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How Global Biofuel Expansion Could Affect the Economy, Environment and Food Supply

  • National targets would contribute to rapid biofuel expansion in the next 10 years
  • Reaching those goals would have a limited impact on the global economy
  • Some countries would be affected significantly, with higher cost of food imports

June 27, 2011—Expanding biofuel production to meet various national targets in the next decade would have a limited impact on the global economy, but poor people in some developing countries would find it harder to afford an adequate diet, according to recent World Bank research.

The expansion would push up prices for many food staples. Global prices for corn and other major grains could rise by as much as 3 percent and the price of sugar by 8%, according to the research, which is based on a simulation model covering 25 countries or regions through 2020. The expansion would only lead to a modest percentage decline in global gross domestic product.

The effort would benefit major biofuel-exporting countries, such as Brazil, Argentina and Indonesia, as higher demand boosts their exports of biofuels and feedstocks. But other countries, which have ambitious targets for biofuels but only limited domestic production, could end up converting a significant amount of land from food crops to biofuel production.

The volume and cost of their agricultural imports, meanwhile, would rise. India’s agricultural imports, for example, would rise 4 percent, and its food exports would drop by up to 6 percent. The overall impact on the cost of food purchase would be fairly minor for most countries, but higher prices of basic staples would prove especially burdensome for the very poor in places such as India and many parts of sub-Saharan Africa.

“Biofuels are an important alternative source of energy, but a large-scale expansion could hurt countries already constrained by land, food and other resources,” says Govinda Timilsina, a senior economist at the World Bank’s Development Research Group and leader of its biofuels research program. He spent two and a half years conducting the research with partners at the Bank, the University of California at Berkeley and Iowa State University.

The research comes as developing and developed countries alike have set biofuel mandates or voluntary targets in recent years, amid concerns about climate change and the rising cost of fossil fuels. Brazil, for example, requires regular gasoline to contain as much as 25 percent ethanol blends. If all the countries meet their goals, global biofuel production would go up more than 60 percent in the next decade, though it would still be a fairly small share of global fuel consumption.

The rapid expansion over the past decade contributed to the 2008/09 jump in food prices, though findings from different studies provide a broad range of estimates for the exact impact. Even less is known regarding how meeting all those goals for biofuel expansion would affect the world’s economy, the environment and the availability of food for the world’s growing population, among other things, in the long run.

The research aims to help fill that gap by evaluating the impact of the expansion through 2020. Using a global economic model, it simulates how the global expansion of biofuel production would affect the world’s economic activities, environment and social welfare. The analysis addresses in detail key factors such as the cost of biofuels, changes in land use and competition between biofuels and food production. The results are presented in comparison to a scenario without those mandates, assuming the current pace continues in economic development, population growth and biofuel development.

There are some caveats. The research assumes countries will meet all of their biofuel targets, which would require significant reshuffling of land use, capital and labor. Land expansion is also likely to lead to more deforestation, says Dominique van der Mensbrugghe, a co-author and economist at the World Bank’s Development Prospects Group.

In addition, a sustained and significant rise in crude oil prices could increase the demand for biofuels and raise overall food prices. For example, if oil prices rise 150 percent from their 2009 levels by 2020 – rather than the 65 percent used as a baseline assumption in the current research – biofuel production would be expanded at a faster pace. The researchers point out that this would lead to a larger impact on food prices and the overall economy than the findings summarized above. 

And, while many support biofuels as an instrument to reduce greenhouse gas emissions, the researchers say emissions would rise in the short run, mainly because of destroyed pasture and forest areas. It would take more than two decades to reverse the trend through reductions in the use of fossil fuels, unless the conversion of forest land is avoided.

“Second-generation” biomass-based fuels, which are made from non-crop feedstocks, would be more environmentally friendly and put less pressure on the global food supply. But the researchers conclude that those potential sources need to overcome major technical obstacles before they are ready for large-scale commercial production.

“The research helps policy makers and the development community better understand the factors influencing the long-term impacts of expanding biofuels,” says Michael Toman, manager of environment and energy research in the Development Research Group. “It points especially to both challenges and uncertainties presented by a concerted effort to expand global biofuels production.”

 




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