Fuel versus Food

What are the economic trade-offs between growing biofuel and growing food? Policies that encourage biofuel production may not only worsen world hunger but may also indirectly exacerbate climate change. Conversion of forestland to cropland—predicted as a consequence of such policies—causes carbon leakage and threatens to undo some of the very goals the incentives and regulations are designed to achieve in the first place.

In January 2007, a spike in the price of corn tortillas in Mexico was blamed on U.S. demand for biofuels and the diversion of part of the corn harvest to ethanol production. Elsewhere, the Chinese government has decided to slow down its expansion of ethanol plants because of worries about the country’s food security. Are biofuels really crowding out food?

Nuclear power and solar and wind energy can replace fossil fuels to generate electricity and heat, but for the near future, the only viable green substitutes for transportation energy are first-generation biofuels—ethanol from corn and sugarcane, and biodiesel from rapeseed and palm oil. The biofuel industry is built on transportation demand, which is projected to double globally by 2030.

Government policies that encourage biofuels are intended to promote cleaner energy sources and lessen dependence on foreign oil. But the perceived benefits of boosting domestic agriculture are also an important political motivation. The European Union is seeking to supply 10 percent of its transportation fuels from biofuel by 2020 but seems unlikely to reach the target, largely because crude oil prices may not rise high enough to create an incentive for biofuel suppliers.

Moreover, the scarcity of land in Europe means that a good portion of the crops used in biofuel production will have to be imported. In the United States, however, ethanol production relies on domestic corn and can expand more rapidly. The U.S. Energy Policy Act of 2007 set a biofuel production target of 36 billion gallons in 2022 compared to projected gasoline use of 120 billion gallons; an ambitious goal, considering biofuel use in 2009 was only 10 billion gallons.

An important feature of the U.S. mandate is the requirement that 21 billion of the 36 billion gallons in 2022 come from second-generation biofuels. These are derived from residual, inedible parts of existing crops, such as wood chips and straw. For example, cellulosic ethanol (a substitute for ethanol) is produced by transforming a structural material containing many of a plant’s building blocks (but not the plant in its entirety) into alcohol. Second-generation biofuels are more energy efficient because they capitalize on what otherwise goes to waste or is put to a lesser use. Currently, they are about three times more costly than first-generation fuels, however, because of the difficulty of converting plant material into usable fuel.

However, as the price of crude oil rises in the future, and the opportunity cost of land also increases because of growing demand for food, these fuels will become economically competitive. Because these fuels use parts of the plant other than the fruit or the grain, they require less land and their large-scale adoption under the U.S. mandate will lead to a lower impact on food prices. Since they are produced from existing crop and plant residues, their emissions are lower than for first-generation biofuels. If widespread adoption of second-generation biofuels further reduces their costs because of learning and sharing of better techniques and technologies by producers and suppliers, emissions from the transportation sector may be significantly reduced and impacts on food prices might be muted.

Competition for Land

The acreage currently used for growing biofuels is small—in 2004, an estimated 14 million hectares worldwide, or around 1 percent of global cropland. Although there are large amounts of land available globally, especially in developing countries such as Brazil, Indonesia, Malaysia, most of this land may be of relatively low quality for agricultural production.

Because forests and wetlands supply valuable environmental services, such as biodiversity conservation, carbon sequestration, and water filtration, some of these areas will be protected. For example, to preserve Brazil’s indigenous lands, biodiversity, and natural resources, the  government prohibits the construction or the expansion of sugarcane farms in areas like Amazon, Pantal (Brazilian wetlands), or the upper Paraguay River Basin. So, only 64 million hectares will be eligible for sugarcane farming, considerably less than the 197 million hectares of underutilized pasture area.

Meanwhile, obligatory sustainability standards that are defined in the EU Renewable Energy Directive determine that biofuels must not be grown on sensitive lands, including protected areas and land with high biodiversity value or high carbon stock. Consequently, some of the growth in biofuel supply must come from achieving higher productivity on low-quality lands or taking acreage out of food production.

