malnutrition and other indicators using the IMPACT-WATER model developed by IFPRI. The analysis conducted for this paper of potential crops in the region show that from a technical and productivity standpoint in which to base biofuels expansion continues to be sugarcane and palm oil trees. Most countries in Latin America will not have a production constraint in terms of meeting existing and projected mandatory blends requirements. However, if the goal is to obtain energy independence, this result only holds for a few countries, with obvious food security implications as countries dedicate higher shares of their agricultural land to biofuels expansion. Our analysis, and those made in other studies, show that biofuels expansion is not likely to have a binding land production constraint in Latin America, with a few exceptions. The forward-looking estimations from the IMPACT-WATER model show that Brazil will continue to be the major player in the ethanol market. Brazil will expand its ethanol exports to meet growing demand in other countries including some in Latin America. Other countries such as Argentina and Colombia will likely continue their biofuels expansion plans, although our estimate show that they will not likely meet their demand based on current production potential. The IMPACT-WATER simulations also show that biofuels impacts on food security and malnutrition will likely happen in those countries where the feedstock used for biofuels production is a critical component of a major share of the population, other things equal. An example of this potential is Mexico and most of the Central America region, where a high proportion of the diet is composed of maize. The extent to which biofuels efforts can contribute towards addressing or affecting all broader contextual issues depend on a series of strategic determinants of impact success, ranging from the characteristics of installed capacity and industrial organization and coordination to whether any nascent market for biofuels will be economically sustainable and financially viable without continuous government support or interventions.