Presentation of the study conducted by IFPRI for the Inter American Development Bank on the economic and environmental impacts of the US and EU biofuel policies with a focus on Brazil. Technical document available: http://idbdocs.iadb.org/wsdocs/getdocument.aspx?docnum=35529623

1. European Union and
United States Biofuel
Mandates
Impacts on World Markets
IADB seminar – December 2nd 2010
by Perrihan Al-Riffai, Betina Dimaranan,
David Laborde Debucquet
with the collaboration and support
from IADB, ICONE and FIESP

2. Overview
• Introduction and Background
• Modeling Choices
• Database
• The Baseline
• Results
• Concluding Remarks
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3. INTRODUCTION
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4. Goals of this study
• Assessing Economic and Environmental Effects
• Increase in yield
Increased
• Increase in area
•Extension of crop
L
production land
•Reduction of other
crops A
New N
Reduced • Hunger?
Demand supply for
final D
consumers • Substitution effects
for crops
Reduced
supply for
• Feed
• Other sectors
U
intermediate (agrifood, cosmetics)
consumers • Substitution effects
S
• Terms of trade effects (energy, biofuels) E
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5. Previous conclusions:
The Biofuels Mix matters
Emissions uncertainties –
MARGINAL ILUC crop EU mandate (Monte Carlo
specific simulations).
Mandate 5.6% Land Use Emissions (gCO2eq/MJ) / 20 years
Marginal Coef. gCO2/Mj
100%
Ethanol -49.69
90%
Ethanol Sugar Beet -35.86
80%
Ethanol SugarCane -53.95
70%
Ethanol Maize 3.64
60%
Ethanol Wheat -7.00
50%
Biodiesel 5.95
40%
Palm Oil (no peat land) -21.98
30%
Ethanol
Rapeseed Oil 8.76
20% Ethanol Free Trade
Soybean Oil 24.07 Biodiesel
10%
Sunflower Oil 8.73
0%
0 20 40 60 80 100
Al Riffai, Dimaranan, Laborde, 2010
Laborde & Valin, 2010
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6. MODELING
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7. Main Features
• Global CGE MIRAGE – assume perfect competition
• Improvement in demand system (food and energy) -
done in previous works
• Improved sector disaggregation
• New modeling of Ethanol sectors
• Land market and land extensions at the AEZ level
• Co-products (ethanols and vegetal oils)
• New modeling of fertilizers
• New modeling of livestocks
(extensification/intensification)
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8. Disaggregation (Sectors)
Sector Description Sector Description Sector Description
Rice Rice SoybnOil Soy Oil EthanolW Ethanol - Wheat
Wheat Wheat SunOil Sunflower Oil Biodiesel Biodiesel
Maize Maize OthFood Other Food sectors Manuf Other Manufacturing
activities
PalmFruit Palm Fruit MeatDairy Meat and Dairy WoodPaper Wood and Paper
products
Rapeseed Rapeseed Sugar Sugar Fuel Fuel
Soybeans Soybeans Forestry Forestry PetrNoFuel Petroleum products,
except fuel
Sunflower Sunflower Fishing Fishing Fertiliz Fertilizers
OthOilSds Other oilseeds Coal Coal ElecGas Electricity and Gas
VegFruits Vegetable & Oil Oil Construction Construction
Fruits
OthCrop Other crops Gas Gas PrivServ Private services
Sugar_cb Sugar beet or OthMin Other minerals RoadTrans Road Transportation
cane
Cattle Cattle Ethanol Ethanol - Main AirSeaTran Air & Sea
sector transportation
OthAnim Other animals EthanolC Ethanol - Sugar PubServ Public services
(inc. hogs and Cane
poultry)
PalmOil Palm Oil EthanolB Ethanol - Sugar Beet
RpSdOil Rapeseed Oil EthanolM Ethanol - Maize
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9. Disaggregation (Regions)
Region Description
Brazil Brazil
CAMCarib Central America and Caribbean countries
China China
CIS CIS countries (inc. Ukraine)
EU27 European Union (27 members)
IndoMalay Indonesia and Malaysia
LAC Other Latin America countries (inc. Argentina)
RoOECD Rest of OECD (inc. Canada & Australia)
RoW Rest of the World
SSA Sub Saharan Africa
USA United States of America
But: Land markets at the AEZ level
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10. Production Tree for an Ag. Sector
Changes
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11. Yield Changes in the Model
• Exogenous technology: TFP in agriculture
• Endogenous effects:
• Factor accumulation:
• More capital and labor by unit of land
• Fertilizers
