Ethanol Featured Articles
Impacts of Ethanol on Planted Acreage in Market Equilibrium
By Hongli Feng and Bruce A. Babcock of Center for Agricultural and Rural Development, Iowa State University.
Introduction
The urgency of assessing the impacts of biofuels on land use is underscored by two recent events. First, the Energy Independence and Security Act of 2007 (EISA) directs the government to support the development of analytical tools for assessing greenhouse gas emissions of biofuels, including “emissions related to direct and indirect land use changes.” Second, recent research, notably two articles published in Science, has shown that instead of mitigating climate change, the use of biofuels may actually increase greenhouse gas emissions when land use impacts are taken into account (Searchinger et al. and Fargione et al.). To what extent biofuels can reduce greenhouse gas emissions is vital to the future of the sector because EISA requires that carbon reduction thresholds be met before biofuels can be counted as contributing toward mandates. Besides this federal government requirement, California and many other states have established low carbon standards for transportation fuels. The appropriate assessment of land use changes, which are often associated with large changes in carbon emissions, will be essential to the assessment of the greenhouse impacts of biofuels.
Despite the importance of the issue, it is not clear just how land use changes should be assessed. There is even skepticism about whether land use changes can be rigorously modeled. Land use changes as a result of biofuel production are often divided into direct and indirect land use changes. Different definitions have been given to these seemingly straightforward concepts (e.g., Wang and Haq, and O’Hare). In general, it appears that direct land use changes refer to changes directly associated with the production of feedstock for biofuels. Any other land-related changes are considered indirect land use changes. According to Dale, while direct land use change is a legitimate subject, the “indirect land use change caused by biofuel production is tenuous, uncertain and highly speculative.”
To date, most studies that examine the land use impacts of biofuels do not consider market reactions in response to biofuels production (e.g., Feng et al., Righelato and Spracklen, and Fargione et al.). Feng et al. pointed out that carbon emissions on land before and during land conversion can be larger than the emissions avoided by biofuels. Similarly, Righelato and Spracklen, and Fargione et al. compared the carbon impacts of using land for biofuels versus using the same land directly as a carbon sink through trees, grasses, and/or soil. Both studies found that the latter outweighed the former in its impact. How biofuels production changes crop prices, how price changes induce the clearing of forests or other land, and how corn and other crops compete for cropland were not examined in these studies.
There are only a handful of studies thus far that take into account crop markets in estimating land use impacts of biofuels. In Searchinger et al., crop supply and demand were studied in the context of international commodity markets. They estimated new demand for cropland and then assigned it to different regions based on historical conversion patterns that might not be plausible in the context of biofuel expansion. Sweeney and Hertel performed a comprehensive general equilibrium analysis on the land use impacts of biofuels. Real-world market forces were well represented by their simulation framework. However, it is often challenging for non-expert readers to see interactions among essential drivers because they are contained in the “black box” of the simulation models. Further, as acknowledged by Birur et al. in a related analysis, the usefulness of these models is limited by the availability and quality of data, and this can also be a source of criticism of analyses based on such models. Given the skepticism surrounding land use modeling, simple and transparent analyses can facilitate an understanding of fundamental issues.
In this paper, we develop a simple but rigorous analytical framework that embodies major essential economic forces affecting land use decisions: the allocation of land between crops, input use, crop markets and prices, land markets, and yield improvement. Our analysis is closely related to the large literature on land allocation and input use decisions that has no direct connection to biofuels (e.g., Arnade and Kelch, Orazem and Miranowski, Chavas and Holt). In most of these papers, the acreage allocation decisions are considered for a given fixed total cropland area. In our paper, we link the acreage allocation decisions with responses in total cropland area. We show how changes in crop supply are determined by adjustments in input use, land share, and total cropland area.
Through the integrated framework of ethanol and land use decisions, we study the drivers behind land use changes in different policy contexts: (i) a laissez-faire environment without government intervention; (ii) government subsidies for ethanol production; and (iii) government mandates on ethanol quantity, which can act as either minimums or maximums that constrain the ethanol industry. Yields can have major impacts on land use changes. Higher yields have been touted as a key solution to the competition between food, fuel, and wilderness (Farrell, Monsanto, and Zulauf). However, if higher yields mean more profitable farming, yield increases could induce cropland expansion. Within our analytical framework, we are able to make some general predictions with regard to the land use impacts of higher biofuel prices or government incentive programs. The role of higher yields is shown to be different under different policy scenarios.
Concluding remarks
When agricultural crops are converted to transportation fuels, a direct link is created between crop markets and crude oil markets. Without government intervention, this means that higher crude oil prices will result in higher corn prices. Until recently, at relatively low crude oil prices, the biofuel industry has largely depended on the government for development or even survival. If crude oil prices persistently stand at over $120 a barrel, then the biofuel industry can expand without government support. Such expansion will lead to more land being converted to cropland because more biofuel production means higher demand for agricultural crops, which in turn means higher net return to cropland. In such situations, government intervention would be needed to prevent the loss of forest and grass land.
Our simple framework can assist the understanding of some of the most basic issues related to land use and biofuels. For example, upon careful examination, we show that the distinction between direct and indirect land use changes seems to be much less obvious than commonly assumed. Somewhat counter-intuitively, higher yields will not necessarily relieve the pressure on cropland expansion as many have argued or hoped. If anything, under free market conditions, higher yields for a crop that is used for biofuels will lead to even more land going into agricultural production. This is because higher yields mean higher profits on a given acre, unless output prices decrease dramatically. If biofuels account for only a small percentage of transportation fuel, as they do now, a greater supply of biofuels will not significantly depress fuel prices, which in turn implies that crop prices will not decrease significantly. However, higher yields can lead to a reduction in cropland area if government mandates act as a ceiling of allowed biofuels. The intuition is that with higher yields, less area is needed to supply the world’s need for food and (a fixed quantity of) biofuels.
Further Reading
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June 2008
