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Handbook of bioenergy economics and policy volume II modeling land use and greenhouse gas implications

Natural Resource Management and Policy
Series Editors: David Zilberman · Renan Goetz · Alberto Garrido

Madhu Khanna
David Zilberman Editors

Handbook
of Bioenergy
Economics and
Policy: Volume II
Modeling Land Use and Greenhouse
Gas Implications


Natural Resource Management and Policy
Volume 40

Series editors
David Zilberman, California, USA
Renan Goetz, Girona, Spain
Alberto Garrido, Madrid, Spain



There is a growing awareness to the role that natural resources, such as water, land,
forests and environmental amenities, play in our lives. There are many competing
uses for natural resources, and society is challenged to manage them for improving
social well-being. Furthermore, there may be dire consequences to natural resources
mismanagement. Renewable resources, such as water, land and the environment are
linked, and decisions made with regard to one may affect the others. Policy and
management of natural resources now require interdisciplinary approaches including
natural and social sciences to correctly address our society preferences.
This series provides a collection of works containing most recent findings on
economics, management and policy of renewable biological resources, such as
water, land, crop protection, sustainable agriculture, technology, and environmental
health. It incorporates modern thinking and techniques of economics and
management. Books in this series will incorporate knowledge and models of
natural phenomena with economics and managerial decision frameworks to assess
alternative options for managing natural resources and environment.

More information about this series at http://www.springer.com/series/6360


Madhu Khanna David Zilberman


Editors

Handbook of Bioenergy
Economics and Policy:
Volume II
Modeling Land Use and Greenhouse Gas
Implications

123


Editors
Madhu Khanna
Department of Agricultural and Consumer
Economics
University of Illinois at Urbana-Champaign


Urbana, IL
USA

David Zilberman
Department of Agricultural and Resource
Economics
University of California at Berkeley
Berkeley, CA
USA

ISSN 0929-127X
ISSN 2511-8560 (electronic)
Natural Resource Management and Policy
ISBN 978-1-4939-6904-3
ISBN 978-1-4939-6906-7 (eBook)
DOI 10.1007/978-1-4939-6906-7
Library of Congress Control Number: 2017930613
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Contents

Bioenergy Economics and Policy in US and Brazil: Effects
on Land Use and Greenhouse Gas Emissions . . . . . . . . . . . . . . . . . . . . . .
Madhu Khanna and David Zilberman
Part I

Market and Policy Incentives for Biofuel Production
in the US and Brazil

US Biofuel Policies and Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gal Hochman, Michael Traux and David Zilberman
The Sugarcane Industry and the Use of Fuel Ethanol in Brazil:
History, Challenges, and Opportunities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Márcia Azanha Ferraz Dias de Moraes, Luciano Rodrigues
and Scott Kaplan
Incentives and Barriers for Liquid Biofuels in Brazil . . . . . . . . . . . . . . .
Luiz Augusto Horta Nogueira and Rafael Silva Capaz
Prospects for Biofuel Production in Brazil: Role of Market
and Policy Uncertainties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maria Paula Vieira Cicogna, Madhu Khanna and David Zilberman
Part II

1

15

39

65

89

Land Use and Greenhouse Gas Effects of Biofuel
Production in the US and Brazil

Biofuel Life-Cycle Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121
Jennifer B. Dunn, Jeongwoo Han, Joaquim Seabra and Michael Wang
Effect of Biofuel on Agricultural Supply and Land Use . . . . . . . . . . . . . . 163
David Zilberman, Deepak Rajagopal and Scott Kaplan
Global Land Use Impacts of U.S. Ethanol: Revised Analysis
Using GDyn-BIO Framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 183
Alla A. Golub, Thomas W. Hertel and Steven K. Rose

v


vi

Contents

Land Use and Greenhouse Gas Implications of Biofuels:
Role of Technology and Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 213
Xiaoguang Chen and Madhu Khanna
Modeling Bioenergy, Land Use, and GHG Mitigation with
FASOMGHG: Implications of Storage Costs and Carbon Policy . . . . . . 239
Robert H. Beach, Yuquan W. Zhang and Bruce A. McCarl
Empirical Findings from Agricultural Expansion and Land
Use Change in Brazil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 273
Leila Harfuch, Luciane Chiodi Bachion, Marcelo Melo Ramalho Moreira,
André Meloni Nassar and Miguel Carriquiry
Land Use Change, Ethanol Production Expansion and Food
Security in Brazil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 303
Joaquim Bento de Souza Ferreira Filho and Mark Horridge
Lessons from the ILUC Phenomenon . . . . . . . . . . . . . . . . . . . . . . . . . . . . 321
Michael O’Hare and Richard J. Plevin
Part III

Feedstocks for Cellulosic Biofuels: Production Risks
and Risk Management

Innovation in Agriculture: Incentives for Adoption and Supply
Chain Development for Energy Crops. . . . . . . . . . . . . . . . . . . . . . . . . . . . 347
Madhu Khanna, David Zilberman and Ruiqing Miao
Effects of Liquidity Constraints, Risk and Related Time Effects
on the Adoption of Perennial Energy Crops . . . . . . . . . . . . . . . . . . . . . . . 373
Géraldine Bocquého
Contracting in the Biofuel Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 401
Xiaoxue Du, Madhu Khanna, Liang Lu, Xi Yang and David Zilberman
Part IV

Conclusions

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 429
David Zilberman, Madhu Khanna and Ben Gordon


