Modelling the regional economic impacts of biofuels development

Mr Grant Allan, Department of Economics, University of Strathclyde

Biofuels offer the possibility of serving most, if not all, of the four goals of Scottish energy policy (Scottish Government, 2009): reducing emissions; improving security of supply; improving accessibility to cheap fuels (particularly, perhaps, in remote rural areas); and offering scope for regional economic development potential. The extent to which economic development in the region is boosted is likely to depend upon the specific biofuels technology employed, and its embeddedness into the regional economy, noting any existing regional activity which is likely to be displaced by that fuel technology (if applicable). These issues can be considered within appropriately disaggregated regional Input-Output (IO) models, and have been incorporated in studies for ethanol and biodiesel technologies. Such studies show the regional economic link between changes in demand for biofuels in the region and economic variables. Such models however, typically employ conventional “demand-driven” IO models in linking changes in demand for a sectors output and regional output changes. In the specific case of (first-generation) biofuels, the assumptions underlying “demand-driven” models appear to be unsuitable, particularly the assumption that sector outputs are not supply-constrained. This could necessitate the use of “hybrid”, or “mixed” IO modelling techniques. In this paper, we use “demand-driven” and “hybrid” IO models of regions of the UK to demonstrate the differences in economic impact implied by these two approaches.  We outline the possible advantages to using a Computable General Equilibrium modelling approach for examining these issues, and some directions for future research in this area. We note the applicability of these methods to estimating the economic impact of the production of biofuels from algal biomass, as well as considering what lessons can be learned from the regional development opportunities secured from first- and second-generation biofuel development, for third-generation technologies.