• Working Paper

Impact of Biofuel Production on World Agricultural Markets: A Computable General Equilibrium Analysis

Citation

Birur, D. K., Hertel, T. W., & Tyner, W. E. (2008). Impact of Biofuel Production on World Agricultural Markets: A Computable General Equilibrium Analysis.

Abstract

This paper introduces biofuels sectors as energy inputs into the GTAP data base and to
the production and consumption structures of the GTAP-Energy model developed by
Burniaux and Truong (2002), and further modified by McDougall and Golub (2008). We
also incorporate Agro-ecological Zones (AEZs) for each of the land using sectors in line
with Lee et al. (2005). The GTAP-E model with biofuels and AEZs offers a useful
framework for analyzing the growing importance of biofuels for global changes in crop
production, utilization, commodity prices, factor use, trade, land use change etc. We
begin by validating the model over the 2001-2006 period. We focus on six main drivers
of the biofuel boom: the hike in crude oil prices, replacement of MTBE by ethanol as a
gasoline additive in the US, and subsidies for ethanol and biodiesel in the US and EU.
Using this historical simulation, we calibrate the key elasticities of energy substitution
between biofuels and petroleum products in each region. With these parameter settings
in place, the model does a reasonably good job of predicting the share of feedstock in
biofuels and related sectors in accordance with the historical evidence between 2001 and
2006 in the three major biofuel producing regions: US, EU, and Brazil. The results from
the historical simulation reveal an increased production of feedstock with the replacement
of acreage under other agricultural crops. As expected, the trade balance in oil sector
improves for all the oil exporting regions, but it deteriorates at the aggregate for the
agricultural sectors.