The Economics of Biofuels, food, and the Environment

This chapter provides optimal welfare economics policies that incorporate some of the recent developments that led to the introduction of biofuels and policies to manage biofuel, food, and fossil-fuel allocation. Our model suggests that (1) globalization contributes to higher food and fuel prices by increasing incomes, (2) the introduction of biofuels puts extra pressure on prices that can be alleviated only through the adoption of innovation and enhanced supply, and (3) optimal policies include carbon taxes and subsidies for fuel security. Policy making is not as general and comprehensive as the welfare economics model suggests. Rather, it is piecemeal and adaptable. We argue that major biofuel policies, such as biofuel mandates, tariffs on imported biofuels, and the renewable fuel standard, can be explained as the outcome of a policy that tries to maximize fuel security, subject to budgetary, behavioral, and environmental constraints. Our analysis suggests that some of the impacts of biofuels on food prices as well as deforestation can be mitigated if regulations and incentives that slow the adoption of modern agricultural technologies are modified and the capacity to adopt biofuels is expanded. Finally, biofuel policies are in a transitional stage and will need to be modified once a more comprehensive policy to address climate change has been established.