Discussion Topic 2: Energy Security

1. Costs of Energy Security and
Implications for Food Prices
Madhu Khanna
University of Illinois, Urbana-Champaign

2. Biofuel Policies: US, Brazil, India
• Motivation: Reducing dependence on fossil fuel imports
• Policy support critical to induce consumption of biofuels given their relatively high cost compared to gasoline
• Corn ethanol in the US meeting more then 10% of the demand for transportation fuel
• Sugarcane ethanol in Brazil meeting about 50% of the domestic demand and some exports
• Ethanol from sugarcane molasses meeting about 5% of the domestic demand for gasoline in India
• Key national policies:
• Biofuel mandate: Renewable Fuel Standard in the US with a quantity mandate for various types of biofuels
• Blend mandate: 18-25% of gasoline consumed in Brazil
• Blend target 10-20% of gasoline consumed in India by 2017
• Tax Credit: Subsidy in the US for corn ethanol (45c-51c/gallon) and cellulosic ethanol ($1.01/gallon) for cellulosic
• Differentiated taxes in Brazil: 110% tax on gasoline with tax credit for E100 and anhydrous ethanol: 42%
• Administered prices for ethanol and gasoline in India that make it unprofitable to produce ethanol or blend it
• Who pays and who benefits from these policies?
• What are the implications of these policies for
• fossil energy consumption/imports?
• food crop production/prices?

3. Impact of Biofuel Production in the US
Biofuel mandate:
• Increase in food crop prices (20-30%) but decrease in fuel price (5-10%)
• Would have had a less negative impact on corn price in the absence of
import tariff (prior to 2010)
• Overall an increase in welfare for the US because it improves the US terms
of trade (Chen et al., 2014; Cui et al. 2011)
• But decrease in global social welfare due to food price increase
• Increases fuel consumer surplus and agricultural producer surplus
• Decreases food consumer surplus and fuel producer surplus
• Could reduce cumulative gasoline imports (2007-2030) by 10%
• Overall global reduction in fossil fuel consumption less than 50% of biofuel
produced in US due to global rebound effect
• Potential indirect land use change (Khanna and Crago, 2012)

4. Biofuel Production in Brazil
0
20
40
60
80
100
Status Quo First Best
0
2
4
6
8
10
12
14
16
Status Quo First Best
Increase in Oil Exports Relative to No Policy
Baseline (MTOE)
-40
-30
-20
-10
0
10
20
30
Fuel
Consumers
Sugar
Consumers
Oil
Industry
Producers
Sugarcane
Industry
Producers
GHG
Emissions
Total
Status Quo
First Best
Welfare and GHG Effects
(% Deviation Relative to No-Policy Baseline)
Change in Government Revenue Relative to No Policy
Baseline ($R Billion)
Khanna, Nunez, Zilberman (unpublished)
• Large availability of pastureland in low productive uses
• Significant potential for intensification of livestock
production
• Relatively small impact of biofuel production on
food crop prices (Nunez et al., 2013)

5. Biofuel Production in India
Blend mandate of 20% by 2017
• Require about 5.7 B liters of ethanol
• Sugarcane grown under irrigated conditions
• Requirement to meet a significant portion of it using molasses rather than
sugarcane juice directly to avoid conflict with sugar production
• Would require a significant increase in sugar production leading to a decline in sugar prices
• Diversion of molasses from alcohol industry; increase in beverage alcohol prices
• Use of 26% of sugarcane could meet the blend mandate
• Grown on 1.2 million hectares (1% of cropland)
• Increase in wheat and rice price of 1% and 5%; sugar price by 14%
• Increase in blended fuel price of 10%
• Spatial location of sugarcane expansion will matter due to heterogeneity in yields,
irrigation requirements and length of growing season
(Khanna et al., 2012)

6. Summary
• Large scale reliance on food crop based biofuels will involve conflicts between
energy security and food security
• Except in some land abundant countries, such as Brazil
• Energy security effects of biofuels depend on their impact on global fuel
prices and strategic behavior by OPEC
• Biofuel mandates can however increase aggregate domestic social welfare
due to positive impacts on agricultural producers and possibly on fuel
consumers
• Transition to second generation biofuels from crop residues and high yielding
energy crops has a larger potential to contribute to energy security with less
adverse impact on food crop production
• Requires policies that differentiate among biofuels and set performance based targets,
such as a carbon tax or a low carbon fuel standard
• Expansion in biofuel production needs to be accompanied by demand side
policies that lead to a higher share of flex fuel cars and fuel distribution
infrastructure to support them

7. References
• Khanna, M., H. Onal, C. Crago, and K. Mino, 2012“Can India Meet Biofuel Policy Targets? Implications for Food and Fuel
Prices,” American Journal of Agricultural Economics, 95 (2), 296-302. 2013
• Chen, X. and M. Khanna, 2012 “Food vs. Fuel: The Effect of Biofuel Policies,” American Journal of Agricultural Economics,
May, 2012. 95 (2), 289-295. 2013
• Huang, H. M. Khanna, M, H. Onal and X.Chen, 2013 “Stacking Low Carbon Policies on the Renewable Fuel Standard:
Economic and Greenhouse Gas Implications.” Energy Policy. 56, 5-15.
• Khanna, M and C.L. Crago, 2012 “Measuring Indirect Land Use Change with Biofuels: Implications for Policy,” Annual
Review of Resource Economics, DOI: 10.1146/annurev-resource-110811-114523.
• Khanna, M and X. Chen, 2013 “Economic, Energy Security and Greenhouse Gas Effects of Biofuels: Implications for Policy,”
American Journal of Agricultural Economics, 95(5), 1325-1331.
• Chen, X, H. Huang, M. Khanna and H. Onal, 2014 “Alternative Fuel Standards: Welfare Effects and Climate Benefits” Journal
of Environmental Economics and Management 67, 241–257.
• Nunez, H., H. Onal and M. Khanna, 2013 “Land Use and Economic Effects of Alternative Biofuel Policies in Brazil and the U.S”
Agricultural Economics, 44: 487–499.
• Khanna, M., H. Nunez and D. Zilberman, 2014 “Who Pays and Who Benefits from Fuel Policies in Brazil,” manuscript.
• Cui,J.,Lapan,H.,Moschini,G.,Cooper,J.,2011.” Welfare Impacts of Alternative Biofuel and Energy Policies” American Journal of
Agricultural Economics 93, 1235–1256.
• Salvo, A., Huse, C., 2011. Is Arbitrage Tying the Price of Ethanol to that of Gasoline? Evidence from the Uptake of Flexible-
Fuel Technology. The Energy Journal 32, 119–148.