Biofuels and their by-products: Global economic and environmental implications☆
Introduction
The global biofuel industry has been growing rapidly over the past decade. This has resulted in strong growth in the associated by-products. Biofuels from grains, in particular corn, are produced in conjunction with various distillers grains products, mainly dried distillers grains with solubles (DDGS) and wet distillers grains with soluble (WDGS). US DDGS production increased sharply from about 4.5 Mt in 2001 to 11.25 Mt in 2006. Soy and rapeseed meals are joint products obtained from production of vegetable oils from oilseeds. In this paper, we refer to the latter class of by-products as VOBP. This paper only concerns first generation biofuels and not possible second generation biofuels that could be produced from cellulose.
Biofuel by-products represent an important component of total industry revenues. For example, each 100 kg of corn used in a typical dry milling ethanol plant generates roughly 40.2 L of ethanol and 32.1 kg of DDGS. Correspondingly, producing 10 L of biodiesel from soybean (rapeseed) generates 38.3 kg (12.3 kg) of soybean (rapeseed) meal. According to our calculations about 16% of a corn based dry milling ethanol plant's revenue comes from DDGS sales. Corresponding shares for typical rapeseed and soybean based biodiesel producers are about 23% and 53%, respectively. These by-products are mainly used as a protein source and their prices are highly correlated with prices of grains and oilseeds.
An important outcome of this joint production process in the biofuel industry is that when biofuel production is encouraged, for example due to government subsidies or positive oil price shocks, the production of these by-products also increases, and, as a result, their prices fall relative to other feed ingredients. This encourages livestock producers to use more biofuel by-products in their production processes. On the other hand, any reduction in the prices of by-products diminishes total revenue and acts as a brake on growth of the biofuel industry. From this perspective, biofuel by-products function as both a shock absorber and a price adjuster.
Another important aspect of biofuel by-products is that they help mitigate the environmental consequences of expansion by the biofuel industry. For example, DDGS substitutes for both corn and soybean meal in livestock rations but mainly for corn. This ultimately reduces the land use consequences of biofuel production and eases the demand for chemical inputs, such as fertilizers and pesticides, in crop production.
The importance of incorporating by-products of biofuel production in economic models is well recognized in several early partial equilibrium analyses of biofuel production. For example, Tokgoz et al. [1] incorporated DDGS as a substitute for corn into the CARD agricultural model at Iowa State University and show that the inclusion of DDGS in the model significantly changes the results. Tyner and Taheripour [2] and Babcock [3] have also incorporated DDGS by-products into their partial equilibrium models to evaluate the economic impacts of biofuel production. By-products from grain milling have previously been incorporated into a CGE framework by Rendleman and Hertel [4] who show that, by ignoring this factor, the benefits to corn producers from the sugar program are greatly overstated. However, to date, this issue has not been tackled by those conducting CGE analysis of biofuels programs, and this has been a serious omission.
Several papers have used CGE models and addressed the economy-wide and environmental consequences of producing biofuels at a large scale (recent examples are: refs. [5], [6], [7], [8]). These papers mainly argue that since biofuels are mostly produced from agricultural sources, their effects are largely felt in agricultural markets with major land use and environmental consequences. In this paper, we argue that these earlier studies have significantly overstated the impact of liquid biofuels on agricultural markets due to the fact that they have ignored the role of by-products resulting from the production of biofuels.
In this paper we introduce DDGS and VOBP into a global CGE model, nicknamed GTAP-BIO, developed at the Center for Global Trade Analysis at Purdue University. The GTAP-BIO model is a modified version of the GTAP-E model, originally developed by Burniaux and Truong [9] to incorporate energy into the GTAP framework, and recently modified by McDougall and Golub [10]. Birur et al. [8] have introduced biofuels into this model. They augment the model by adding the possibility for substitutability between biofuels and petroleum products. In a recent work, Hertel et al. [11] have augmented this model with a land use module to accurately depict the global competition for land between land use sectors. The land use module, nicknamed GTAP-AEZ, disaggregates land use into 18 AEZ [12]. AEZs share common climate, precipitation and moisture conditions, and thereby capture the potential for real competition between alternative land uses. They used this model to examine the implications of US and EU biofuel mandate policies for the world economy.
We introduce biofuel by-products into their model and compare our simulation results with their results omitting by-products. This comparison highlights the importance of incorporating biofuel by-products into the economic analysis of policies which are designed to encourage production of biofuels. One of the main obstacles in accomplishing this previously has been the challenge of incorporating biofuels and their by-products into a global, economy-wide data base. Taheripour et al. [13] have explicitly incorporated biofuels production, consumption, and trade into the standard GTAP database. In this paper we introduce by-products into the GTAP-BIO database.
In the standard GTAP framework, there is a one-to-one mapping from commodities to single-product sectors. However, with joint products, the number of commodities is larger than the number of sectors due to the presence of biofuel by-products. This paper divides the global economy into 28 sectors/industries, 30 commodities, and 18 regions comprising the major biofuel producers (including US, EU, and Brazil) as well as non-biofuel producers. It analyzes impacts of implementation of biofuel promotion policies on key economic variables such as land use, production, prices and trade of a wide range of commodities, emphasizing food and agricultural commodities. In particular, this paper examines the global impacts of the US Energy Independence and Security Act of 2007 and the European Union mandates for promoting biofuel production. These mandates are discussed in detail in ref. [11].
Section snippets
Data
Taheripour et al. [13] have explicitly introduced three biofuel commodities (including ethanol from food grains, ethanol from sugarcane, and biodiesel from oilseeds) into the GTAP database. In this paper we extend the GTAP-BIO database in several directions to properly trace the link among the biofuel, vegetable oil, food, feed, and livestock industries. We first distinguish between feedstock of the US and EU ethanol industries. In the modified GTAP-BIO database, the US uses corn and EU uses
Model
The model used in this paper, GTAP-BYP, is a modified version of the GTAP-BIO model introduced earlier. This section explains key equations which have been added to the model. Interested readers may obtain the revised model from the authors upon request.
To introduce by-products into the supply side of the model we revised the zero profit condition of the original model. The original GTAP model and its extensions, including GTAP-BIO, assume each sector only produces one commodity. These models
Alternative scenarios
The goal of this paper is to highlight the importance of incorporating biofuel by-products in the economic and environmental analysis of biofuel production on a global scale. To accomplish this goal we adopt the method developed in Hertel et al. [11]. Those authors have provided an experiment which uses the 2001 database and shocks only those variables that were key in shaping the US and EU biofuel economy over the time period of 2001–2006 to generate a database for 2006. Then they shock the
Simulation results
Here we compare the results from the two prospective scenarios which depict the world economy in 2015 in the presence of the US and EU biofuel mandate policies, both with and without biofuel by-products present in the analysis. In this comparison we highlight the implications for several key economic variables as well as for indirect land use change which has become the most controversial topic surrounding biofuel mandates in the US and the EU.
Conclusions
This paper uses a general equilibrium framework to study the importance of biofuel by-products in the economic analysis of policies which are designed to encourage production of biofuels. This study shows that incorporating biofuel by-products in such analyses considerably alters the results in the face of 2015 international biofuel mandates. While both models demonstrate significant changes in agricultural production pattern across the world, the model with by-products shows smaller changes in
Acknowledgments
The reseach reported in this paper was partially supported by funding from the U.S. Department of Energy and Argonne National Laboratory.
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Farzad Taheripour is energy economist, Thomas H. Hertel and Wallace E. Tyner are professors, and Dileep K. Birur is Ph.D. candidates in the Department of Agricultural Economics at Purdue University. Jayson F. Beckman is an economist in the USDA.