More Biofuel = More Food?

In face of increased efforts to mitigate climate change, biofuels may be included in reduction plans for greenhouse gas emissions. Feedstock for first generation biofuels and food crops both use arable land and may compete for it. Also, fuel is an input for the production and transport of food. The purpose of this paper is to quantify with empirical data how these two aspects affect market outcomes and to introduce a counterfactual setting where the latter aspect dominates the former. The setting allows an expansion of biofuel production to increase food production by lowering costs of production and transport. Namely, lower costs increase market access, allowing a higher utilization of idle production capacities for food crops. For this quantification, I develop an open market, welfare maximizing, partial equilibrium model for three interdependent goods fuel, fuel feedstock, and food (these goods are represented by diesel/biodiesel, palm oil, and cassava/maize respectively). The model is calibrated to Zambia, which exhibits the necessary underlying conditions of underutilized agricultural capacity, high transport costs, and low exports of food. Compared to a baseline, model results show the counterfactual switch from fossil diesel to biodiesel to reduce the diesel price by 51%. This increases food supply (cassava and maize combined) by 0.4% and decreases related prices by 3%. Overall welfare increases by 9.9%. If additionally, a higher world market price of maize renders exports just profitable, overall welfare continues to gain 9.9%, domestic food supply rises by 0.3%, and related prices drop by 2%, but food supply including exports grows by 32%. Furthermore, the introduction of a palm oil based biodiesel sector eliminates import dependency on fossil diesel and palm oil.