Contributors

Robert H. Beach Agricultural, Resource & Energy Economics and Policy
Program, RTI International, Research Triangle Park, NC, USA
Géraldine Bocquého LEF, AgroParisTech, INRA, Nancy, France
Rafael Silva Capaz Institute of Natural Resources, Federal University of Itajubá,
Itajubá, Brazil
Miguel Carriquiry Universidad de la República, Montevideo, Uruguay
Xiaoguang Chen Research Institute of Economics and Management, Southwestern
University of Economics and Finance, Chengdu, China
Luciane Chiodi Bachion Agroicone, São Paulo, Brazil
Maria Paula Vieira Cicogna Polytechnic School, University of São Paulo, São
Paulo, Brazil
Xiaoxue Du Department of Agricultural and Resource Economics, University of
California at Berkeley, Berkeley, CA, USA
Jennifer B. Dunn Energy Systems Division, Argonne National Laboratory,
Argonne, IL, USA
Alla A. Golub Department of Agricultural Economics, Center for Global Trade
Analysis, Purdue University, West Lafayette, IN, USA
Ben Gordon Department of Agricultural and Resource Economics, University of
California at Berkeley, Berkeley, CA, USA
Jeongwoo Han Energy Systems Division, Argonne National Laboratory,
Argonne, IL, USA
Leila Harfuch Agroicone, São Paulo, Brazil
Thomas W. Hertel Department of Agricultural Economics, Center for Global
Trade Analysis, Purdue University, West Lafayette, IN, USA

vii


viii

Contributors

Gal Hochman Department of Agriculture, Food and Resource Economics,
Rutgers University, New Brunswick, NJ, USA
Mark Horridge Centre of Policy Studies, Victoria University, Melbourne, VIC,
Australia
Scott Kaplan Department of Agricultural and Resource Economics, University of
California at Berkeley, Berkeley, CA, USA
Madhu Khanna Department of Agricultural and Consumer Economics,
University of Illinois at Urbana-Champaign, Urbana, IL, USA
Liang Lu Department of Agricultural and Resource Economics, University of
California at Berkeley, Berkeley, CA, USA
Bruce A. McCarl Department of Agricultural Economics, Texas A&M
University, College Station, TX, USA
Ruiqing Miao Department of Agricultural Economics and Rural Sociology,
Auburn University, Auburn, AL, USA
Márcia Azanha Ferraz Dias de Moraes (USP—ESALQ, Department of
Economics, Administration and Sociology), University of São Paulo, São Paulo,
Brazil
Marcelo Melo Ramalho Moreira Agroicone, São Paulo, Brazil
André Meloni Nassar Agroicone, São Paulo, Brazil
Luiz Augusto Horta Nogueira Institute of Natural Resources, Federal University
of Itajubá, Itajubá, Brazil
Michael O’Hare Goldman School of Public Policy, University of California at
Berkeley, Berkeley, CA, USA
Richard J. Plevin Institute of Transportation Studies, University of California at
Davis, Davis, CA, USA
Deepak Rajagopal Institute of the Environment and Sustainability, University of
California at Los Angeles, Los Angeles, CA, USA
Luciano Rodrigues (USP—ESALQ, Department of Economics, Administration
and Sociology) and Specialist with Extensive Experience on the Sugarcane Industry
and Ethanol Market in Brazil, Applied Economics at the University of São Paulo,
São Paulo, Brazil
Steven K. Rose Electric Power Research Institute, Washington, DC, USA
Joaquim Seabra UNICAMP, Campinas, São Paulo, Brazil
Joaquim Bento de Souza Ferreira Filho Escola Superior de Agricultura “Luiz de
Queiroz”, Universidade de São Paulo, São Paulo, Brazil


Contributors

ix

Michael Traux Department of Agriculture, Food and Resource Economics,
Rutgers University, New Brunswick, NJ, USA
Michael Wang Energy Systems Division, Argonne National Laboratory,
Argonne, IL, USA
Xi Yang Department of Agricultural and Consumer Economics, University of
Illinois at Urbana-Champaign, Urbana, IL, USA
Yuquan W. Zhang Agricultural, Resource & Energy Economics and Policy
Program, RTI International, Research Triangle Park, NC, USA
David Zilberman Department of Agricultural and Resource Economics, University
of California at Berkeley, Berkeley, CA, USA


Bioenergy Economics and Policy in US
and Brazil: Effects on Land Use
and Greenhouse Gas Emissions
Madhu Khanna and David Zilberman

1 Overview
The biofuel industry has expanded since the start of the millennium. This expansion
was due to the desire to reduce dependence on foreign oil, to mitigate greenhouse
gas (GHG) emissions from the transportation sector and enhance rural economic
development. Brazil emerged as an early leader in biofuel production, producing 3
billion gallons of sugarcane ethanol in 2000 followed by the US producing 1.6
billion gallons from corn ethanol. Production expanded in both countries in the
following decade but much more significantly in the US which overtook Brazil as
the leading producer of ethanol in the world and shifted from an importer of
biofuels from Brazil to becoming an exporter of biofuels to Brazil. US production
rose to about 14 billion gallons in 2014 while production of sugarcane ethanol in
Brazil increased to about half of that.
There is a large body of literature that aims to address the economic, political
and technological aspects of the biofuel sector. The first volume of the Handbook of
Bioenergy Economics and Policy broadly covered the major economic and policy
issues associated with biofuel and bioenergy. This second volume focuses on three
major issues.

