Biofuels in the world markets: A Computable General Equilibrium assessment of environmental costs related to land use changes

There is rising scepticism about the potential positive environmental impacts of first generation biofuels. Growing biofuels crops could induce diversion of other crops dedicated to food and feed needs. The relocation of production could increase deforestation and bring significant new volumes of carbon into the atmosphere. In this paper, we develop a methodology for assessing indirect land use effects related to biofuels policies in a Computable General Equilibrium framework. We rely on the trade policy model MIRAGE and on the GTAP 7 database, both of which have been modified and improved for this purpose. The model explicitly represents the role of different types of biofuel feedstock crops, energy demand, and carbon emissions. Land use changes are represented at the level of Agro-Ecological Zones in a dynamic framework using land substitution with nesting of Constant Elasticity of Transformation functions and a land supply module taking into account the effects of economic land expansion. In this integrated global approach, we capture the environmental cost of different land conversion due to biofuels in the carbon budget, taking into account both direct and indirect CO2 emissions related to land use change. We apply this methodology in looking at the impacts of biofuel (ethanol) policies for transportation in the United States and in the European Union with and without ethanol trade liberalization. We find that emissions released because of ethanol programs significantly worsen the total carbon balance of biofuel policies. Ethanol trade liberalisation benefits are ambiguous and depend highly on the parameters governing land use change, in Brazil in particular. We conclude by pointing out the critical aspects that have to be refined in order to improve our understanding of the environmental implications of biofuels development.