Biofuel Potential in Mexico: Land Use, Economic and Environmental Effects

Abstract

This paper aims to develop a framework to forecast biofuel policies impacts about fifteen years ahead in Mexico, where there have been several attempts to introduce biofuels into the market but so far no success. Technically, we develop an endogenous-price mathematical programming model emphasizing the Mexican agricultural and fuel sectors, which are embedded in a multi-region, multi-product, spatial partial equilibrium model of the world economy. There is a module for the U.S. and another for Rest of the World. Mexico is disaggregated into 193 crop districts. Production functions are specified for 14 major crops as well as livestock. Biofuel can be produced both from dedicated crops and from agroindustrial residues. We consider three policy alternatives as well as a base case in which, as now, liquid fuels are all derived from fossil sources. The first alternative consists of subsidies to biofuel producers, the second of blending mandates and the third of both combined. Biofuel imports are allowed in all cases. Results show some losses for fuel and agricultural consumers, that are not offset by both ethanol producer and GHG emissions reduction gains. This suggests that some compensating redistribution may be needed if these policies are to be seen as politically sustainable.