Key Points
- US energy policy requires that motor fuel is blended with large quantities of biofuels, produced from crops like corn and soybeans. This disrupts domestic production, prices, and trade for major crops.
- Recent studies estimate that corn prices in the US are about 30 percent higher than they otherwise would be because of biofuel production, and staple food prices have increased worldwide by 20 percent.
- International agricultural trade negotiations must expand beyond trimming farm payments to curtail the broader policy instruments that affect agriculture and, particularly, that divert large amounts of crops out of the food use and drive up prices.
The Renewable Fuels Standard created under the 2007 Energy Independence and Security Act establishes minimum biofuels blending mandates in the United States. The regulation raises world food prices by diverting a substantial portion of US corn and soybeans away from global markets and into the production of ethanol and biodiesel. Despite these distortionary effects and opposition to the policy worldwide, the global community likely has no recourse to challenge this policy under existing international agreements. To make any meaningful reductions in government intervention in agriculture, trade negotiations must expand beyond trimming farm payments to curtail broader policy instruments that affect food prices.
It has been 20 years since the international community implemented the World Trade Organization (WTO) Agreement on Agriculture (AoA) to curtail farm subsidies and lessen their distortive impact on international trade. Yet the US agricultural industry remains heavily protected. The 2014 US Farm Bill introduced new programs that are likely to result in generous farm subsidies for major row crops and the dairy sector and that increase distortions in domestic production and trade patterns. However, the 2014 Farm Bill is only one vehicle through which the US government intervenes in the agricultural sector. Federal health, environmental, and energy programs also have important effects on domestic and global crop and livestock markets and prices.
Among the broader set of US government policies that affect agriculture and food prices, the Renewable Fuel Standard (RFS) established by the 2007 Energy Independence and Security Act has had substantial economic impacts. The RFS requires that transportation fuel sold in the US contain a minimum of 15 billion gallons of ethanol by 2015 (Environmental Protection Agency 2010), about 10 percent of the nation’s motor fuels supply. Unless Congress acts to modify or terminate the RFS, the minimum requirement will be expanded to 36 billion gallons of total biofuels by 2022, of which 16 billion must be produced using cellulosic raw materials (for example, switchgrass), 5 billion must consist of other advanced biofuels[1] (a certain portion of which must be biodiesel), and up to 15 billion gallons can be conventional biofuels (Environmental Protection Agency 2010).
US Biofuels Policy
At this point, almost no experts believe that the required volume of either the cellulosic or other advanced biofuels is commercially or even technologically feasible. In the US, conventional biofuel is produced almost exclusively from corn, and in 2014, 5.1 billion bushels of corn—37 percent of the US harvest and 13 percent of global production—were required for ethanol production.
The diversion of 13 percent of global corn production to an industrial use and away from the animal feed and human food markets has raised the global price of corn. The result has also increased world food prices more generally, both because corn is a major input in the livestock industry and because growers in various countries respond to higher corn prices by reallocating land to corn production and away from the production of other crops.
Biodiesel production mandates under the RFS have also affected food markets. In 2013, approximately 50 percent of US biodiesel output was produced from soybean oil, requiring 468 million bushels of US soybeans, about 15 percent of that year’s harvest (US Energy Information Administration 2014). This raised soybean prices, increasing animal feed costs and the prices of human foods containing soybean products. Given that large-scale commercial ethanol production based on cellulosic material is simply infeasible because of high costs and poor conversion efficiency, the increasingly large RFS mandate for the use of advanced biofuels would almost surely have to be satisfied using biodiesel fuels and, by implication, soybeans as a fuel source.[2]
One recent study by economists at the Universities of California at Davis and at Berkeley has estimated that world corn prices are about 30 percent higher than they otherwise would be as a result of the RFS (Carter, Rausser, and Smith 2015). A relatively recent NBER working paper reports that the RFS increases the price of staple foods more generally by about 20 percent (Roberts and Schlenker 2010). These food price impacts are substantial and imply that the RFS may result in hunger and increased rates of malnutrition for many of the approximately 700 million people in the world who currently live in dire poverty.
In fact, US biofuels policy did contribute to world hunger during the 2007–08 food crisis. Partially as a result of increased RFS ethanol mandates, food prices began to rise at an alarming rate in the first quarter of 2007. In response to these price spikes, at least 32 countries, including major grain exporters like Argentina, China, and Russia, restricted agricultural exports in an attempt to bolster their domestic food supplies and quell political unrest (Anania 2013). These export restrictions drove world food prices even higher (Martin and Anderson 2012). Altogether, global prices for corn, soybeans, wheat, and other crops more than doubled between the first quarter of 2007 and the second quarter of 2008 (United States Department of Agriculture 2015). Studies from Bangladesh, Cambodia, and Mauritania reported that the level of acute malnutrition among poor children under five years old increased by around 50 percent over that 15-month period (Compton, Wiggins, and Keats 2010, 99).
Not surprisingly, many developing countries and nongovernmental organizations, and even the United Nations, have urged the United States to repeal its ethanol mandates.[3] Given the widespread global condemnation of the RFS and its unambiguously distortionary effects on international food markets, one important question is why the policy has not been the subject of a WTO dispute. Biofuels mandates have never been adjudicated by the WTO Dispute Settlement Body, but the general consensus among academics is that such policies—somewhat surprisingly—are probably beyond the organization’s remedial reach.[4]
Notes
1. The minimum biodiesel requirement was set at 1 billion gallons for 2012 (Environmental Protection Agency 2013). Subsequent mandates are determined year to year based on the availability of biodiesel and other criteria (Union of Concerned Scientists 2012).
2. The US Energy Information Administration (EIA) estimates that the actual volume of cellulosic biofuel available in 2022 will likely be at least 80 percent lower than the RFS mandated amount (US Energy Information Administration 2015).
3. For example, in August 2012 the director-general of the UN Food and Agriculture Organization called on the US to suspend its biofuels mandates (Graziano da Silva 2012). Similarly, a special representative to the UN secretary-general referred to US biofuel policy as a “criminal path” that contributed to the rise in global food prices (UN News Centre 2008).
4. There are a few caveats to the analysis that follows. First, we examine only whether RFS blending mandates constitute a per se violation of international obligations. Even if the United States can implement blending mandates, the RFS, as implemented, may still run afoul of WTO commitments, such as the most-favored-nation and national treatment requirements. For a discussion of these issues, see Howse, van Bork, and Hebebrand (2006) and Switzer and McMahon (2011).
Second, the RFS blending mandates do not exist in a vacuum; they are only a part of US biofuel policy landscape. De Beer and Smyth (2012) discuss this issue. Often, any finding requires that a complainant show that the policy caused injury, which may be more or less difficult in the complex biofuels policy environment. Finally, although this analysis is based on the opinions of leading international trade scholars, it is impossible to be certain about whether the RFS complies with international obligations because the Dispute Settlement Body has never addressed the issue of biofuels mandates.
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