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12. Fertilizers
• Price elasticities calibrated from the IMPACT
model
• Logistic approach for yield effects
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13. Livestock Sector and Intensification
Traditional approach Intensification approach
• Feedstock  Intermediate • Like fertilizers
consumption • Ratio price of land/price of
• Intermediate consumption & feedstocks  Producer choice
Value Added (including Land) • Increase in price of feedstock 
complementary Substitution effect =
• Increase in feedstock prices  Intensification + Overall price
Increase in production cost  effect = reduction in production
Decrease in demand   Overall, potential increase in
Decrease in production  Land use
Decrease in Land Use
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14. Biodiesel Production
Oil
Crops sector Biofuel
(+meals)
Sunflower Sunflower
seed oil
Soybean
Soybean
oil
Biodiesel
Rapeseed
Rapeseed
oil
Palm fruit
Palm oil
& Kernel
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15. Ethanol Production
Biofuels
Crops Blending
(+ DDG)
Ethanol
Wheat
W
Maize Ethanol M
Sugar
Ethanol B Ethanol
Beet
Sugar
Ethanol C
Cane
Imported Imported
Ethanol* Ethanol*
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16. Land Markets – at the AEZ Level
Wheat Corn Oilseeds
CET
Sugar Substitutable Vegetables Other
Livestock1 LivestockN
crops crops and fruits crops
CET CET
Cropland Pasture
CET
Agricultural Managed
land forest
CET
Land extension
Unmanaged land
Managed land
Natural forest - Grasslands
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17. DATA
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18. Major Efforts on Data: from Values to Quantities
• Improvement from GTAP7
• Split for fertilizers and fossil fuels
• Disaggregation with specific procedure for Maize, Soybeans, Sunflower
seed, Palm fruit, Rapeseed + relevant Oils + Co-products
• Production targeting (FAO) for all relevant crops
• Creation of a “harmonized” price database for calibration
• Case of co-products
• Creation of Ethanol and Biodiesel (2008 trade and production structure).
• Correction of some I-O data (e.g. China)
• Land use (AEZ GTAP database 2001  2004, + consistency with
FAO and M3)
• Correction for Sugar cane AEZ in Brazil
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19. BASELINE
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20. Defining a Relevant Baseline
• Macroeconomic targets
• Growth
• Oil prices
• EU fuel consumption for Road transportation
• Technology and yields
• Policies
• Trade policies
• Ag policies
• Biofuel policies:
• EU and US: 2008 blending rate
• Brazil (Biodiesel mandate, flex for ethanol)
• Mandate in China, ASEAN and Rest of OECD
• One issue: exchange rate USD
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21. Effects EU AD/CD on US Biodiesel
2.00
1.80
Million Tons of Oil Equivalent
1.60 United States
1.40
Rest of OECD
1.20
(Mtoe)
Other Latin American Countries
1.00 (inc. Argentina)
0.80 Indonesia and Malaysia
0.60 China
0.40 Brazil
0.20
0.00
2008 2020
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22. Annual Growth in Yields (baseline)
4
3
2
1
0
-1
Land allocation Fertilizer Factor intensity Technical progress
-2
EU
EU
EU
EU
EU
EU
US
US
US
US
US
US
Brazil
Brazil
Brazil
Brazil
Brazil
Brazil
Maize Rapeseed Soybeans Sugar cane Sunflower Wheat
or beet
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23. RESULTS
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24. Defining a Central Scenario
• Scenario 1 - Mandate Policy: Implementation of the EU [6% of an
overall fuel consumption of 316 Mtoe, of which 40% will be ethanol]
and US [RFS2] biofuel mandates of targeted consumption of ethanol
and biodiesel in 2020, under a Business as Usual trade policy
assumption;
• Scenario 2 - Mandate and Trade Liberalization: Implementation of
the EU and US biofuel mandates of targeted consumption of ethanol
and biodiesel in 2020, with the assumption of full, unilateral, trade
liberalization in biofuels in both countries;
• Scenario 3 - Mandate without Sugarcane Ethanol:
Implementation of the EU and US biofuel mandates of targeted
consumption of ethanol and of biodiesel in 2020, without sugarcane
ethanol imports, under a Business as Usual trade policy assumption.
