Economic Impacts of Biofuels

Abstract

The impacts of biofuels are not limited to biofuel industry and the agriculture sector, they spill over throughout an economy due to the inter-linkages between production sectors. The impacts are also felt across the borders through the international trade. For example, EU’s mandate on biofuels could boost Brazil and Indonesia’s economy. Using global macroeconomic models, particularly, computable general equilibrium (CGE) models, a number of studies have assessed economic impacts of EU’s or global mandates on biofuels (e.g., Timilsina et al. 2012; Hertel et al. 2010; Kretschmer et al. 2010). While a single biofuel project implemented in a country may not have economic impacts at a scale noticeable at a national and an international level, a large group of projects or a biofuel policy aiming a large-scale expansion of biofuels would certainly have significant economic impacts at country level if not at global level. For example, Timilsina et al. (2012) finds that if the biofuel mandates and targets announced by the 40 plus countries around the world are executed by 2020 thereby increasing the share of biofuels in the global liquid fuel demand for transportation to 9 % from the current level of 3 %, various countries or regions would exhibit significant difference in their economic impacts ranging from 0.23 % loss of GDP in India to 0.05 % increase in GDP in Thailand. However, at the global level the impact was fairly modest (0.02 %) compared to that in the baseline. Similarly, Kretschmer et al. (2009) find a 10 % EU-wide biofuel mandate not causing a noticeable change in aggregate welfare of EU countries compared to a reference scenario where EU meets its 20 % GHG mitigation targets without biofuel mandate. However, the welfare impacts differ significantly across EU countries with some countries gaining, while others loosing.