Source: CORNELL UNIVERSITY submitted to NRP
AN INTEGRATED FRAMEWORK TO ANALYZE THE IMPACT OF AGRICULTURAL, ENERGY AND ENVIRONMENTAL POLICIES ON U.S. AGRICULTURE
Sponsoring Institution
National Institute of Food and Agriculture
Project Status
COMPLETE
Funding Source
AFRI COMPETITIVE GRANT
Reporting Frequency
Annual
Accession No.
0220450
Grant No.
2010-65400-20461
Cumulative Award Amt.
(N/A)
Proposal No.
2009-04097
Multistate No.
(N/A)
Project Start Date
Jan 1, 2010
Project End Date
Dec 31, 2011
Grant Year
2010
Program Code
[96160]- Agribusiness Markets and Trade
Recipient Organization
CORNELL UNIVERSITY
(N/A)
ITHACA,NY 14853
Performing Department
Applied Economics & Management
Non Technical Summary
Biofuel policies are motivated by concerns related to energy security, improving the environment and increasing prosperity for agriculture. The new administration's clear focus and emphasis on renewable energy and global warming mitigation will provide additional challenges but also opportunities for U.S. agriculture. One key issue is compatibility with existing biofuel and agricultural price, trade and environmental policies. There will be potential ramifications for international trade as energy costs will go up with a cap and trade policy while carbon offsets can be a source of revenue for agriculture. We propose a thorough examination of U.S. biofuels and agricultural policies, and their proposed changes, with an eye toward welfare and efficiency analysis. The most important ethanol policies we will evaluate are ethanol consumption subsidies (tax credits), mandatory blending and ethanol consumption requirements, production subsidies for both ethanol and corn (the latter including direct, counter-cyclical, loan deficiency and ACRE payments), ethanol import tariffs and quotas, and sustainability standards. The latter include both the federal requirement for a 20 percent reduction in greenhouse gas (GHG) emissions. Environmental policy to be evaluated includes current agro-environmental programs (e.g., CRP and EQIP) and pending legislation for cap and trade and carbon offsets for agriculture. Relevant energy policy includes fuel taxes and biomass production subsidies. Current and proposed policies involve several layers of incentives and regulations, and will become even more complex with proposed legislation on renewable energy and global climate change. To illustrate how biofuel policies can be contradictory, consider the case of the current tax credit for ethanol and the simultaneous consumption mandate where these two policies, designed to increase ethanol consumption when implemented alone, can encourage gasoline consumption when instituted together. Further, given the mandate, this tax credit not only constitutes a substantial burden on taxpayers, it also contradicts the new energy bill's stated objectives of reducing dependency on oil, improving the environment and enhancing rural prosperity. This is but one example of the complex interactions between agricultural, environmental and energy policies. The proposed legislation on cap and trade with carbon offsets for agriculture and the issue of leakage and loss of competiveness due to higher energy prices will complicate the analysis further. Proposed legislation includes a proviso for rebates and "green" tariffs on products from countries with less stringent GHG emissions regulations. The long term goals of our proposed research are to develop an integrated model to evaluate the interactions between agricultural, energy and environmental policies (biofuel policies being an element of each policy category; examine the impact of U.S. policy on efficiency, equity and competitiveness of U.S. agriculture; and evaluate alternative policy structures that could meet the stated goals of the current policy regime at potentially lower costs to taxpayers and the public at large.
