The Long-Run Impact of Biofuels on Food Prices

Abstract

More than 40 percent of US corn is now used to produce biofuels, which are used as substitutes for gasoline in transportation. Biofuels have been blamed universally for past increases in world food prices, and many studies have shown that energy mandates in the United States and European Union may have a large (30-60 percent) impact on food prices. In this paper, we use a partial equilibrium framework to 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 biofuels policy. By specifying a Ricardian model with differential land quality, we find that a significant amount of new land will be converted to farming, which is likely to cause a modest increase in food prices. However, biofuels may actually increase aggregate world carbon emissions, due to leakage from lower oil prices and conversion of pasture and forest land to farming.

Keywords: clean energy, food demand, land quality, renewable fuel standards, transportation

JEL Classification: Q24, Q32, Q42