A Computable General Equilibrium Analysis of Biofuel Promotion Policy in Thailand

Thailand’s economy is susceptible to global energy crises because about half of its energy supplies are sourced from overseas. Consequently, in January 2009, the National Energy Policy Council approved a 15-year renewable energy development plan (2008-2022) focusing on increasing the use of domestic alternative energy, particularly biomass fuel to replace fossil fuel imports. However, at this stage there is limited knowledge about the economic implications of implementing this plan, including the price effects and output impacts on other sectors. The main objective of this study is to develop a computable general equilibrium (CGE) model for Thailand which features several energy-specific enhancements. A database for 2008 was constructed by utilising data from the most recently available 2005 Thailand Input-Output table and various additional sources of information. The model is employed to simulate a number of potential policies to achieve the biofuel targets contained in the 15-year renewable energy development plan. The first set of four experiments conducted on bio-liquid fuel policy include: (i) promoting moderate use of ethanol by discontinuing gasoline-95 use and promoting E20; (ii) promoting aggressive use of ethanol by discontinuing gasoline-95 use, promoting E20, and discontinuing gasoline-91 use; (iii) promoting moderate use of biodiesel by setting B4 as standard diesel and B7 as alternative diesel; and (iv) promoting aggressive use of biodiesel by setting B5 as standard diesel and B10 as alternative diesel. The second set of four policy experiments conducted on biomass-based energy policy include: (i) allowing small power producers (SPPs) to sell an additional 136 MW of biomass-generated electricity; (ii) allowing very small power producers (VSPPs) to sell an additional 136 MW of electricity; (iii) allowing SPPs to sell an additional 136 MW of biomass-generated electricity and 1,066 MW for VSPPs; and (iv) implementing the third policy combined with promoting other agricultural waste use in electricity generation. The third set of four experiments of integrated biofuel policy include: (i) promoting ethanol and biodiesel use with no increase in fuel tax rates on gasohol constant; (ii) promoting ethanol and biodiesel use with increase in fuel tax rates on gasohol to neutralise the fuel tax revenue; (iii) promoting ethanol, biodiesel, and bioelectricity use, while holding the adder cost (subsidy) paid to VSPPs constant; and (iv) promoting ethanol, biodiesel, and bioelectricity use with increasing the adder cost to 0.5 baht per kWh. The simulation results indicate that in the short run, the integrated policy of promoting biofuel use tends to cause an adverse impact on the economy due to a decline in employment and consumption, while in the long run, the adverse effect on the economy is reversed via an increase in aggregate investment and real wages. Biofuel and biofuel feedstock sectors are the major beneficiaries including construction, mining, and non-metallic products. There is a moderate decline in imports of fossil fuels, while food security is not jeopardised by the policy as it causes no significant increase in food prices. In addition, implementing the bio-liquid fuel promotion policy is likely to achieve the target for biodiesel but not for ethanol. This is because the target for ethanol use is too high given the current structural constraints. Other measures such as setting E20 as standard gasohol and promoting E85 use should be implemented at a later stage. In addition, the policy of discontinuing gasoline use, replacing B2 with B5, and B5 with B10 needs to be phased in to avoid a shortage of ethanol and biodiesel. Furthermore, implementing the biomass-based electricity promotion policy is unlikely to be achievable due to a large increase in the prices of biomass. Therefore, increasing the government subsidy paid to biomass-based VSPPs to 0.5 baht per kWh could be an alternative measure to promote the use of bioelectricity. The work begun in this study could be extended in future work by expanding the database to include modern biofuels such as jatropha curcas biodiesel and cellulosic ethanol as well as electricity from wind and solar energy. Future work could also incorporate carbon emissions, given concerns over climate change and the need to consider how Thailand could benefit from carbon credits