Animal Health Component
75%
Research Effort Categories
Basic
25%
Applied
75%
Developmental
(N/A)
Classification

Knowledge Area (KA)Subject of Investigation (SOI)Field of Science (FOS)Percent
6056110301035%
6061510301020%
6061820301010%
6101510301025%
6101820301010%
Knowledge Area
605 - Natural Resource and Environmental Economics; 610 - Domestic Policy Analysis; 606 - International Trade and Development;

Subject Of Investigation
6110 - Economy of the United States and sectors thereof; 1510 - Corn; 1820 - Soybean;

Field Of Science
3010 - Economics;
Goals / Objectives
The long terms goals of this project are to develop an integrated model to evaluate the interactions between agricultural, energy and environmental policies (biofuel policies being an element of each policy category).Much of the current analyses of biofuel and agricultural policies rely on large empirical models. While these models can be useful in looking at simple policy impacts (such as taxes or subsidies that simply shift supply or demand curves), they are not well equipped to handle complex policy designs currently in play which will become even more complex with proposed legislation on renewable energy and global climate change. Current and proposed policies involve several layers of incentives and regulations, requiring clear theoretical and empirical modeling for effective policy analysis. Thus we propose to design a robust model for policy analysis based on the program parameters and structures in place, as well as those that are proposed, and most importantly, the interaction effects between them. We will extend our previous research and modeling efforts of the U.S. markets to include biodiesel and policies of our largest trading partners. We will then examine the impact of U.S. policy on efficiency, equity and competitiveness of U.S. agriculture. Because current and proposed policies are complex and have complex interaction effects, it is important to determine how each of the policies may impact agricultural producers, food consumers, energy consumers, taxpayers and the environment. Thus, we will do comprehensive social cost benefit analysis to determine the effects on all major groups affected including the crop sectors and crop using sectors (meat and dairy). To this end, we will conduct both comparative static and simulation analyses of the various policies (individually and in combination). We will also determine the impact of changes in foreign policies for biofuels, energy and environment (global climate change policies with biofuel on international market opportunities for U.S. agriculture). Given the U.S. tariff and the producer and consumer incentives in other developed nations, there is the potential for strong interaction effects within the market. It is important to determine how U.S. policies may help or hurt U.S. agricultural production which is energy intensive on the international market. We will analyze the impact of these countries' agricultural, environmental, energy and trade policies on U.S. consumers, producers, taxpayers and the public at large. We will then evaluate alternative policy structures that could meet the stated goals of the current policy regime at potentially lower costs to tax payers and the public at large. In addition, we will develop a set of potential policy instruments designed to achieve the stated policy goals with the least amount of taxpayer costs, or dead weight costs. Our analysis will account for the various political constraints that may be faced by policy-makers. U.S. agriculture can lose or does not benefit from particular policy combinations so we will evaluate U.S. competitiveness with own policy and policy of other countries.
Project Methods
We propose to use partial equilibrium analysis to model the impact of each of the agro-energy-enviro policies on energy and agricultural markets. We will expand the mathematical framework outlined in our earlier work to accommodate the target policies. We will use this framework to conduct comparative static analysis of each of the policies both in isolation and in conjunction. In particular we will examine the impact on agricultural prices, profitability, fuel prices, and emissions. We will employ estimates of the important physical relationships in fuel production and combustion to calibrate the physical and welfare impacts of various policy regimes. We will examine the economic content of sustainability standards based on life-cycle analysis (LCA). Current policy requires an emissions reduction of 20% using life cycle analysis for any biofuel receiving the RFS subsidies. We will expand our partial equilibrium model of ethanol, oil and corn markets to explore the economic rationale for this sustainability standard. Our expanded model will include markets for other corn products as well as other potential input uses for land and fossil fuels. Because indirect impacts can reduce or enhance the emissions reduction, we will explore the potential error induced by LCA as presently implemented. We will explore the properties necessary for a simple sustainability standard that can account for indirect changes. We will develop a trade model for biofuels including policy variables for the US' largest trade partners in biofuels and agriculture. We will extend the PEATSIM model to accommodate each of the target policies using our partial equilibrium model. This model includes Brazil, Canada, China and the European Union, important trading partners for ethanol, biodiesel and other agricultural products. This will allow us to extend our work to examine how these policies impact trade and potentially influence the competitiveness of U.S. agriculture. We will derive a partial equilibrium model of the oil and agricultural markets including the production and trade instability components and use this to analyze the impact of alternative policies and policy combinations on instability within each market. We will expand our partial equilibrium model to allow for production shocks in both agriculture and oil. This will allow us to determine the potential impact of policies on price instability in agriculture as well as fuel. Further, we will analyze policy options that might reduce the transmission of extreme fuel prices to food markets through the use of trip points or other mechanisms. Building on our model of the ethanol market, we will develop a partial equilibrium model of biomass, agricultural land use and the agro-energy-enviro policies. In particular we will examine the impact on agricultural prices, profitability, fuel prices and emissions.