M. Khanna (&)
Department of Agricultural and Consumer Economics,
University of Illinois at Urbana-Champaign, Urbana, IL, USA
e-mail: khanna1@illinois.edu
D. Zilberman
Department of Agricultural and Resource Economics,
University of California at Berkeley, Berkeley, CA, USA
e-mail: zilber11@berkeley.edu
© Springer International Publishing AG 2017
M. Khanna and D. Zilberman (eds.), Handbook of Bioenergy Economics
and Policy: Volume II, Natural Resource Management and Policy 40,
DOI 10.1007/978-1-4939-6906-7_1

1


2

M. Khanna and D. Zilberman

First, what led to this over fourfold increase in total biofuel production in the two
countries? What role did market forces versus policy incentives play in explaining
these trends? Both the US and Brazil have had a mix of policy incentives to support
biofuel production over the last two decades. In particular, both countries have
relied on a biofuel mandate to accelerate blending of biofuels with gasoline beyond
the levels that would have been supported by the market. Were supply-side factors,
such as, limits to availability of land or feedstocks and high costs of production, or
demand-side factors, such as, the technical feasibility of blending biofuels with
gasoline responsible for the plateauing or even declining trend in biofuel production
observed in recent years in these two countries? Did the interaction of biofuel
policies with other policies create further incentives or barriers for the growth of the
biofuels sector? Several chapters in this book address these issues.
Second, as biofuel production from food crops in the two countries expanded,
concerns about the increasing diversion of cropland to biofuel crop production and
the conversion of noncropland to crop production have grown. These changes in
land use have implications for both food prices and for GHG emissions as carbon
stored in soils is released when land is converted to agricultural production. This
has led to considerable skepticism about the potential for biofuels to lead to GHG
savings relative to fossil fuels. Life cycle analysis has been used to assess the GHG
impacts of biofuels. Life cycle analysis of the GHG emissions accounts for all
emissions associated with the production of biofuel, including production of fertilizers and other inputs used to produce the feedstock, transport the feedstock to the
bio-refinery and conversion of the feedstock to biofuel at the refinery. The direct life
cycle emissions are expected to be relatively small with the next generation of
biofuels produced from cellulosic biomass from crop and forest residues and
dedicated energy crops. These feedstocks require fewer carbon intensive inputs in
the process of production. Energy crops can also sequester a large amount of carbon
in the soil and make the resulting biofuel a net sink for carbon rather than a source
(Dwivedi et al. 2015; Hudiburg et al. 2016). In addition to these direct emissions,
emissions can also be generated indirectly due to changes in land use caused by
biofuel-induced changes in crop prices and changes in fossil fuel use caused by
biofuel-induced changes in fuel prices. Estimating the extent to which the food
price increases and land use changes are caused by biofuels and would not have
occurred anyway is complicated since it relies on economic models to simulate
effects with and without biofuels. The outcomes of economic models are dependent
on their structure, parametric assumptions, and scenarios simulated (Khanna and
Crago 2012). Various chapters in this book describe improved methods for modeling the transformation of land from one use to another.
Third, the transition to second generation biofuel will require a shift toward new
crops that are yet to be grown commercially. The nascent commercial scale production of cellulosic biofuels that emerged in 2014 has relied largely on crop
residues for feedstock. Large scale production using energy crops has yet to occur
due to high costs of production, large capital requirements, and riskiness of production. Dedicated energy crops differ from the annual crops used for biofuels
because they are typically perennials with a lifespan of at least 10–15 years and a


Bioenergy Economics and Policy in US and Brazil …

3

lag of 1–5 years between planting and harvestable yield. What type of incentives
will be required to induce farmers to switch from an annual crop with
well-developed markets and subsidized crop insurance to an energy crop with thin
market demand that require a long-term commitment of land to recover investment
value? The rich literature on technology adoption suggests that there are mechanisms that can induce farmers to make long-term investments in risky crops,
including various types of contracts between farmers and feedstock refiners and
government policies such as subsidies and crop insurance that can protect both
farmers and the refiners. Furthermore, adoption of biofuel policy may be constrained by credit availability, which may call for other forms of intervention. There
is paucity of research on adoption of second generation biofuels and mechanisms
that will induce it and we aim to fill this gap.
The chapters in this book provide an economic framework to explore the issues
discussed above in greater detail. The chapters are grouped into three sections. The
first section describes the market forces and policy incentives that have contributed
to the development of the biofuel industry in the US and Brazil.
Biofuels emerged as an infant industry whose high costs of production required
high market prices or policy incentives that level the playing field with their
functionally equivalent fossil fuels. These chapters describe the type of biofuel
policies pursued in US and Brazil, differences in the structure of the fossil fuel
industry and the fossil fuel pricing policies and the differing role of the government
in providing demand-side incentives for biofuel production in the two countries. It
analyzes the implications of these different approaches for the outcomes over time
in the two countries.
The second section describes the methodological and conceptual issues involved
in assessing the direct and indirect life cycle GHG emissions and land use change
associated with biofuel production. Chapters in this section describe the life cycle
approach to GHG accounting, the rationale for including GHG emissions due to
direct and indirect land use change and the role of life cycle analysis in assessing
compliance with biofuel policies in the US and the European Union (EU). It also
discusses issues that arise in modeling land use change. Approaches ranging from
stylized models to partial domestic models to global general equilibrium models are
presented. These chapters describe the conceptual considerations that should be
incorporated and empirical strategies utilized by modelers to represent the determinants of land use change due to biofuels, the mix of biofuels, and feedstocks
likely to be produced under alternative policy scenarios and their global impacts on
food and fuel prices. These chapters also assess the extent to which biofuel policies
in the US and Brazil lead to land use change, the type of land use change likely to
occur and its economic and environmental consequences.
The last section includes chapters that discuss the issues related to developing a
supply chain for cellulosic biofuel feedstocks, including the contractual arrangements needed to induce biomass production. It includes chapters that review the
existing literature on contact design and incentives for technology adoption and
discuss the factors likely to influence farmer willingness to produce bioenergy crops
and the policies needed to overcome the barriers to do so.