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25. Domestic Biofuels Production (2020
compared to baseline)
200%
+ 578%
150%
% Change over baseline
100%
50%
0%
-50%
-100%
Biodiesel Ethanol
Mandate Mandate and Trade Liberalization
Mandate without Sugarcane Ethanol
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26. Price changes (2020, compared to baseline)
8%
7%
6%
5%
4%
3%
2%
1%
0%
Mandate Mandate and trade liberalization Mandate without sugarcane ethanol
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27. Regional Food Prices (2020, compared to baseline)
1.0%
0.8%
0.6%
0.4%
0.2%
0.0%
-0.2%
Mandate Mandate and trade liberalization Mandate without sugarcane ethanol
-0.4%
All Animal Primary All Animal Primary All Animal Primary
crops food crops food crops food
EU27 SSA US
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28. Agricultural Value Added (compared to
baseline, 2020)
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29. Oil Prices
Mandate
10%
Mandate and Trade
8% Liberalization
6% Mandate without Sugarcane
Ethanol
% Change over Baseline
4%
2%
0%
-2%
-4%
Oil Fuel Price
-6%
-8%
World Brazil European Union United States
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30. Real Income and Terms of Trade
Real Income (%) Terms of Trade (%)
US US
SSA SSA Mandate
Mandate
LAC LAC
Mandate and trade
IndoMalay liberalization IndoMalay Mandate and
Mandate without trade
EU27 sugarcane ethanol EU27 liberalization
CIS CIS Mandate without
sugarcane
China China ethanol
CAMCarib CAMCarib
Brazil Brazil
-1.0% -0.5% 0.0% 0.5% -2.0%-1.0% 0.0% 1.0% 2.0% 3.0%
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31. Cropland extension (Mha)
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32. Source of crop land extension
Pasture Managed forest Savannah/cerrado/grassland Primary forest
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Mandate Mandate and Mandate Mandate Mandate and Mandate
trade without trade without
liberalization sugarcane liberalization sugarcane
ethanol ethanol
Brazil World
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33. Carbon Balance Sheet
Mandate and Mandate without
trade sugarcane
Mandate liberalization ethanol
Total carbon release
from land use 845.2 801.9 818.4
(MtCO2eq)
Marginal carbon
reimbursement rate -74.3 -81.4 -40.6
(MtCO2 per year)
EU+US Consumption
of biofuel in 2020 2502 2524 2069
(million GJ)
Annual carbon release
from land use 38.8 36.2 57.81
(gCO2eq/MJ)
Annual direct savings
(gCO2/MJ) -59.6 -64.2 -49.9
Total emission balance
over a 20-year period -20.8 -28 7.92
(gCO2/MJ)
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34. Conclusions
• EU and US biofuels policies slightly costly in
terms of Real Income for the World
• For both regions, the oil price effects is critical to
assess the economic effects
• Brazil will be the main winner [under our assumption,
especially about ethanol on the EU market] and the
region the most affected in terms of land use change
• Sugar Cane Ethanol plays a key role to:
• Limit the effects on food prices
• Improve gains for the consumers at the pump
• Reach a positive environmental outcome
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35. To Sum Up:
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