Progress 01/01/10 to 12/31/11

Outputs
OUTPUTS: Our research developed an integrated framework to analyze the impact of biofuel, energy and environmental policies on U.S. agriculture and policies in the context of political concerns related to reducing dependence on oil, improving the environment and increasing agricultural incomes. We analyzed the myriad of policies and how they interact including ethanol tax credits, mandates, production subsidies (including for feedstocks), import barriers and sustainability standards. The grant resulted in many refereed journal articles (one award winning paper garnered close to 20,000 full text downloads), book chapters, reports, working papers, high profile policy briefs, various media products, conference presentations and academic seminars. Our results show how biofuel policies on their own can have very large welfare effects, either positive or negative; mandates are clearly superior to all other policies, with few tradeoffs arising; adverse interactions between policies used simultaneously are highly likely, i.e., with (1) adding subsidies to mandates, or (2) adding biofuel policies to farm subsidy programs. We also find that benefits from any biofuel policy can easily be offset by the inefficiencies of other policies (e.g. by import barriers such as tariffs, production subsidies and sustainability standards). For example, we developed a model to analyze the implications of mandates and tax credits with three different second best constraints: a sub-optimal fuel tax; adding a tax credit with a binding mandate; and interaction effects with the fiscal system where mandates and tax credits have differential effects on government tax revenues and the size of the fiscal base. We expanded the performance measures to include fuel consumers, greenhouse gas emissions, negative externalities associated with traffic congestion and traffic related accidents, and local air pollution. We developed a theory of the corn-ethanol price relationship and how biofuel policies affect commodity prices. The situation of the U.S. becoming a major exporter of ethanol was also addressed. We developed a general model of international trade in biofuels where the world market price of a biofuel is determined in one country with a combination of the highest consumer price paid for gasoline and the lowest net tax (the combination of the lowest fuel tax and highest biofuel tax exemption/tax credit). We developed a model to analyze the sustainability of biofuel production based using a cost-benefit procedure that utilizes a social discount rate and a non-decreasing price of carbon over time, and determines a maximum payback period endogenously. We have developed a general economic framework to analyze carbon leakage - where emissions reductions by an environmental policy are offset to some degree because of market effects - for four basic policy categories: biofuels (leakage in the fuel market and land market), forests (leakage in land market), carbon offsets for agriculture (subsidies to change production practices) and cap and trade (the latter being the source for carbon offsets). Our model allows for a counter leakage in forest markets and leakage in the fuel market. PARTICIPANTS: Professor Harry de Gorter, principle investigator Professor David R. Just, co-investigator Dusan Drabik, graduate student Kristen Cooper, graduate student TARGET AUDIENCES: Outputs have taken different forms. I have many academic journal articles, several policy briefs on the web, a Hill briefing to policymakers in Washington DC, 2 newspaper op-eds, several podcasts, one television appearance and one radio show. I also made several conference presentations. The audience has varied from farm groups to Congressional staff, the World Bank, IMF, trade associations, the National Economists Club and the like. PROJECT MODIFICATIONS: Nothing significant to report during this reporting period.

Impacts
Our research shows how carbon offsets reduce leakage from cap and trade, thereby lowering the cost of cap and trade while developing countries benefit. Leakage in the timber market is positive with reduced deforestation offsets but negative with afforestation offsets. This asymmetry has implications for policy design. Taking into account land market interactions moderates these results however, requiring empirical analysis to determine the net outcome. Our research also focuses on carbon leakage in the fuel market itself. The emphasis has been on carbon leakage in the land market (indirect land use change) but we show one gallon of ethanol is found to replace only 0.40 gallons of gasoline, not one gallon as assumed by life-cycle accounting. For the US, this ethanol emits 10 percent more carbon than gasoline if indirect land use change is not considered and about 40 percent more if the latter is accounted for. Our research shows that the effects of polices can be very different if analyzed in the context of international trade. The US tax credit, for example, acts as a production subsidy in the form of higher market prices when the US is an exporter of ethanol (the US became a significant net exporter of ethanol since early 2010). This has major implications for the efficacy of tax credits versus mandates. Our findings are that the welfare effects of a biofuel policy can be quite large. Furthermore, most countries are using several biofuel policies in concert. When used in some combinations, biofuel policies can be contradictory, where the effects of a policy are reversed. These biofuel policies never complement each other, but can on rare occasions be complementary to energy or environmental policy. Rarely does a biofuel policy have a neutral effect. One implication is that a quantity-based biofuel mandate is superior to a price-based consumption subsidy. Empirically, we find that the mandate can potentially increase social welfare substantially. On the other hand, a consumption subsidy likely decreases welfare significantly, primarily because of the taxpayer burden but also because it encourages negative externalities related to vehicle miles traveled, local air pollution and CO2 emissions. These differences are magnified if one is saddled with a sub-optimal fuel tax, as is arguably the case in the US. We find that sustainability standards which set a maximum amount of CO2 emissions per gallon are ineffective because of leakage to other sectors or countries not covered by the standard. Further, the US standard is highly unlikely to survive a legal challenge in the WTO under the exception for the environment, because the latter requires a measure that is necessary and least trade-restrictive, and not discriminatory or arbitrary (criteria that a sustainability standard does not meet). Our empirical analysis of the sustainability of ethanol production show that if the range of social discount rates used by climate change economists is considered, only three land types out of seven in Brazil pass the cost-benefit test while none pass the test for the United States.

