Why ILUC Theory Bears No Resemblance to Reality

Iowa State’s Bruce Babcock has written a defense of the current economic equilibrium models used by the EPA and California Air Resources Board, in light of the fact that the models’ assumptions about soybean production and acreage have turned out wrong. Babcock frames the debate over international land use change as “whether the models used by CARB and EPA are accurate enough to support regulations.” There is, however, a larger question over whether the models are the appropriate ones to use in the first place.

Economic equilibrium models by definition measure the demand for biofuel feedstocks as a shock to the worldwide agricultural system. As Babcock explains, economists estimate a baseline measure of the agricultural system “under a set of assumptions about future macroeconomic growth, growing conditions, crop yields, exchange rates, and government policies,” and then rerun their model with a higher amount of biofuel production while holding all other factors constant. The difference in model outcomes is intended to isolate the effect of biofuels on the system.

It has been noted that the outcomes are highly sensitive to the assumptions for the factors that are held constant. For instance, authors at Iowa State have explored the sensitivity of the model to the variable of crop yield. But the underlying problem with the model is that it presents the worldwide agricultural system with only one possible reaction to the “shock” of U.S. biofuels — land use change. And it does so by assuming that worldwide land use is at a point of equilibrium. “Expansion of U.S. biofuels will result in more land being devoted to crop production on an aggregate worldwide basis,” Babcock writes.

Worldwide agricultural land use is shifting and has shifted over time as other countries compete with the U.S. for agricultural markets. The USDA Economic Research Service’s “Agricultural Projections to 2018” shows that U.S. agricultural land devoted to the eight major crops has shrunk since 1980, but is expected to remain stable through the next decade due in part to biofuels. While this model and its outcomes are also based on and sensitive to assumptions, they are designed to measure the interplay of worldwide economic growth, population growth, the value of the U.S. dollar, and oil prices in addition to U.S. agricultural policies and biofuels.

Babcock notes that the variables plugged into the models being used by EPA and CARB “are ripe ground for aggrieved parties.” It should also be noted that the choice of models by EPA and CARB were also political decisions influenced by the input of environmental and other interests. The fact that these models are used by EPA and CARB only to measure the effects of biofuels, while different models are used for petroleum, is likewise a political decision. Perhaps certain parties would not be so aggrieved if the outcome of the “analyses” by EPA and CARB had not been predetermined in such a way.

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EPA Denies Texas Request to Waive RFS

Today, EPA Administrator Stephen Johnson announced the decision to deny Texas Gov. Rick Perry’s request for a waiver of the Renewable Fuel Standard.

Johnson said in a press release: “After reviewing the facts, it was clear this request did not meet the criteria in the law. The RFS remains an important tool in our ongoing efforts to reduce America’s greenhouse gas emissions and lessen our dependence on foreign oil, in aggressive yet practical ways.”

In its formal response to the request, EPA noted several reasons for denying this request and laid out a framework for future requests.

The EPA rejected Texas’ claim that the RFS was causing severe harm to the economy by raising food and feed prices. They relied on a model developed by Iowa State University that shows biofuel production is only one element — and a small one compared to oil prices — contributing to high food and feed prices. Further, the EPA found that granting the waiver would not lower corn prices, so it would not provide the remedy that Texas sought.

In the end, EPA affirmed that the goals of energy independence, rural growth and reduction of greenhouse gases — which biofuels can provide — provide economic benefits that must be weighed against any claim of economic harm contained in a future request to set aside the RFS.

Overall, the EPA did not consider two important questions that this blog has been following — the development of advanced biofuels and the calculation of greenhouse gas emissions attributable to indirect land use.