Biofuels for Food – A spatial PEM approach to determine when the production of biofuel increases that of food crops

Mr Niklas  Hinkel, University of Cologne, Germany

Following initial excitement about biofuels, competition between energy crops and food crops for resources came to the center of attention in the mid-2000s, when food prices rose distinctly. The resulting generalizing criticism on biofuels needs to be differentiated. In this project, I show under which circumstances food production profits from biofuels. Namely, if high export costs, caused by high fuel costs, seclude the producers of underutilized agricultural areas from global markets, an expansion of local biofuel production could be beneficial. It would lower fuel costs and thus, transport and export costs. Given favorable market conditions (prices globally are higher than locally plus respective transport costs), producers could now profitably export and increase food output up to their capacity limit.

This project outlines the transition from the dependence of imports from volatile oil markets towards sustainable energy independence in the transport sector of a developing economy (in this case Zambia). The production of biofuel is a technological innovation in energy supply, which permits an increase in agricultural production. This augments welfare globally. If this increase in production stems from technological progress rather than from net-expansion of agricultural area, welfare can raise at low ecological cost.

Using GAMS, I develop a static spatial computable partial equilibrium model based on three goods (corn, palm oil, and biodiesel) and two non-spatial regions (local and global) to scrutinize how model parameters affect the economic viability of the setting. I model the production functions fundamentally (building on Burke et al. 2011 for corn and on Sinkala et al. 2013 for palm oil/biodiesel) and let producers choose to what extend they allocate resources to the production of food or energy crops. This reveals how the substitution of imported fossil fuel by cheaper local biofuel affects transport costs between the regions and, eventually, profits. The definition of fuel costs as endogenous in a model which includes the production of fuel is a necessary extension to the existing literature (cf. Drabik et al. 2016 for a related model with exogenous transport costs).

The analysis of country level macro data revealed Zambia as a promising real world application. Thus, I model Zambia as the local market, a small country regarding international trade, i.e. it does not influence global markets. The data is taken from literature and publicly available sources, such as UN FAOSTAT or publications by local governments.

Preliminary results indicate that local production of liquid biofuels can increase energy independence in the transport sector, if this production crowds out sufficiently pricy imports of liquid fossil fuels. A limiting factor for this crowding out is a potentially lucrative alternative use of energy crops, i.e. the use of palm oil for cooking and industrial products other than biodiesel. Combined with untapped agricultural potential, the production of biofuels may lead to increased production and export of food. Several landlocked African countries display these necessary conditions for the examined setting, allowing for an increase in welfare for over 160 million people, if biofuels unlock the agricultural potential of these countries. A logical next step is to apply the analysis to other promising countries, e.g. Uganda.