Publications

  • Harry de Gorter. 2011. The Implications of Alternative Biofuel Policies for Carbon Leakage. 13th Congress of the European Association of Agricultural Economists (EAAE) Zurich, Switzerland, August 30-September 2.
  • Harry de Gorter. 2011. Biofuel Policies and Food Grain Prices. Rutgers-NSF IGERT Project: Renewable and Sustainable Fuels Solutions Second Annual International Summer Symposium: Biofuels and Bioenergy: Technologies to Drive the Globe 7 - 8 June.
  • de Gorter, H., Drabik, D. 2012. Biofuel Policies and Grain Crop Price Volatility Biofuels Vol. 3, No. 2, p. 111-113.
  • de Gorter, H., Drabik, D. 2012. The Effect of Biofuel Policies on Food Grain Commodity Prices Biofuels Vol. 3, No. 1, p. 21-24.
  • Drabik, D., and H. de Gorter. 2011. Biofuel Policies and Carbon Leakage. AgBioForum Vol. 14, No 3, p. 104-110.
  • de Gorter, H., D. Drabik and D.R. Just. 2011. The Economics of a Blenders Tax Credit versus a Tax Exemption: The Case of U.S. Splash and Dash Biodiesel Exports to the European Union. Applied Economic Perspectives and Policy. 33 (4): 510-527.
  • de Gorter, H. and Drabik, D. 2011. Carbon Offsets and Biofuels. Biofuels 2 (3): 255-256.
  • de Gorter, H., Drabik, D. 2011. Components of Carbon Leakage in the Fuel Market due to Biofuel Policies. Biofuels. 2 (2): 119-121.
  • de Gorter, H. 2011.The Political Economy of Food Policies: The Role of Political Institutions: Discussion. American Journal of Agricultural Economics. Vol. 93: No. 1, January.
  • de Gorter, H. and Jerry Taylor. 2011. CBO Report underestimates costs of the corn-ethanol tax credit: four compelling reasons why the CBO should update their study. Biofuels. January. 2(1), pp. 17-19.
  • Kliauga, Erika M., Harry de Gorter and David R. Just. 2011. Measuring the Subsidy Component of Biofuel Tax Credits and Exemptions. Chapter 4 in A. Schmitz (ed.) The Economics of Alternative Energy Sources and Globalization: The Road Ahead Bentham-E Book.
  • de Gorter, Harry, and David R. Just. 2011. The Social Costs and Benefits of Biofuel Policies with Pre-Existing Distortions. Chapter 10 in U.S. Energy Tax Policy, Gilbert Metcalf, editor, Cambridge University Press.
  • Drabik, D. 2011. The Theory of Biofuel Policy and Food Grain Prices. Working Paper No. 2011-20. Charles H. Dyson School of Applied Economics and Management, Cornell University. December 2011. http://dyson.cornell.edu/research/researchpdf/wp/2011/Cornell-Dyson-w p1120.pdf
  • Rajcaniova, M., Drabik, D., and Ciaian, P. 2011. How Policies Affect International Biofuel Price Linkages. Working Paper. http://papers.ssrn.com/sol3/papers.cfmabstract_id=1945022
  • Tsur, Yacov, and Harry de Gorter. 2011. On the Regulation of Unobserved Emissions. Discussion Paper No. 2.11 The Center for Agricultural Economic Research, The Department of Agricultural Economics and Management, The Hebrew University of Jerusalem, Israel.