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M. Khanna and D. Zilberman

Like Volume 1 of the Handbook, this volume will be of value for academic
audiences and policy analysts and for decision makers in industry and nongovernment organizations that are interested in understanding the economic impacts
of biofuels and their implications for land use, GHG emissions, energy, and food
prices. It will be a useful reference for scholars seeking a review of the current state
of knowledge and a comparative understanding of the biofuel industry in the two
leading producers of biofuels in the world, US and Brazil. The book provides
comprehensive coverage of not only issues that have affected the development of
the first generation of biofuels but also challenges facing the development of the
next generation of biofuels. This volume will also be of interest to practitioners and
managers in industry and agriculture who seek to understand the conceptual and
practical issues associated with implementation and use of bioenergy and economic
and policy dimensions of a growing bioeconomy. Policy makers will find useful
insights on the economic consequences of various policy alternatives to support
biofuel production. Scholars with an interest in renewable energy policy and its
effects on agriculture, trade, economic development, resource economics, and
public policy will appreciate the comparative analysis of US and Brazil biofuel
policies.
Similar to Volume 1, this book should also be attractive for educational purposes, for use as a textbook for courses and curricula associated with the emerging
field of bioenergy economics. As universities develop more specialized curriculum
centered around bioenergy, this book could serve as a supplementary reading to
familiarize students with applications of economic tools to analyze the economic
and environmental implications of bioenergy development and policies.

2 Market and Policy Incentives for Biofuel Production
in the US and Brazil
Chapter “US Biofuel Policies and Markets” by Hochman, Traux, and Zilberman
discusses the suite of biofuel policies established in the US, including the biofuel
mandate, the tax credit, and the import tariff to enable the infant biofuel industry to
develop. They compare the implications of these policies for food and fuel prices
and the costs of these policies to consumers, producers, and the government. This
chapter also describes the various indirect effects that biofuel production generate in
the food and fuel markets because they affect food and fuel prices. These include,
among others, the positive and negative indirect effects of biofuels, including the
land use change effect, the fuel rebound effect, and a balance of trade effect. The
chapter concludes by discussing the demand-side challenges to expanding ethanol
production due to the blend wall in the US.
Chapters “The Sugarcane Industry and the Use of Fuel Ethanol in Brazil:
History, Challenges and Opportunities,” “Incentives and Barriers for Liquid


Bioenergy Economics and Policy in US and Brazil …

5

Biofuels in Brazil,” and “Prospects for Biofuel Production in Brazil: Role of Market
and Policy Uncertainties” trace the development of the biofuel industry in Brazil.
Chapter “The Sugarcane Industry and the Use of Fuel Ethanol in Brazil: History,
Challenges, and Opportunities” by Moraes, Rodriguez, and Kaplan describes the
early stages of the development of the biofuel sector in Brazil and the institutional
factors that helped Brazil support not only increased production of ethanol but also
develop the infrastructure needed for its supply to consumers and the purchase of
flex-fuel cars that would enable its consumption by consumers. The military regime
in Brazil together with the state owned oil company Petrobras enabled the development of an integrated supply chain for biofuels that included production by mills,
distribution, and transportation as well as price incentives for biofuels and
ethanol-operated cars that made biofuels appealing to fuel consumers in the 1980s.
The chapter also discusses the post-deregulation period in the 1990s, the design of a
new institutional feedstock pricing arrangement between sugarcane growers and
mills to ensure fair remuneration to each group and the growth in demand for
flex-fuel cars which facilitated market-based incentives for production and consumption of ethanol.
Brazil has been able to establish a biofuel industry that sells ethanol in two
forms: anhydrous ethanol which is pre-blended with gasoline (to form gasohol) and
100% ethanol (hydrous ethanol) that fuel consumers can blend as they choose
depending on its price competitiveness with the pre-blended fuel whose price
depends in part on the price of gasoline. The government has regulated the domestic
price of ethanol to prevent it from fluctuating with the international price of oil in
order to limit inflationary pressures in Brazil. In recent years, the domestic price of
gasoline has remained below the international price. This together with the lowering
of the federal tax on gasoline has adversely affected the competitiveness of sugarcane ethanol. In Chapter “Incentives and Barriers for Liquid Biofuels in Brazil,”
Nogueira and Capaz focus on the post-2005 period of development of the sugarcane
ethanol industry and describe the adverse effect of government interventions in the
gasoline market on the ethanol industry. In contrast, support through mandates and
other financial incentives provided by the government for development of the
biodiesel industry to benefit small farmers in less developed rural areas has led to
exponential growth of the biodiesel industry. The chapter explains the contrast
between biodiesel versus ethanol markets and the policy toward gasoline versus
diesel markets.
In Chapter “Prospects for Biofuel Production in Brazil: Role of Market and
Policy Uncertainties” Cicogna, Khanna, and Zilberman discuss the role of market
and policy uncertainties in limiting incentives for investment in sugarcane ethanol
production in Brazil. Fuel taxes and tax credit for ethanol have played an important
role in improving the competitiveness of hydrous ethanol. Ethanol production costs
have been increasing over time while the tax on gasohol has been declining.
Fluctuations in these taxes and in the mandated blend rate have also added to


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M. Khanna and D. Zilberman

uncertainty about future demand for ethanol and limited incentives for investment.
This policy uncertainty has been accompanied by market uncertainties about the
price of ethanol, due to the absence of futures markets for ethanol. This chapter
discusses various options for mitigating market uncertainties, including mechanisms for storage of ethanol, diversifying the revenue stream by producing
co-generated electricity and cellulosic biofuels as co-products with sugarcane. It
concludes by discussing the prospects for cellulosic biofuel production in Brazil.

