Seminar

Biofuel Mandates, Food Prices and Poverty

Ujjayant Chakravorty (University of Alberta)

June 11, 2012, 11:00–12:30

Toulouse

Room MF 323

Environment Economics Seminar

Abstract

PAPER 1 - In recent years, many countries have adopted aggressive policies that promote biofuels as a substitute for gasoline in transportation. For instance, 40% of US grain is now used in transportation. This share is expected to rise significantly under the current Renewable Fuels Mandate. In this paper, we focus on the effect of the US mandate on poverty in India. First, we use a model with endogenous land use to estimate the effect of the mandate on the world price of selected food commodities, namely rice, wheat, sugar and meat and dairy, which provide almost 70% of food calories in India, and fuel for transportation. We obtain world price increases of the order of 10% for most of these commodities. Next we estimate their price pass-through to the Indian domestic market. Finally, using household data on Indian food consumption, wages and income, we estimate the effect on welfare. We account for the positive effects of food price increases through wages and income. We show that the net impact on welfare is negative and regressive, i.e., the policy affects the poorest the most. The current mandate may create about 35 million new poor in India alone. With imperfect pass-through of world prices food markets, this number declines to 14 million. The main implication is that even if biofuel policies lead to only a modest increase in food prices, they may cause a significant increase in poverty in developing countries. Keywords:Clean Energy, Food Prices, Renewable Fuel Standards, Poverty Estimates --- PAPER 2 --- The Long Run Impact of Biofuels on Food Prices -- More than 40% of US grain is now used to produce biofuels, which are used as substitutes for gasoline in transportation. Biofuels have been blamed universally for recent increases in world food prices. Many studies have shown that these energy mandates in the US and EU may have a large (30-60%) impact on food prices. In this paper we show that demand-side effects - in the form of population growth and income-driven preferences for meat and dairy products rather than cereals - may play as much of a role in raising food prices as biofuel policy. Because of new land that can be brought under farming, the rise in food prices is likely to be small. However, biofuels may increase aggregate world carbon emissions, due to leakage from lower oil prices and conversion of pasture and forest land for farming. Keywords: Clean Energy, Food Demand, Land Quality, Renewable Fuel Standards, Transportation