  • Harry de Gorter. 2012. Optimal Ethanol Policies for the U.S. in a General Equilibrium Framework. Selected paper at Agricultural and Applied Economics Association 2012 Annual Meeting, Seattle Washington, 13-16 August.
  • Harry de Gorter. 2012. U.S. Policy Contributions to Food Grain Commodity prices. Paper for UNU-Wider Workshop on The Political Economy of Food Price Policy, Cornell University, Ithaca NY, 9-12 July.
  • Harry de Gorter. 2012. Costs and Benefits of Biofuel: US and EU Perspectives. Paper for invited address at the 16th ICABR Conference 128th EAAE Seminar, Ravello Italy, 24-27June.
  • Harry de Gorter. 2012. The Political Economy of Biofuel Policies. Selected paper at the 16th ICABR Conference 128th EAAE Seminar, Ravello Italy, 24-27June.
  • Harry de Gorter and Jerry Taylor. 2011. CBO Report underestimates costs of the corn-ethanol tax credit: four compelling reasons why the CBO should update their study. Policy Update in Biofuels (January). 2(1), 17-19. http://www.future-science.com/doi/pdf/10.4155/bfs.10.84
  • Harry de Gorter. 2010. What is better for the environment: a biofuel tax credit or mandate Policy Update in Biofuels (November). 1(6), 815-816 http://www.future-science.com/doi/pdf/10.4155/bfs.10.68
  • Harry de Gorter. 2012. The Effect of Biofuel Policies on Food Grain Commodity Prices. Paper for keynote address at conference entitled Global Commodity Markets: New Challenges and the Role of Policy, Nitra Slovakia, 15-17 May.
  • Harry de Gorter. 2012. The Implications of Biofuels for the new US Farm Bill. Paper presented for a symposium on Agricultural trade policy in the United States: Can reform advance domestic policy objectives and sustainable development International Centre for Trade and Sustainable Development, Washington DC, 12 April.
  • Harry de Gorter. 2012.The Welfare Economics of Biofuel Policies. Panel presentation at the 28th IAAE Triennial Conference, The Global Bio-Economy, Foz do Iguacu, Brazil, 18- 24 August.
  • Harry de Gorter. 2012. The Economics of Biofuel Policies. Paper presented to 5th Berkeley Bioeconomy Conference: Renewable Resources, UC Berkeley California, 26-28 March.
  • Harry de Gorter. 2011. Modeling Carbon Leakages with Forestation Policies. 13th Congress of the European Association of Agricultural Economists (EAAE) Zurich, Switzerland, August 30-September 2.
  • Harry de Gorter. 2011. Carbon Leakage with Forestation Policies. Selected paper at Agricultural and Applied Economics Association Annual Meeting, 24-26 July, Pittsburgh, Pennsylvania Harry de Gorter. 2011. The Implications of Alternative Biofuel Policies on Carbon Leakage. Selected paper at Agricultural and Applied Economics Association Annual Meeting, 24-26 July, Pittsburgh, Pennsylvania.
  • Harry de Gorter. 2011. A Proper Methodology to Measure Carbon Leakages from Indirect Output Use Change (iOUC) due to Alternative Biofuel Policies. 15th Conference of International Consortium on Applied Bioeconomy Research (ICABR) Frascati-Monteporzio Catone, Italy 26-29 June.
  • Harry de Gorter. 2011. The Green Paradox of environmental regulations on biotechnology and biofuels. Panel at a joint ICABR-EAERE session, 18th Annual Conference of the European Association of Environmental and Resource Economists (EAERE) Frascati-Monteporzio Catone, Italy June 29-July 2.
  • Harry de Gorter. 2011. The Implications of Alternative Biofuel Policies on Carbon Leakage. Discussion of research ideas, Biobased Industry Center (BIC) Bioenergy Camp, Perry Iowa, 15-18 May.
  • Harry de Gorter. 2011. Land-related Carbon Offsets and Leakage. Presentation at conference The Role of Carbon Offsets in Climate Policy: Theory and Practice Cornell University, 13-15 May.
