Implications of market-mediated emissions and uncertainty for biofuel policies

Biofuel policies affect global agricultural and oil commodity markets, whose response has consequences for greenhouse gas (GHG) emissions. Estimates of the net GHG impact of biofuel policies are wide ranging and shrouded in uncertainty. We perform a Monte Carlo experiment using a stylized model of the global liquid fuel market and compare different biofuel policies with respect to global GHG emissions and global oil consumption taking ILUC emissions into consideration. We find that for the currently commercial biofuels, inclusion of ILUC emissions as part of the policy rating of biofuels' GHG intensity: (i) likely leads to lower emissions; (ii) leads to greater reduction in both domestic and global oil consumption; (iii) leads to higher price of fuels in the home region; all compared to when ILUC emissions are excluded from the policy rating; and (iv) does not, however, ensure that emissions absolutely decline, owing to fuel market effects, which, unlike ILUC, are presently excluded from all existing fuel GHG regulations. Sensitivity analysis suggests that ILUC emissions and the price elasticity of oil supply are the greatest contributors to variance in net global GHG emissions under any given policy.

► Inclusion of Indirect land use change (ILUC) emissions in the policy's fuel rating system leads to lower emissions compared to when ILUC is excluded. ► Mere inclusion of ILUC emissions in the fuel rating does not, however, guarantee emissions decline absolutely relative to the baseline. ► Availability of low global warming intensity fuel is essential for ILUC rating to make a difference.