3 Land Use and Greenhouse Gas Effects of Biofuel
Production in the US and Brazil
Chapter “Biofuel Life-Cycle Analysis” reviews the methodology for life cycle
analysis of biofuels and its application for different biofuel pathways and the issues
associated with estimating direct and indirect land use change emissions due to
biofuels. Dunn, Han, Seabra, and Wang discuss various methodological choices,
such as the techniques for handling biofuel co-products, and range of estimates for
the GHG intensities of ethanol from corn, sugarcane, stover, switchgrass, and
miscanthus. They also describe how life cycle analysis is used to determine compliance with regulations in various countries and how estimates of the carbon
intensities of a biofuel differ across countries, feedstocks and with the inclusion of
land use change emissions. They show the extent to which estimates of land use
change emissions, in particular, vary considerably across studies.
Assessing the indirect land use effects of biofuels necessitates reliance on economic models that make a number of assumptions about the behavior of agents,
market structure and elasticities of supply, demand and transformation of land from
one use to another. General equilibrium models, in particular, rely on the
assumption that the elasticities are constant over time and across large regions
within a single agro-ecological zone. In Chapter “Effect of Biofuel on Agricultural
Supply and Land Use,” Zilberman, Rajagopal, and Kaplan question the assumptions that the elasticity of land use change with respect to agricultural prices is
constant over time. The authors develop a stylized dynamic model framework to
show that the responsiveness of land allocation between agricultural and environmental uses varies depending on changes in demand for agricultural and environmental goods, environmental regulations, and the evolution of the relationships
between output, land use, and variable input use over time. Moreover, the observed
land use changes and the observed changes in cropland rents in the US in recent
years indicate that cropland acreage at the extensive margin is fairly inelastic (Barr
et al. 2011). Relatively large changes in land rents in recent years have been
accompanied by very small changes in aggregate crop acreage. Although this


Bioenergy Economics and Policy in US and Brazil …

7

before and after biofuels comparison of land use change is different from the
analysis of with and without biofuels at a point in time done by general equilibrium
models, it does suggest a divergence between the observed phenomenon and the
simulated behavior. This calls into question the data and modeling assumptions
being made by the large scale static CGE and multi-market models such as those by
Searchinger et al. (2008).
Golub, Hertel, and Rose demonstrate this in Chapter “Global Land Use Impacts
of U.S. Ethanol: Revised Analysis Using GDyn-BIO Framework,” by developing a
dynamic computational general equilibrium (CGE) version of the GTAP model and
using it to compare the land use effects of a 15 billion gallon mandate with those
from a static CGE model. They examine the extent to which use of a dynamic
model leads to a decline in land use effect of biofuels it allows for increased
possibilities for intensification of production in the agricultural and forestry sectors,
growth in crop yields over time and changes in demand and supply elasticities over
time.
In Chapter “Land Use and Greenhouse Gas Implications of Biofuels: Role of
Technology and Policy,” Chen and Khanna use a dynamic partial equilibrium
model, BEPAM (Biofuel and Environmental Policy Analysis Model) which is an
integrated model of the agricultural and transportation sectors to compare the land
use and GHG effects of the RFS with those of the RFS combined with alternative
biofuel policies, such as a volumetric tax credit, an LCFS and a carbon tax. They
model the potential to produce both first generation biofuels, advanced biofuels, and
cellulosic biofuels from a wide range of feedstocks. Their analysis compares the
implications of two indirect effects of biofuel policies on GHG emissions—the
indirect land use effect and the fuel market rebound effect. They use the spatially
explicit nature of the BEPAM structure to show the spatial pattern of production of
feedstocks for cellulosic biofuels and how it varies with the policy incentives
provided. Their analysis provides another estimate of the extent to which total land
use can be expected to respond to changes in crop prices. It also shows how the
effectiveness of using land to mitigate GHG emissions varies across the policies
considered.
In Chapter “Modeling Bioenergy, Land Use, and GHG Mitigation with
FASOMGHG: Implications of Storage Costs and Carbon Policy,” Beach, Zhang,
and McCarl use the dynamic partial equilibrium model FASOMGHG to examine
the optimal mix of feedstocks to meet the RFS while taking into account the
differential need for storage of biomass for different feedstocks. They analyze the
extent to which energy crops have a smaller need for storage because they have a
longer harvest window as compared to an annual biomass crop like corn stover. The
inclusion of storage costs in the model affects the economic incentives to produce
energy crops instead of crop residues. Similar to Chen and Khanna in the previous
chapter, they also examine the effect of the addition of a carbon price to the RFS on
the mix of feedstocks and the extent to which it shifts the mix toward low carbon
energy crops instead of crop residues.