  • Harry de Gorter. 2011. The Theory of Biofuel Policy and Food Grain Prices. Slovak Agricultural University, Nitra, Slovakia, 16 December.
  • Harry de Gorter. 2011. The Implications of Alternative Biofuel Policies on Carbon Leakage. Slovak Agricultural University, Nitra, Slovakia, 23 March.
  • Harry de Gorter. 2011. On the EU-U.S. Biodiesel Splash and Dash Controversy: Causes, Consequences and Policy Recommendations. Agricultural and Applied Economics Association Annual Meeting Denver, Colorado July 25-27.
  • Harry de Gorter. 2011. Biofuels and Leakages in the Fuel Market. International Agricultural Trade Research Consortium, Climate Change in World Agriculture: Mitigation, Adaptation, Trade and Food Security, June, Stuttgart-Hohenheim, Germany.


Progress 01/01/10 to 12/31/10

Outputs
OUTPUTS: We develop a general economic framework to analyze carbon leakage - where emissions reductions by an environmental policy are offset to some degree because of market effects - for four basic policy categories: biofuels (leakage in the fuel market and land market), forests (leakage in land market), carbon offsets for agriculture (subsidies to change production practices to reduce GHGs with leakages in the land market) and cap & trade (the latter being the source for carbon offsets). Leakage in land markets due to biofuels has been extensively studied to date but our model allows for (a) a counter leakage in forest markets by modeling the input market of land including both agriculture and forests; and (b) leakage in the fuel market. We analyze alternative policies like a biofuel tax credit versus mandate, afforestation subsidies (including grassland and CRP), subsidies for changes in agricultural production practices with carbon offsets (e.g., no till which affects cost curves and output) and cap & trade. We identify two components of carbon leakage: the "market leakage effect" and the "emissions savings effect". We distinguish "domestic" versus "international" leakage which differs from the methodology used by the IPCC, where domestic leakage is implicitly netted out. We also develop a model of the economic effects of emissions intensive and trade exposed sectors (like ethanol) being allocated free allowances as in recent legislation. We take into account that the number of free permits is fixed and allocated annually. If requests exceed the cap, free allowances for each firm are prorated down proportionately. Furthermore, if the emissions intensity of a firm is below the industry average, this firm receives proportionately more allowances (at the expense of firms with emissions intensity above the industry average) and so is likely to expand output. We develop a general model of international trade in biofuels where the world market price of a biofuel is determined in one country with a combination of the highest consumer price paid for gasoline and the lowest net tax (the combination of the lowest fuel tax and highest biofuel tax exemption/tax credit). We develop a model to analyze the implications of mandates and tax credits with three different second best constraints: a sub-optimal fuel tax; adding a tax credit with a binding mandate; and interaction effects with the fiscal system where mandates and tax credits have differential effects on government tax revenues and the size of the fiscal base. We develop a model to analyze the sustainability of biofuel production based using a cost-benefit procedure that utilizes a social discount rate and a non-decreasing price of carbon over time, and determines a maximum payback period endogenously. We developed collaborations with Jerry Taylor at the Cato Institute to disseminate our findings through a Hill briefing, meetings with lobby groups and discussions with the media (print, radio and television). We also collaborated with Erika Kliauga on ethanol policies in Brazil and implications for the U.S. A collaboration was also made with Yacov Tsur of Hebrew University, an expert on climate change. PARTICIPANTS: Professor Harry de Gorter, principle investigator Professor David R. Just, co-investigator Dusan Drabik, graduate student Kristen Cooper, graduate student TARGET AUDIENCES: Outputs have taken different forms. I have many academic journal articles, several policy briefs on the web, a Hill briefing to policymakers in Washington DC, 2 newspaper op-eds, several podcasts, one television appearance and one radio show. I also made several conference presentations. The audience has varied from farm groups to Congressional staff, the World Bank, IMF, trade associations, the National Economists Club and the like. PROJECT MODIFICATIONS: Not relevant to this project.

