On the Indirect Effect of Biofuel

American Journal of Agricultural Economics Advance Access published June 24, 2013 O N THE I NDIRECT E FFECT OF B IOFUEL D AVID Z ILBERMAN , G EOFF B ARROWS , G AL H OCHMAN , AND D EEPAK R AJAGOPAL David Zilberman (zilber11@berkeley.edu) is a Professor and Robinson Chair in the Agricultural and Resource Economics Department at UC Berkeley and a member of the Giannini Foun- dation. Geoff Barrows (geoffrey.barrows@gmail.com) is a GSR (Graduate Student Researcher) in the Department of Agricul- tural and Resource Economics at UC Berkeley. Gal Hochman (hochman@AESOP.Rutgers.edu) is an Associate Professor at Rut- gers University. Deepak Rajagopal (rdeepak@ioes.ucla.edu) is an Assistant Professor at UCLA. This research was supported by the Energy Biosciences Institute. We would like to thank Scott Kaplan and Eunice Kim for their invaluable assistance. This article was presented in an invited paper session at the 2013 ASSA annual meeting in San Diego, CA. The articles in these sessions are not subjected to the journal’s standard refereeing process. Economists have found that LCA has multi- ple flaws (Khanna and Crago 2012) in current biofuel polices and many have reservations about the use of LCA as a major regulatory tool. But accepting that LCA is used for regu- lation,our challenge is to use economic analysis to evaluate the use of ILUC in computing the GHGE of biofuel in the policy process. In the next section we develop an economic foundation for the computation of ILUC and derive a related indirect effect—the indirect food consumption effect (IFCE) of biofuels. This is followed by the discussion of other indi- rect effects. The third segment investigates the reliability of ILUC estimates and their use in the regulatory process, which is followed by a conclusion. Conceptual Analysis of the Use of LCA in Computing GHGE of Biofuels To better view the LCA of GHGE of bio- fuel from an economic perspective, we will develop a simple conceptual model. Let B denote the amount of a biofuel we analyze. LCA considers the GHGE resulting from the production of B units of biofuel throughout the supply chain. Assume that biofuel production includes two stages: production of feedstock and processing used to produce the biofuel. The GHGE generated in producing the biofuel can be decomposed into (1) the emissions from the production of the feedstock denoted by GF and (2) emissions from processing denoted by GP. The calculation of the GHGE of the feedstock GF considers the GHGE of activ- ities both on the farm (use of tractors and other machinery) and off the farm (produc- tion of fertilizers). LCA is seeking to calculate impact coefficients based on average perfor- mance that will enable the assessment of the annual GHGE associated with a proposed Amer. J. Agr. Econ. 1–6; doi: 10.1093/ajae/aat038 © The Author (2013). Published by Oxford University Press on behalf of the Agricultural and Applied Economics Association. All rights reserved. For permissions, please e-mail: journals.permissions@oup.com Downloaded from http://ajae.oxfordjournals.org/ at University of California, Los Angeles on August 22, 2014 Biofuel policies were partially motivated by concerns about climate change. Therefore, qualifications for the benefit of these poli- cies were based on the amount of green- house gas emissions (GHGE) of particular biofuels. For example, entitlement for subsi- dies and mandates associated with the U.S. Energy Independence and Security Act of 2007 requires remaining below upper bounds of GHGE per gallon. The computation of the GHGE of biofuel are based on lifecycle analy- sis (LCA), which takes into account emissions throughout the supply chain, including fertil- izer production and use, shipping, and refining. Searchinger et al. (2008) introduced the indi- rect land use change (ILUC) of biofuel pro- duction, which is the extra GHGE resulting from the expansion of acreage of a feedstock such as corn to accommodate the increase in price associated with the introduction of bio- fuel. Governments have considered including ILUC in computing GHGE of various biofu- els to determine compliance with policies like the Renewable Fuels Standard (RFS) or Low Carbon Fuel Standard (LCFS). Thus, inclusion of the ILUC in the computation GHGE of a fuel will make it more difficult to qualify for the RFS. This paper identifies some of the chal- lenges associated with the application of LCA, and in particular, the use of ILUC as part of the estimated GHGE of biofuel.