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M. Khanna and D. Zilberman

In Chapters “Empirical Findings from Agricultural Expansion and Land Use
Change in Brazil” and “Land Use Change, Ethanol Production Expansion and Food
Security in Brazil” we turn our attention to land use changes in Brazil due to
sugarcane ethanol production. Harfuch, Bachion, Moreira, Nassar, and Carriquiry
present an updated version of the partial equilibrium BLUM (Brazil Land Use
Model) model that more accurately models land use change at the intensive and
extensive margins. Instead of keeping the land supply elasticity as a constant, the
authors present a modified structure of the model in which the land supply elasticity
varies with the extent to which current agricultural land use diverges from that in
base period. This implies that as land is increasingly converted to agriculture, further
changes in land use become more inelastic. Changes in land use at the extensive
margin (between agriculture and forestry) in the model occur in response to changes
in the weighted average return to agriculture. The revised model relies on observed
land use transition data to determine the weights to be attached to different activities
so that activities directly responsible for deforestation are assigned a higher weight.
The improved model also increases the ease of pasture intensification. They discuss
the implications of these changes for the effect of increased production of sugarcane
ethanol for land use change and show how it affects the indirect land use change
related GHG intensity of sugarcane ethanol in Brazil.
In Chapter “Lessons from the ILUC Phenomenon,” O’Hare and Plevin discuss
the conceptual challenges posed by indirect land use change for GHG emissions
accounting for biofuels and its implications for policy. They note that the indirect
effects of biofuels depend on the policy used to promote biofuels and that these
effects are uncertain and model dependent. The authors also point out that models are
simplifications of the global economy and discuss the need to make policy choices
while recognizing the uncertainties that will remain in estimating the exact magnitude of the indirect land use change effect. An important consideration that is often
overlooked in estimating this magnitude is the timing of the different emissions over
the life cycle of the biofuel. The indirect land use change effect occurs at the onset of
the conversion of noncropland to crop production while other emissions associated
with the production of biofuel crops and the savings due to displacement of fossil
fuels are annual effects that occur over time in the future. The chapter discusses
various options for incorporating the effect of this difference in timing of emissions
on the climate system in accounting for the GHG effect of biofuels.

4 Feedstocks for Cellulosic Biofuels: Production Risks
and Risk Management
Large scale and sustainable production of cellulosic biofuels will require a dedicated feedstock. These feedstocks present new crop choices and/or production
systems for farmers with uncertainties about yields, costs and returns. Studies
analyzing the costs of producing dedicated energy crops and cellulosic biofuels


Bioenergy Economics and Policy in US and Brazil …

9

typically assume that crop yields are known with certainty, that farmers are risk
neutral, have low discount rates and do not have any credit constraints; the fixed
costs of establishing energy crops can therefore be amortized over the lifespan of
the crop. Macro-models implicitly assume that biomass will be sold on the spot
market and its price will fluctuate with demand and supply. In practice, farmers are
likely to require long-term contracts and an assurance of demand before they will be
willing to convert land from an annual crop to an energy crop.
Khanna, Zilberman, and Miao discuss the various factors likely to influence the
adoption of energy crop feedstocks for biofuels in the chapter “Innovation in
Agriculture: Incentives for Adoption and Supply Chain Development for Energy
Crops”. Using miscanthus and switchgrass as examples of promising energy crops
they describe the key biophysical features of these crops such as yield and lifespan
as well as the farm and farmer characteristics that are likely to affect the economics
of the energy crop adoption decision. Heterogeneity in these features across spatial
locations and across farmers can be expected to lead to spatial variability in the
pattern of energy crop production across the rain-fed US.
In the chapter “Effects of Liquidity Constraints, Risk and Related Time Effects
on the Adoption of Perennial Energy Crops” Bocqueho delves deeper into the role
of liquidity constraints, risk aversion and time preferences on the incentives to
adopt an energy crop. She examines the empirical evidence on the effects of these
factors on technology adoption and presents a model to analyze the effects of
liquidity constraints on a farmer’s adoption decision. She describes survey evidence
on the perceptions of risk of producing energy crops by farmers in France. The
chapter also discusses other factors such as the irreversibility of the adoption
decision, intertemporal fluctuations in income and reduced flexibility of changing
the allocation of land that has been planted under a perennial crops as other barriers
to energy crop production.
In the Chapter “Contracting in the Biofuel Sector” Du et al. address the issue of
contracting for the production of biomass feedstocks. Biomass production from
perennial energy crops imposes a number of risks for farmers because markets for it
are thin, costs of transporting them long distance are high and a 10 to 15 year
lifespan requires long term commitment of land to it to recover the initial investment. There is a large literature examining the incentives for farmers to enter into
marketing or production contracts due to risk aversion, transactions costs and thin
markets. This chapter reviews this existing literature and then discusses the design
of contracts for biomass feedstocks.