Impacts
Our analysis on carbon leakage shows that biofuel studies to date on indirect land use change ignore counter-leakages in the forest market and leakages in the fuel market. Although international fuel leakage is always positive, domestic leakage is negative with a mandate only but total leakage is positive. Our empirical results show that domestic leakage is less important for total market leakage compared to the case of carbon leakage, a result driven by the emissions savings effect. We also show that it is possible for a country whose biofuel policies have a smaller impact on world oil prices can generate lower leakage than a "large" country on world oil markets. Empirically, we find market leakage around 65 percent, i.e., one gallon of ethanol replaces only 0.35 gallons of gasoline and the rest is leakage. Free permits to emissions intensive and trade exposed sectors generate two inefficiencies. First, because the government will prorate down each firm's free permit by the amount the sector's emissions cap is exceeded, lower cost firms will seek to increase their output at the expense of higher cost firms. Second, because the permits are free and a firm gets more free permits if emissions (and output) are higher, there is now an incentive to over abate and overproduce. We analyze the world biodiesel market and the U.S. splash & dash policy. Although the U.S. tax credit serves as a production (instead of a consumption) subsidy because the EU tax exemption establishes the world price, such a subsidy can be nullified if both countries had a tax exemption or a tax credit. Empirical analysis shows that reduced EU biodiesel production profitability was due to reduced world oil prices, decreasing EU tax exemptions and increasing rapeseed oil prices. Splash & dash is shown to have benefited EU taxpayers and fuel consumers as well as U.S. biodiesel producers. In analyzing biofuel policies with pre-existing distortions, we show that the superiority of mandates over tax credits is magnified by a sub-optimal fuel tax. The benefits come in the form of reduced GHGs, local air pollution, traffic congestion and traffic related accidents, and oil dependency. On the other hand, we show how a sub-optimal fuel tax makes an ethanol tax credit even more distortionary. However, both policies used in combination have tax credits now subsidizing gasoline consumption. Mandates have different impacts than tax credits on government tax revenues and fuel prices. Although in theory a mandate can cost more in taxpayer monies, empirically we find it saves substantial tax costs for the same quantity of ethanol (although the tax base is reduced through relatively higher fuel prices). Our empirical analysis of the sustainability of ethanol production show that if the range of social discount rates used by climate change economists is considered, only three land types out of seven in Brazil pass the cost-benefit test while none pass the test for the United States. Furthermore, the social value of CO2e savings by having the ethanol production from 12.8 million hectares of U.S. corn be produced in Brazil instead may be as high as $817.7 bil.

Publications

  • de Gorter, Harry, and Yacov Tsur. (2010). Cost-Benefit Tests for GHG Emissions from Biofuel Production. European Review of Agricultural Economics. Vol. 37(2):133-145; June.
  • de Gorter, Harry. (2010). The Social Costs and Benefits of Biofuels: The Intersection of Environmental, Energy and Agricultural Policy. Applied Economic Perspectives and Policy Vol. 32, Number 1:4-32.
  • de Gorter, Harry. (2010). What is better for the environment: a biofuel tax credit or mandate Biofuels (November). 1(6), 815-816.
  • de Gorter, Harry. (2010). Does US corn-ethanol really reduce emissions by 21 percent: Lessons for Europe. Biofuels (September) 1(5).
  • de Gorter, Harry. (2010). The one tragic mistake of biofuel policy that everyone can agree on: how tax exemptions with mandates subsidize oil consumption. Biofuels (July) 1(4), 531to 533.
  • de Gorter, Harry, and Erika M. Kliauga. (2010). Why Government Policies in Brazil Provide Little Support for its Ethanol Industry. Biofuels (May).
  • de Gorter, Harry. (2010). Why the EU Biodiesel Import Tariff on U.S. Splash & Dash Exports Will Make No Difference. Biofuels (March).
  • de Gorter, Harry. (2010). The Controversy over Indirect Land Use Change and the U.S. Sustainability Standard for Ethanol Production is Misplaced. Biofuels (January) 1(1), 23 to25.
  • de Gorter, Harry, and David R. Just. (2010). Ethanol and Corn Prices: the Role of U.S. Tax Credits, Mandates and Import Tariffs. Chapter 9 in Ball, V. Eldon; Fanfani, Roberto; Gutierrez, Luciano (Eds.) The Economic Impact of Public Support to Agriculture: An International Perspective Series: Studies in Productivity and Efficiency, Vol. 7, Springer.
  • Drabik, Dusan, Harry de Gorter and David R. Just. (2010). The Implications of Alternative Biofuel Policies on Carbon Leakage. Charles H. Dyson School of Applied Economics and Management Working Paper # 2010-22, Cornell University, November.
