COLBY EC 476 - Journal of Agricultural & Food Industrial Organization

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Journal of Agricultural & FoodIndustrial OrganizationVolume 5 2007 Article 1SPECIAL ISSUE:Explorations in Biofuels Economics, Policy, and HistoryExplorations in Biofuels Economics, Policy,and History: Introduction to the Special IssueBruce Gardner∗Wallace Tyner†∗University of Maryland, College Park, [email protected]†Purdue University, [email protected]2007 The Berkeley Electronic Press. All rights reserved.Explorations in Biofuels Economics, Policy,and History: Introduction to the Special IssueBruce Gardner and Wallace TynerAbstractBiofuels are prominent in current discussion both as a solution to problems and as a creatorof problems. They have promise as a substitute for fossil fuels, particularly for petroleum as theraw material for transportation fuel. But biofuels also have pitfalls, especially when produced at ascale sufficient to replace a significant proportion of the world’s use of petroleum. The articles inthis special issue analyze key aspects of both the promise and pitfalls of biofuels. They address is-sues in the technology of producing raw materials for biofuels and converting these raw materialsinto fuel, resource constraints facing expansion of biofuel production, and the demand for fuels.Particular attention is paid to the relationship between expanded biofuel production and the costof food. The economics of biofuels is inherently linked to policy issues as well as market anal-ysis because biofuels in every country have received subsidies from governments. Consequentlyseveral articles address the welfare economics of governmental efforts to promote biofuels, with afocus on U.S. ethanol subsidies. These subsidies generate net social losses (deadweight costs) on aglobal scale, although not necessarily from the U.S. national viewpoint. Governmental promotionof biofuels can be justified on the grounds of externalities created by the use of fossil fuels, mostnotably in recent debates on global warming caused by the release of sequestered carbon in theform of carbon dioxide. This justification is weakened and perhaps even nullified by externalitiesin the production and use of biofuels. The articles in this issue consider a range of topics con-cerning these matters, and the welfare losses caused by biofuel subsidies absent net environmentalgains from biofuels.KEYWORDS: biofuels, ethanol, biomass, subsidy, policy, economic historyThis issue of the Journal of Agricultural & Food Industrial Organization contains ten articles devoted to a single topic, biofuels. The main focus is on the economics of biofuels and related policies, but the articles also address the history and prospective technology of biofuel production. In keeping with the agricultural and food subject matter of JAFIO, several of the articles analyze the resource and cost constraints involved with the use agricultural products as biofuel feedstocks, and the competition between fuel and food in the uses of agricultural resources. Biofuels are energy sources derived from recently living organic material, as opposed to fossil fuels. Biofuels have a long history, with intensified attention in recent years as fossil fuels have become more costly and the benefits of leaving their carbon sequestered underground become more salient. In the United States, biofuels policy has had its greatest effects through ethanol from corn. In Brazil, ethanol from sugar cane dominates. Other feedstocks, and biofuels other than ethanol, are also on the political agenda in these countries and elsewhere. Recent attention has moved in the direction of biofuels from cellulosic feedstocks. Topics that must be analyzed to provide a full picture of the situation and outlook for biofuels, and to provide estimates of the benefits and costs of policy options, include the following: • Demand for biofuels, as related to fossil fuel markets, particularly for crude oil • Industrial organization, economies of scale, and technological change in the biofuels industry • Derived demand for feedstocks, particularly agricultural commodities. • Supply of feedstock alternatives, including resource constraints on feedstock production, in land, water, and capital investment • Environmental benefits and costs in the production and use of biofuels and associated feedstocks • Interrelationships between biofuel and food markets, in competition for land and water, and in the use of feed by-products in biofuel production • International trade in biofuels • Impacts of biofuels policies on global poverty and hunger • Evaluation of policy options for biofuels including subsidies and mandated use of biofuels The articles in this issue of JAFIO pay most attention to the policy choices centered upon the subsidization of ethanol from corn. Ethanol subsidies are important politically because they link biofuels in energy policy with agricultural policy. Ethanol subsidies raise questions related to each of the topics listed above. In the context of U.S. ethanol policy, the issues include: • To what extent is the U.S. demand for fuel ethanol created by ethanol policy, as compared to the price of crude oil or other economic forces? 1Gardner and Tyner: Biofuels Economics, Policy, and HistoryProduced by The Berkeley Electronic Press, 2007• To what extent does the U.S. ethanol program reduce demand for oil imports and potentially provide welfare benefits through reduced oil prices? • What is the distribution of gains and losses from ethanol subsidies among corn producers, the ethanol production industry, owners of agricultural land, and buyers of ethanol-related products? • What is the extent of spillover effects between the market for corn and other agricultural products, both crops and livestock, and consumer food prices? • What are the resource/environmental effects of additional corn produced for use in ethanol, and of substituting ethanol for crude oil as a fuel source? • How do U.S. ethanol subsidies and import restrictions affect international trade, in corn and crude oil as well as ethanol itself? • What are the overall benefits and costs of the U.S. ethanol subsidy? Most of the preceding topics are addressed in the articles of this issue, some in more depth than others. Following are highlights: “Policy Alternatives for the Future Biofuels Industry,” which leads off, reviews the history of U.S. biofuels policy, with its focus on ethanol. It then goes on to consider the


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COLBY EC 476 - Journal of Agricultural & Food Industrial Organization

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