Indirect Land Use Change, Uncertainty, and Biofuels Policy

Abstract:     
Indirect land use change (ILUC) is based on the simple observation that use of cropland for biofuels raises food prices and thereby increases the incentive to convert forests and grasslands to crop production, causing the released of stored carbon and decreasing future carbon sequestration. ILUC is mediated by world food and fiber prices and therefore requires no geographic link between the land used for biofuels and the land converted to crops – growing biofuels in Iowa could cause the loss of rainforest in Brazil. Current models indicate that ILUC is substantial but there is substantial uncertainty about its magnitude.

This Article uses EPA’s recent decision to approve corn ethanol as a renewable fuel as a lens for examining the ILUC issue and more generally the regulatory treatment of uncertainty. Given the closeness of the decision to approve corn ethanol as a renewable fuel, a more sophisticated treatment of uncertainty would likely have changed the outcome. But EPA was correct to proceed with a consideration of ILUC despite the admitted degree of uncertainty regarding the magnitude of ILUC.

Number of Pages in PDF File: 32

Keywords: biofuels, indirect land use, uncertainty, risk aversion, renewable fuels, administrative law

JEL Classification: N50, Q18, Q48, K32

working papers series