  • de Gorter, Harry, and Jerry Taylor. (2010). Ethanol: Let Protectionism Expire: Its high noon for ethanol subsidies and import tariffs, but not for the ethanol industry. National Review. December 8.
  • de Gorter, Harry, and Erika M. Kliauga. (2010). The Importance of Pending U.S. Ethanol Policy Reforms for Brazil. Guest columnist UNICA. http://english.unica.com.br/opiniao/show.aspmsgCode=24CC8816-CD5B-44 09-B091-35D6605484C1
  • Drabik, Dusan, Harry de Gorter and David R. Just. (2010). On the EU U.S. Biodiesel Splash & Dash Controversy: Causes, Consequences and Policy Recommendations. Selected paper Agricultural and Applied Economics Association Annual Meeting, July 25 to 27, Denver, Colorado
  • de Gorter, Harry, and Jerry Taylor. (2010). The Ethanol Tax Credit Its worse than You Think. http://www.masterresource.org/2010/08/ethanol-tax-credit-worse-than-t hink/
  • de Gorter, Harry. (2010). Rethinking Biofuels Policy. Capitol Hill Briefing Thursday, September 30. B 338 Rayburn House Office Building http://www.cato.org/event.phpeventid=7533 http://ne.edgecastcdn.net/000873/archive-2010/hba-09-30-10.mp3
  • de Gorter, Harry. (2010). Inefficiency of Free Permits under Cap and Trade. Fox Business News July 6. http://video.foxbusiness.com/v/4273476/can-we-afford-cap-and-trade-in -this-economy
  • de Gorter, Harry. (2010). Agriculture and Climate Change. Presentation to conference Bioeconomy and Global Climate Change, Michigan State University 26-27 April. http://espp.msu.edu/climatechange/symsession-DeGorter_Harry.php
  • de Gorter, Harry. (2010). National Economists Club podcast. The Unique Interaction Effects of Renewable Energy Policies. October 14. http://www.national-economists.org/podcasts/nec151.mp3
  • de Gorter, Harry. (2010). AEPP podcast and transcript on The Social Costs and Benefits of Biofuels The Intersection of Environmental, Energy and Agricultural Policy. Feb 15. http://www.oxfordjournals.org/our_journals/aepp/podcast_episodes.html http://www.oxfordjournals.org/our_journals/aepp/podcasts/transcript32 .1.html
  • Harry de Gorter (2010). has a more complicated take the subsidy decreases the cost and therefore the price of gasoline, effectively subsidizing its consumption. Your Congress at work. http://www.nationalreview.com/articles/255221/ethanol-idiocy-will-not -die-rich-lowry
  • Why ethanol tax credit and import tariff should not be extended. (2010). http://www.washingtonexaminer.com/politics/Ethanol-subsidies-pose-ear ly-test-for-the-GOP-1465907-106781458.html
  • Ethanol subsidies. (2010). Gordon Liddy Radio Show http://feeds.radioamerica.org/loudwater/ggl/000004222_000_000000006.m p3
  • de Gorter, Harry, and Erika M. Kliauga. (2010). A Importancia para o Brasil das Reformas em Curso nos Estados Unidos sobrea Politica de Etanol. (The Importance of Pending U.S. Ethanol Policy Reforms for Brazil) Valor Economico Op-ed, 5 December.
  • Drabik, Dusan, and Harry de Gorter. (2010). Biofuels and Leakages in the Fuel Market. Paper at the IATRC Public Trade Policy Research and Analysis Symposium Climate Change in World Agriculture: Mitigation, Adaptation, Trade and Food Security Universitat Hohenheim, Stuttgart, Germany, June 27 to 29.
  • Ethanol subsidies could complicate WTO negotiations Inside Trade. (2010). http://sugarcaneblog.com/2010/10/15/leaked-proposal-from-u-s-ethanol- groups-to-have-wto-implications/
  • Other Seminar Presentations on the Social Costs and Benefits of Biofuel Policies. (2010).
  • The National Economic Council Washington DC October 14, 2010 IMF World Bank Macroeconomic Group June 30 2010 Michigan State University April 28, 2010
  • Discussant WB Workshop on Biofuels March 17 2010