The Regional Economic Impacts of Biofuels: A Review of Multisectoral Modelling Techniques and Evaluation of Applications

Abstract

The regional economic impact of biofuel production depends upon a number of interrelated factors: the specific biofuels feedstock and production technology employed; the sector's embeddedness to the rest of the economy, through its demand for local resources; the extent to which new activity is created. These issues can be analysed using multisectoral economic models. Some studies have used (fixed price) Input-Output (IO) and Social Accounting Matrix (SAM) modelling frameworks, whilst a nascent Computable General Equilibrium (CGE) literature has also begun to examine the regional (and national) impact of biofuel development. This paper reviews, compares and evaluates these approaches for modelling the regional economic impacts of biofuels.Keywords: biofuels; economic modelling; input-output; social accounting matrix; computable general equilibrium. Continued growth of biofuels production is projected for the coming decades.The US is targeting a four-fold increase between 2008 and 2022 to 36 billion gallons, (UNITED STATES ENVIRONMENTAL PROTECTION AGENCY, 2010), while biofuels and other renewable fuels 1 for transport are mandated by the European Commission to increase to a minimum of 10% of energy in the transport sector in every member state by 2020 (EUROPEAN COMMISSION, 2011). Ethanol production is projected to increase by 70% in the decade to 2020 (OECD, 2011). The same report predicts that biodiesel production will increase by 138% over the same period, largely due to increases in Western Europe and large percentage increases in North and South America and Asia (OECD, 2011).Biofuels production in each region will require significant resources from its host economies, in particular labour and land. A major report into "green jobs" by the United Nations Environment Programme (UNEP) argues that biofuel development will lead to jobs both in the agricultural sector and in fuel processing industries (UNEP, 2008) 2 . In the future, biofuels production is predicted to generate employment for over 9 million people in China alone (UNEP, 2008, p. 119). The specific employment impacts will depend critically, among other things, on the types of biomass produced -biodiesel feedstock, for instance, is typically harvested using more labour intensive forms of production than bioethanol feedstock (UNEP, 2008).Page 2The UNEP report points to significant increases in the amount of land required for biofuel production. This would increase demand for a geographically immobile factor of production. Further adverse impacts could be felt on critical ecosystemsperhaps due to increased demand for water (OECD, 2011) -and on those communities who may be removed from land which is to be used to grow bio-feedstock (UNEP, 2008, p. 122). It would be expected that the potentially large changes in demands for factors of production across the world would lead to significant impacts on these regional economies.The only robust method of assessing the impact of new, or changes to existing, biofuels production on the host regional ...

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“…In this unconstrained scenario, biofuel production basically adds to other agricultural outputs and farmers generate additional revenues. This is not only in line with classical input-output analysis [38], but has also been applied in a more recent analysis of the regional economic impacts of biofuel production [4].…”

“…For this reason, most multisectoral impact studies of biofuel production follow the simpler final demand approach [4]. The basic idea behind this approach, which is described in more detail by Miller and Blair [39], is to account for the different input structure of the specific subgroup by treating the first round of intermediate flows as the final demand impulse.…”

“…According to Allan [4] multisectoral economic models are necessary to take into account "the specific biofuels feedstock and production technology employed; the sector´s embeddedness in the rest of the economy, through its demand for local resources; and the extent to which new activity is created". CGE models have been applied to examine the economic impacts of biofuels for a wide range of regions, including Austria [8], Spain [9], the USA [10], Brazil [11], Argentina [12], Mozambique [13] and Tanzania [14].…”

“…The consequences of this substitution on production and employment have been the subject of recent academic studies [1][2][3]. Multi-sectoral modelling approaches (CGE models, input-output models) are used in most of these studies (compare [4]) and applied to future scenarios that vary with respect to biofuel use.…”

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