A Dynamic General Equilibrium Analysis Of U.S. Biofuels Production

With the rising global interest in energy security and climate change mitigation, biofuels have gained the prominent attention of researchers and policy makers. The U.S. has emerged as the leading producer of biofuels and is aiming for achieving a target of 36 billion gallons of renewable fuels by 2022 under its updated renewable fuels standard (RFS2) policy. In this paper, we study the longer-term global implications of large-scale renewable fuels production in the U.S. We utilize the GTAP v7.1 data base and introduce a detailed breakdown of agricultural crops, first and second generation biofuels and by-products. We update this fully disaggregated data base to reflect the 2010 global economy, based on secondary data for the sectors and regions included. We adapt the Applied Dynamic Analysis of Global Economy (ADAGE) model developed by Ross (2009) into a recursive dynamic framework and introduce agriculture, biofuels, and land use linkages. We construct a dynamic baseline from 2010 through 2050 in five-year time steps. The dynamics in the model comes from growth in GDP, population, capital accumulation, labor productivity, growth in natural resource stocks, and technological changes in the energy intensive and agricultural sectors. We implement a representative RFS2 policy scenario in the U.S for 2025, using two alternative approaches: (i) RFS permits approach – which assumes biofuels and petroleum fuels are perfect substitutes after adjusting for energy content, and (ii) Target share of biofuels in transportation fuels approach – which treats biofuels and petroleum fuels as imperfect substitutes. Both approaches offer insights regarding potential policy impacts, particularly on the international market and indirect land use change. Because the share approach keeps the biofuels share fixed in the regions outside the U.S., it does not result in dramatic changes in the rest of the world. In the permits approach, however, the regions without a specific policy requiring a given level of biofuels tend to reduce biofuels consumption. This is a result of the reduction in relative price of petroleum products as U.S. policy increases demand for biofuels and reduces global demand for petroleum, making renewable fuels less cost-competitive in the rest of the world.