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Climate Economics Seminar: Impact of Biofuel Policy on Food Prices and Poverty

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Date(s): May 1, 2012, 2 - 3:30 PM

Location: Room 4128, EPA West Building, 1301 Constitution Ave., NW, Washington, DC

Contact: Carl Pasurka, 202-566-2275

Presenter: Ujjayant Chakravorty, Department of Economics, University of Alberta

Description: The seminar will present material from the following two papers:


"Do Biofuel Policies Really Increase Food Prices?" - More than 40% of US grain is now used to produce biofuels, which are used as substitutes for gasoline in transportation. Biofuels have been blamed universally for recent increases in world food prices. Many studies have shown that these energy mandates in the US and EU may have a large (30-60%) impact on food prices. In this paper we show that demand-side effects - in the form of population growth and income-driven preferences for meat and dairy products rather than cereals - may play as much of a role in raising food prices as biofuel policy. Because of new land that can be brought under farming, the rise in food prices is likely to be much smaller than predicted by other studies. However, biofuels may increase aggregate world carbon emissions, due to leakage and conversion of new land for farming.


"Does US Biofuel Policy Increase Poverty in India?" - Many countries have adopted aggressive policies that promote biofuels as a substitute for gasoline in transportation. For instance, more than 10% of US gasoline use now comes from corn ethanol. This share is expected to rise to 30% in 2022. In this paper, we focus on the effect of US biofuel policy on poverty in India. First, we use a model with endogenous land use to estimate the effect of the mandate on the world price of selected food commodities - rice, wheat, sugar and meat and dairy – which provide almost 70% of food calories in India. We obtain world price increases of the order of 10% for most of these commodities. Next we estimate their price pass-through to the Indian domestic market. Finally, using household data on Indian food consumption, wages and income, we estimate the effects of these energy-induced price increases on welfare. We account for the positive effects of food price increases through wages and income. We show the net impact on welfare is negative and regressive, i.e., the policy affects the poorest the most. About 35 million new poor may be created in India due to US energy policy. With imperfect pass-through mainly due to strong (and potentially costly) government intervention in food markets, these numbers reduce to 14 million. The main finding of the paper is that even if biofuel policies lead to a modest increase in food prices, they may cause a significant increase in poverty in developing countries.


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