This study seeks to clarify the interactions between different biofuel policy scenarios and their potential impacts on global agricultural markets and on the environment, particularly on production, trade, welfare, land use and CO2 emissions. The primary goal is to analyze the potential impacts of the EU and US biofuels mandates on world biofuels markets. It focuses on Brazil, and not on other developing countries in Latin America or other regions, because of the importance of Brazil in international ethanol markets. For example, within Latin America, Brazil accounts for more than 95% of ethanol exports. This is amplified in some countries in the region, especially those in Central America and the Caribbean, where most of the ethanol exports are re-exports from Brazil.
This evaluation focuses on the impacts of the mandates on (a) the distribution of global production, consumption and trade; (b) the prices of agricultural products and of fuel to consumers; (c) value added, real income and terms of trade; (d) changes in land use; and (e) the balance of emissions of GHGs associated with the liquid fuel market, counting both the direct reduction of GHG emissions from the replacement of fossil fuels with biofuels, as well as emissions from land-use change.
Although the study covers both the biodiesel and ethanol markets, it provides greater emphasis on the evaluation of impacts of policies on the ethanol market. This emphasis on ethanol arises from the greater expansion in ethanol, relative to the biodiesel market, that results from both the US and EU mandates, and the concentration of initial high levels of trade protection in the sector. With the stronger slant towards ethanol and the acknowledged importance of Brazil in the global biofuel market, this study also analyses the hypothetical impacts of limited consumption of sugarcane ethanol on the US and EU markets, including the impacts of biofuel consumption targets on GHG emissions.
This study builds on an earlier International Food Policy Research Institute (IFPRI) study by Al-Riffai, Dimaranan, and Laborde (2010) that analyzes the impact of possible changes in EU biofuel and trade policies on global agricultural production and the environmental performance of the EU biofuel policy as concretized in the RED. The quantitative analysis of the global economic and environmental impact of first-generation biofuel development was conducted using an extensively modified version of the Modeling International Relationships in Applied General Equilibrium (MIRAGE) global, dynamic computable general equilibrium (CGE) model, which captures domestic intersectoral relationships and interregional linkages in the global economy. Primary among the major methodological innovations introduced in this new MIRAGE model (MIRAGE-BIOF) is the new modeling of energy demand, which allows for substitutability between different sources of energy, including biofuels. This is facilitated by the extension of the underlying Global Trade Analysis Project (GTAP) database, which separately identifies ethanol with four subsectors, biodiesel, five additional feedstock crop sectors, four vegetable oils sectors, fertilizers and the transport fuel sectors. The model was also modified to account for co-products generated in the ethanol and biodiesel production processes and their role as inputs to the livestock sector. Fertilizer modeling was also introduced to allow for substitution with land under intensive or extensive crop production methods. Finally, another major innovation is the introduction of a land use module, which allows for substitution between land classes, classified according to AEZs and land-extension possibilities. This land-use module enables assessment of the GHG emissions (focusing on CO2) associated with land-use changes.
In this study commissioned by the Inter-American Development Bank (IDB), the MIRAGE-BIOF model was further improved with data for Brazil obtained from Brazil’s Institute for International Trade Negotiations, including information from the Brazilian Land Use Model (BLUM).
A brief review of biofuel policies in the EU, US and Brazil is provided in section 2. Section 3 includes an overview of the data development and model development involved in the study. The baseline scenario and alternative trade policy scenarios analyzed in the study are presented in Section 4. Results and discussions are provided in Section 5, and concluding remarks are given in Section 6.

By: P. Al-Riffai, B. Dimaranan, D. Laborde (IFPRI)

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