Energy policies and their impact on establishing nature areas in Poland - an AGE analysis

Biomass as a source of energy has several advantages over fossil fuels. It delivers energy at low net CO2 emission levels and it contributes to sustaining future energy supplies. However, an often-heard concern is that large-scale biomass plantations might increase pressure on the productive land and might cause a substantial increase of food prices. Johansson and Azar (2004) predict that due to rigid CO2 policy the price of agricultural goods increase substantially. McCarl and Schneider (2001) analyses the impact of carbon price on food and biomass production and they conclude that with a carbon price of 500$/MTCE, US crop prices almost triple. If we can exploit the multi functionality properties of biomass plantation, such as bioremediation, they can contribute to environmental policy by reducing the competition between biomass and agricultural production. In this paper we deal with the trade-off between agricultural and biomass production when such synergies are explicitly taken into account. To assess the impact of environmental policies on greenhouse gas emissions, land use allocation, sectoral production and consumption levels and prices of land, food, electricity and other commodities we present an applied general equilibrium (AGE) model with special attention to biomass and multi-product crops. The model describes the entire economy, with explicit detail in the representation of production of traditional agricultural and biomass crops. The model is an extended version of the model described in Ignaciuk et al. (2004). The model distinguishes 35 sectors, including 6 agricultural and biomass sectors. Moreover, the bioelectricity sector is explicitly described. We include three primary production factors: labor, capital and land. Three land classes are identified to capture differences in productivity from different land types. A representative consumer maximizes utility under the condition that expenditures on consumption goods do not exceed income. Utility is represented by a nested constant elasticity of substitution (CES) function, in order to allow for substitution possibilities between different consumption goods, such as between conventional electricity and bioelectricity. Producers maximize profits subject to the available production technologies. Production technologies are represented by six-level nested CES functions, where also emissions (emission permits) from production processes are incooperated. The emissions of major greenhouse gases are calculated; namely CO2, N2O and CH4. A government sector collects taxes, distributes subsidies and consumes public goods; environmental policy is implemented by reducing the number of emission permits the government auctions. This way of modeling environmental policy ensures that a cost-effective allocation is achieved. The interactions between the various production sectors are relevant, as the agricultural and energy sectors have strong links with the rest of the economy. An economy-wide model, such as the AGE-framework provides, allows us to take these interlinkages fully into account. Moreover, the indirect impacts of environmental policies, that are often ignored but can be highly relevant (cf. Dellink 2005) are incorporated in this way, ensuring a consistent assessment of the economic costs of environmental policy. We calibrate the AGE model using data for Poland for 1997. Poland provides a relevant case as it has a high potential for biomass production, and has a large agricultural sector (Ignaciuk et al.2005). In the empirical application, we focus on bioremediation characteristics of willow plantations and on biodiversity support of forestry. Data are taken from Statistics Poland (GUS 2002) and the GTAP database (Rutherford & Paltsev 2000). The preliminary results show that bioremediation characteristics of willow can substantially increase the potential for bioenergy, thanks to its potential of growing on marginal land. Thus, the costs of climate policy can be substantially reduced and the policy goals set for bioenergy use can be achieved with less effort. However, at current prices, willow and forestry are not economically interesting, and hence stringent environmental policies are needed to ensure that these opportunities are reaped.