Biofuels, Policy Options, and Their Implications: Analyses Using Partial and General Equilibrium Approaches

In this chapter, we highlight some important aspects of biofuels development and policies from partial and general equilibrium perspectives. We first examine US biofuel policy backgrounds to determine factors which caused the boom in the ethanol industry in recent years. Then, we use a partial equilibrium model to investigate the economic consequences of further expansion in the ethanol industry for the key economic variables of the US agricultural and energy markets. This analysis is done for a range of alternative policy options and crude oil prices. Finally, we extend our analyses to examine consequences of further biofuel production at a global scale. This chapter shows that biofuels policies such as the blending subsidies and the effective ban on use of MTBE have had significant impacts on US biofuel expansion in recent years. In addition, the increased price of crude oil has significantly contributed to biofuel expansion. Our analyses indicate that corn ethanol is economic without a subsidy at crude oil prices more than $60 per barrel (even though subsidies persist in the United States), but biodiesel would not exist even at high crude oil prices without government subsidies. Both ethanol and biodiesel production involve potentially large land use changes that take place all over the world. The model and data used for land use change analysis illustrated here need improvement. However, the preliminary results illustrate the kinds of estimated changes that can be produced from the global analysis.