Rising fuel consumption in countries with booming economies, including China and India, where more and more households own a car, add pressure to the landscape. Accompanying this trend is another that will exacerbate the fuel versus food debate even further—the growing desire for meat and dairy products. Currently, per-capita consumption of meat and dairy production in developing countries is only a quarter of that in developed countries but this gap is narrowing. Expected income growth in developing countries will mean more pressure on arable land to produce meat and dairy products—problematic as livestock use more land than do vegetables in production.

The consequences of competition for land between fuel and food are potentially serious. In theory, as petroleum becomes scarcer, its price increases, which makes biofuels competitive. Land then shifts out from food to energy production, which leads to an increase in the price of food, exacerbating hunger and malnutrition in poorer countries. That scenario appears to be playing out to some extent. Although short-run increases in food prices are generally caused by supply shortages arising from poor harvests, droughts, and rising demand from populous developing countries, a 2008 study suggests that about a quarter to a third of the recent food price increases can be explained by the production of energy from land.

Even without policies to encourage their production, biofuels are expected to put some pressure on food prices. Models show that corn and oil seed prices may increase by 65 to 75 percent by 2020. When productivity improvements and second-generation biofuels are taken into account, the impact is somewhat lower, around 45 to 50 percent. The rise in food prices will affect poor economies, particularly in sub-Saharan Africa, causing an 11 percent reduction in daily calorie availability and a consequent increase in malnutrition. New studies, which allow for marginal lands to be brought under cultivation, show more muted impacts of biofuels production on food prices. Biofuel mandates in countries such as the United States lead to a significant reduction in U.S. exports, causing more land conversion in developing countries to meet domestic food consumption requirements.

Carbon Policy Fallout

In addition to policies directly aimed at encouraging biofuels, other government policies will indirectly affect the food-energy equation. The immediate implication of a cap on carbon emissions is higher energy prices, which will speed up adoption of biofuels and lead to a rise in food prices. The magnitude of these effects will depend on the level of land scarcity, demand for food, regulatory constraints, and abundance of fossil fuels. And when oil prices rise above $70 per barrel, biofuels become quite cost effective.

Studies that have examined the least-costly mitigation strategies for different carbon prices suggest that biofuels play no role below a carbon price of $40 per ton. However, for carbon prices above $70, biofuels dominate all other agricultural mitigation strategies. Some recent estimates suggest that the expected allowance price of carbon around 2020 will be in the ballpark of $50 per ton.

Serious concerns exist about the actual carbon benefits of biofuel production and use. Contrary to popular impression, they are not carbon neutral when land-use changes are taken into account, which may occur in countries other than those promoting biofuel policies. For gasoline, carbon is emitted to the atmosphere mostly during combustion but for biofuels, the emissions occur primarily during production. Based on a life-cycle assessment, corn-based ethanol, instead of reducing carbon emissions by 20 percent (as previously thought), may actually double emissions over a 30-year period.

This is because widespread biofuel use will lead to encroachment into forestlands, increasing the rate of deforestation. Converting rainforests, savannas, or grasslands to grow biomass may release 17 to 420 times more carbon than the annual savings from replacing fossil fuels. Most studies fail to account for this potential increase in the carbon footprint of biofuels.

Biofuel mandates imposed by the United States and the European Union will also cause a “green paradox;” that is, lower global crude oil prices in the rest of the world and hence increased oil consumption and carbon emissions. As a result, the combined effect of land conversion in the developing countries and terms of trade effects may neutralize any savings from biofuel mandates, according to some recent estimates.

Additionally, production of biomass, of course, requires water. If cropland acreage increases to grow biofuels, irrigated land areas may expand, with multiple consequences: raising the price of water, limiting water for food production, reducing crop yields, and slowing the growth of food production. This issue is critical in countries that already suffer from water shortages, such as India and China.

To explore such complex trade-offs, economists are using models of agriculture and transportation that factor in the opportunity cost of the land, biofuel yields and production costs, petroleum stocks and prices, food and energy demand, trade flows, government policies, technological advances, and other variables. Policymakers who are developing cap-and-trade programs and determining subsidies and tax credits for alternative fuels would do well to re-consider the wisdom of incentives for biofuels, given their unintended consequences.