Analysis of Trade-offs Between First-generation Biofuels and Food Production for Japan Using CGE Modelling

Abstract

Depending on the technology used to produce liquid biofuels, they can be classified into: first-, second-, and third-generation biofuels. The first generation uses as feedstock edible biomass such as corn and sugar cane, the second generation uses lignocellulosic biomass such as forest residues, and the third generation uses algae. The technologies employed to produce first-generation liquid biofuels are more developed and mature than those employed by the second- and third-generation. However, the fact that they use edible crops as feedstock leads to a debate about the negative impacts that this can cause in an economy, particularly over the prices of the food sector. This work joins this debate by analyzing the economic impacts that introducing ethanol produced from rice can cause in the Japanese economy. A comparative-static, multi-sector, Computable General Equilibrium (CGE) model is used to execute the analysis. The model simulates a neoclassical economy where producers maximize profits subject to technological constraints, and households maximize utility subject to budget constraints. It incorporates intermediate demands, has a government and an investment agent, and includes the rest of the world interacting with the economy through exports, imports, and transfers. Different case study scenarios have been set based on two criteria: the bioethanol production process and the gasoline-ethanol mix ratio. Among the bioethanol production processes, an only ethanol production system, and an ethanol and power production system are considered. For the gasoline-ethanol mix ratio the model includes a biofuel penetration rate parameter that represents how much of the gross output of the gasoline sector is replaced by the new biofuel. We run various simulations for different values of this biofuel penetration rate parameter (in a range from 5% to 85%) with the intention to cover all the common ethanol fuel mixtures standards. The relevance of the study is that understanding the consequences of introducing biofuels into an economy is crucial to be able to design a supportive policy that helps to enhance the positive effects and decrease the negative ones. This work offers that understanding by analyzing and measuring the impact of allocating part of the domestic rice production to produce ethanol. Changes in prices and gross outputs for the different sectors in the economy for the different scenarios are some of the results. Additionally, how the Gross Domestic Product (GDP), international trade (exports and imports), and emissions of CO2 behave before the introduction of bioethanol is inquired. Our main results are as follows. (1) The food sector is not affected significantly by the introduction of ethanol; instead, the sectors related to food production that suffer more negative impacts are the other crops farming and vegetable oils sectors. (2) The economic sectors more sensitive in price to the introduction of bioethanol are (in descending order): other crops farming, petroleum refinery products, and paddy rice. (3) The trend for the real GDP is to decrease as more bioethanol is introduced into the economy, and the net trade flows keep almost constant. (4) First-generation bioethanol is not a cost-effective measure for CO2 emissions reductions.