A dynamic analysis of U.S. biofuels policy impact on land use, greenhouse gas emissions and social welfare

Biofuels have been promoted to achieve energy security and as a solution to reducing greenhouse gas (GHG) emissions from the transportation sector. This dissertation presents a framework to examine the extent to which biofuel policies reduce gasoline consumption and GHG emissions and their implications for land allocation among food and fuel crops, food and fuel prices and social welfare. It first develops a stylized model of the food and fuel sectors linked by a limited land availability to produce food and fuel crops. It then analyzes the mechanisms through which biofuel mandates and subsidies affect consumer choices and differ from a carbon tax policy. A dynamic, multi-market equilibrium model, Biofuel and Environmental Policy Analysis Model (BEPAM), is developed to estimate the welfare costs of these policies and to explore the mix of biofuels from corn and various cellulosic feedstocks that are economically viable over the 2007-2022 period under alternative policies. It distinguishes biofuels produced from corn and several cellulosic feedstocks including crop residues (corn stover and wheat straw) and bioenergy crops (miscanthus and switchgrass). A crop productivity model MISCANMOD is used to simulate the yields of miscanthus and switchgrass. The biofuel policies considered here include the biofuel mandate under the Renewable Fuel Standard (RFS), various biofuel subsidies and import tariffs. The effects of these policies are compared to those of a carbon tax policy that is directly targeted to reduce GHG emissions. The stylized model shows that a carbon tax can reduce gasoline consumption and lower GHG emissions, and is likely to increase biofuel consumption with a higher elasticity of substitution between gasoline and biofuels and an elastic supply of gasoline. A biofuel mandate would reduce gasoline consumption, but the effects on GHG emissions depend on parameters in the fuel sector, such as the demand elasticity of miles, the elasticity of substitution between gasoline and biofuels and the supply elasticity of gasoline. A biofuel mandate accompanied with subsidies would create incentives to increase the consumption of the blended fuel by lowering its price. Gasoline consumption and GHG emissions would increase under the mandate and subsidy relative to a mandate alone. The numerical simulation is used to analyze the impacts of biofuel mandate and subsidies relative to a carbon tax. We find a biofuel mandate alone leads to a welfare gain of 0.1% while reducing GHG emissions by 1% relative to a carbon tax of $30 per ton of CO2e (Carbon dioxide equivalent). However, it would increase corn and soybean prices in 2022 by 19% and 20% relative to the carbon tax. The provision of biofuel subsidies that accompany the mandate under the RFS significantly changes the mix of bofuels in favor of cellulosic biofuels produced from high yielding perennial grasses and reduces the adverse impact of RFS alone on food prices. Biofuel mandates and subsidies also reduce GHG emissions by 3% relative to the carbon tax but at a welfare cost of $106 B relative to the tax. To meet the cellulosic biofuel mandates, a mix of feedstocks (corn stover, wheat straw, switchgrass and miscanthus) is used, where the mix differs over time, with biofuels from miscanthus meeting about 90% of the cellulosic ethanol produced between 2007- 2022. Corn stover comes primarily from the plain states while wheat straw is collected mainly in the central and northern plains and western mountain states. Production of miscanthus is more concentrated in the Great Plains and in the Midwest and along lower reaches of the Mississippi river. Switchgrass, though not as competitive as miscanthus in terms of yields and costs of production in most parts of the country, is still produced in a significant amount in northern and central Texas and Wisconsin where miscanthus yields are relatively low. We then analyze the implications of imposing import tariffs on biofuels for social welfare and GHG emissions in an open economy considering trade in biofuels. When biofuel mandates and subsidies are in place, the imposition of import tariffs would significantly reduce the imports of sugarcane ethanol by 28% relative to biofuel mandates and subsidies. It also results in a higher GHG intensity of the blended fuel and marginally increases GHG emissions but raises social welfare by 0.01% relative to biofuel mandates and subsidies