5 Summary
The corn and sugarcane ethanol industries have grown rapidly in recent decades and
reached a high degree of maturity in both the US and Brazil. Policy has played a
critical role in both countries in enabling the infant industry to develop. However,
production levels of both types of ethanol have stalled recently in both the US and


10

M. Khanna and D. Zilberman

Brazil although for different reasons. Although Brazil has lagged behind the US in
the volume of biofuel production, it has achieved much greater penetration of
ethanol in its fuel mix because it was able to simultaneously develop the infrastructure to distribute 100% ethanol and induce a shift in the vehicle fleet to include
an increasing share of flex-fuel vehicles. In contrast, in the US, biofuel consumption
has hit a blend wall because of inadequate ability to distribute or consume higher
blends. Brazil, on the other hand, has provided inadequate incentives for new
investments in biofuel production because government policies have reduced the
competitiveness of biofuels relative to gasoline. The first section of the book
describes the policy incentives as well as the market and policy barriers for
increased biofuel production in the US and Brazil.
Expansion of biofuel has raised concerns about the GHG savings they can lead
to and their adverse implications for land use and food prices. Models estimating
indirect land use changes due to biofuels rely on a number of parametric
assumptions and their outcomes are dependent on model structure. Chapters in
Sect. 2 of the book presents the improvements made in existing models to enable
them to have a more flexible structure that better captures the evolution in the
responsiveness of land supply to prices over time. This section of the book also
includes chapters that take a prospective look at the land use and GHG implications
of the cellulosic biofuel mandate in the US.
The last section of the book examines the factors that will influence farm-level
decisions about producing dedicated energy crops for cellulosic biofuels. It
describes the effects of risks and uncertainties associated with perennial energy crop
production and the role of liquidity constraints in creating disincentives for energy
crop production. These chapters highlight the need for developing contractual
arrangements between farmers and the refinery to develop the supply chain needed
to support cellulosic biofuel production.
The chapters in this book will familiarize readers with the latest conceptual
analysis and developments in numerical models to assess the land use and GHG
implications of biofuels. They describe the suite of biofuel policies implemented in
the US and Brazil and describe the intended and unintended effects these policies
have had on the development of the biofuel industry in these two countries. Finally,
the chapters in this book discuss the economic issues that will affect farm-level
production of energy crops and the development of a supply chain for the next
generation of biofuels.

References
Barr, K. J., B. A. Babcock, M. A. Carriquiry, A. M. Nassar, and L. Harfuch. 2011. Agricultural
Land Elasticities in the United States and Brazil. Applied Economic Perspectives and Policy 33
(3):449−462.
Dwivedi, P., W. Wang, T. Hudiburg, D. Jaiswal, W. Parton, S. Long, E. DeLucia, and M. Khanna.
2015. Cost of Abating Greenhouse Gas Emissions with Cellulosic Ethanol. Environmental
Science and Technology 49(4):2512−2522.


Bioenergy Economics and Policy in US and Brazil …

11

Hudiburg, T.W., W. Wang, M. Khanna, S. P. Long, P. Dwivedi, W. J. Parton, M. Hartmann, and
E.H. DeLucia. 2016. Forthcoming. Impacts of a 32 Billion Gallon Bioenergy Landscape on
Land and Fossil Fuel use in the US. Nature Energy 1, 15005. doi:10.1038/nenergy.2015.5.
Khanna, M and C.L. Crago. 2012. Measuring Indirect Land Use Change with Biofuels:
Implications for Policy. Annual Review of Resource Economics 4:161−26. doi:10.1146/
annurev-resource-110811-114523.
Searchinger, T., R. Heimlich, R.A. Houghton, F. Dong, A. Elodeid, J. Fabiosa, S. Tokgoz, D.
Hayes, and T.-H. Yu. 2008. Use of U.S. Croplands for Biofuels Increases Greenhouse Gases
Through Emissions from Land-Use Change. Science 319(5867):1238–1240.


Part I

Market and Policy Incentives for Biofuel
Production in the US and Brazil


US Biofuel Policies and Markets
Gal Hochman, Michael Traux and David Zilberman

Abstract The United States has established various policies to support a transition
to biofuels from fossil fuels as part of its strategy to achieve energy security and
independence. These policies include mandates, tax credits, and import tariffs aimed
at developing the nascent biofuel industry. To compare the impact of various
energy sources requires a comprehensive understanding of both direct and indirect
effects. This chapter discusses some of the indirect effects, including land use
change, fuel rebound effect, and balance of trade effect. It finds that due to the
ubiquity of energy, indirect effects impact numerous markets and that an already
noncompetitive energy market that is capital intensive exacerbates the challenge of
introducing biofuels. While first-generation biofuels contributed to rural development and reduced dependency on imported fuel sources, they have failed to reduce
GHG emissions significantly. Introduction of advanced biofuels is challenged by
the blend wall in the US and high costs, there is much opportunity for them to
contribute significantly to energy security but also reducing GHG emissions.

Á

Keywords Balance of trade Benefit and costs
Greenhouse gases Policy Risk

Á

Á

Á Biofuels Á Energy security Á

1 Introduction
For years now, the United States has been attempting to find a way to have energy
security and independence (Yergin 2006). With decades of net importation of petroleum and natural gas, the idea of developing a source of energy from the staple crop
G. Hochman (&) Á M. Traux
Department of Agriculture, Food and Resource Economics, Rutgers University,
New Brunswick, NJ, USA
e-mail: gal.hochman@rutgers.edu
D. Zilberman
Department of Agricultural and Resource Economics,
University of California at Berkeley, Berkeley, CA, USA
e-mail: zilber11@berkeley.edu
© Springer International Publishing AG 2017
M. Khanna and D. Zilberman (eds.), Handbook of Bioenergy Economics
and Policy: Volume II, Natural Resource Management and Policy 40,
DOI 10.1007/978-1-4939-6906-7_2

