The Distributive Effect and Food Security Implications of Biofuels Investment in Ethiopia: A CGE Analysis

http://www.rff.org/Publications/Pages/PublicationDetails.aspx?PublicationID=22122

Abstract:

In response to global opportunities and domestic challenges, Ethiopia is revising its energy policy to switch from high-cost imported fossil fuel to domestically produced biofuels. Currently, there are biofuel investment activities in different parts of the country to produce ethanol and biodiesel. However, there is no rigorous empirical study to assess impacts of such investments. This paper assesses the distributive effect and food security implications of biofuels investment in Ethiopia, using data from 15 biofuels firms and 2 NGOs in a CGE (Computable General Equilibrium) analysis. Findings suggest that biofuels investments in the context of Ethiopia might have a ‘win-win’ outcome that can improve smallholder productivity (food security) and increase household welfare. In particular, the spillover effects of certain biofuels can increase the production of food cereals (with the effect being variable across regions) without increasing cereal prices. When spillover effects are considered, biofuel investment tends to improve the welfare of most rural poor households. Urban households benefit from returns to labor under some scenarios. These findings assume that continued government investment in roads allows biofuels production to expand on land that is currently unutilized, so that smallholders do not lose land. Investment in infrastructure such as roads can thus maximize the benefits of biofuels investment.

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Banse et al. (2008) analyze the trade impacts of an EU Biofuels Directive using a global CGE model, i.e., a modified version of the GTAP model. They find that cereal prices actually decline in the long-run, though less than theywo uld without the directive. Using IFPRI’s partial equilibrium model, Rosegrant finds that biofuels demand accounted for 39% of the increase in corn price from 2000 to 2007. Rajagopal et al. (2007) analyze the effect of the ethanol production tax credit on corn price, using a stylized partial equilibrium model. They find a 21% increase in corn price attributable to a $0.51 ethanol production tax credit in the US in 2006. The US Congressional Budget Office (CBO) estimates also suggest that about 10 to 15 percent of the rise in food prices between April 2007 and April 2008 is attributable to the increased use of ethanol (CBO, 2009). However, Chakravorty et al. (2011) show that about two-thirds of the increase in food prices can be attributed to changes in consumption patterns and only one-third to biofuels mandates. 

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Cereals (food) benefited most from biofuel expansion in Ethiopia, especially in zones where biofuel investment is located. In particular, the jatropha and castor bean scenarios that involved spillover effects affected cereal production, with the effect being variable across regions. For example, under the jatropha with spillover scenario, cereal production in z3 and z4 (AEZ 3 & 4) increased by 4.3 percent; it decreased by 1.6 percent in z1 and z2 and by 1.5 percent in z5. Similarly, under the castor bean with spillover scenario, cereal production in z4 and z5 respectively increased by 4.6 and 4.7 percent but decreased by 1.2 percent elsewhere.

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by Zenebe Gebreegziabher, Alemu Mekonnen, Tadele Ferede, Fantu Guta, Jorgen Levin, Gunnar Kohlin, Tekie Alemu, Lars Bohlin
Resources For the Futures (RFF) www.RFF.org

RFF Discussion Paper EfD DP 13-02; January, 2013