15


16

G. Hochman et al.

of corn seemed to be a promising way to achieve energy security and independence
from fossil fuels (Lapan and Moschini 2009). It was believed that with improving
technology in both biofuel production, and agricultural techniques, producing ethanol
would become competitive with imported petroleum, allowing the market to help
develop the infant industry. After years of stagnant development for ethanol fuels (the
1980s and 1990s), the United State government developed policies aimed at promoting the use and production of ethanol to compete with gasoline.
The government established a biofuel mandate in 2005, which required a minimum amount of ethanol to be blended with transportation fuel (the Energy Policy
Act of 20051). It also implemented the now repealed tax credit, and import tariff,
which together were supposed to protect the domestic industry by making foreign
ethanol more expensive and less competitive with the domestically produced corn
ethanol. Although these policies were intended to benefit the domestic energy
sector and provide a variety of competitive fuel sources for consumers, the infant
industry led to unintended consequences as it developed. While the biofuel industry
has matured, the adverse effects of its growth are causing policy makers to
reconsider if the benefits outweigh the side effects (Hochman and Zilberman 2016,
and references therein).
Land use and rising food prices have caused the most concerns for policy
makers, with food prices increasing 2.7% annually2 since the implementation of
these policies. The amount of available land for agriculture transitioned to producing ethanol crops affects the cost of other staple crops now no longer being
produced at the same levels (Hertel et al. 2010; Chen et al. 2012a; Roberts and
Schlenker 2013).
Although initially not a direct goal of the enacted policies, greenhouse gas
(GHG) emissions were explicitly introduced into the regulation in May 2009
(Renewable Fuel Standard—RFS2) and were expected to contribute to the development of low carbon fuel sources. Research into GHG emissions from burning
ethanol has shown mixed results against the supposed benefits of ethanol fuels
(Hochman and Zilberman 2016), with some research showing that ethanol fuel
worsen the problem of GHGs in the atmosphere (Hertel et al. 2010).
Although the environmental benefits of current crop-based biofuels are much
more limited than initially thought and the cost of producing advanced biofuels
much higher than many hoped, biofuels did affect the U.S. balance of trade and
contributed to its reduction in recent years (Hochman and Zilberman 2016). The rest
of the chapter begins by describing the biofuel industry (Sect. 2). This is followed by
a discussion of biofuel policies in the U.S. (Sect. 3) and a summary of the policy
instruments used (Sect. 4). The U.S. biofuel policy has affected commodity markets
and international trade that are discussed in Sect. 5. We conclude with Sect. 6.

1

The Energy Policy Act of 2005 is available at http://energy.gov/sites/prod/files/2013/10/f3/epact_
2005.pdf.
2
See USDA Food Price Outlook website, available at http://www.ers.usda.gov/data-products/foodprice-outlook/ (viewed: January 21, 2016).


US Biofuel Policies and Markets

17

2 Biofuel Production
Biofuels are seen as an energy source that could help reduce the United States
reliance on fossil fuels, and the amount of GHGs emitted into the atmosphere. The
many advantages of biofuels include lower GHG emissions intensity, domestic
availability, renewability, higher combustion efficiency, lower sulfur, and aromatic
content and biodegradability (Hertel et al. 2010). The disadvantages of biofuels
include lower energy efficiency and its contribution to air pollution (Brown 2008).
However, because the perception was that the benefits outweigh the costs and
because of the high cost of production of biofuels relative to fossil-based fuels,
governments instituted policies that promoted the industry’s growth.
The most efficient country (in terms of fuel yields per unit land) in the world at
producing ethanol is Brazil, using sugarcane as a source of ethanol (Demirbas
2009). The majority of this sugar cane is grown in Mato Grosso, Sao Paulo, and
Parana, along with other eastern-coastal states within the country (see Fig. 1).
There are many different reasons believed to be responsible for Brazil’s success
with ethanol production. Sugarcane itself is a more efficient crop than other sources,
with it being seven times more efficient than corn in terms of fuel yield per unit land
(Crago et al. 2010). Brazilian sugarcane ethanol has a production cost that is, on
average, 24% lower than United States corn ethanol, mainly because it is possible to
produce 45% more ethanol per unit of land from the sugarcane plant than from corn
(Crago et al. 2010). In addition, the tropical weather of Brazil provides a more
suitable climate for sugarcane (Crago et al. 2010).
The Untied States is the second most efficient country at producing biofuel,
relying heavily on corn ethanol (Hochman and Zilberman 2016). The majority of
corn comes from the “corn belt” region, which is composed of Iowa, Illinois,
Indiana, Southern Michigan, Western Ohio, Eastern Nebraska, Eastern Kansas,
Southern Minnesota, and Northern Missouri. This region is the most suitable for
corn production in the United States because of the vast, flat fields naturally
available in the Great Plains (Miller et al. 2009). Figure 3 depicts the top four U.S.
corn ethanol producing states in 2013. These regions are the most productive in
terms of corn production, mainly because of the naturally nutrient rich soil, and the
long growing season (Miller et al. 2009) (Fig. 2).
Corn is used as a primary source of feed for livestock production. Corn also uses
more land per unit of ethanol compared to sugarcane (Bundy 2007). While sugarcane has an energy balance of 8.3–10.2, corn only has a balance of 1.3–1.6
(Bundy 2007), meaning higher energy input is required to produce the same amount
of energy for corn when compared to sugarcane. This also means the productivity
of the land is higher in Brazil than in the United States. In Brazil, there is roughly
355 million hectares (Mha) of land available for agricultural production, with
3.6 Mha dedicated for ethanol production in 2006 (Bundy 2007). In the United


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