Potential Gains and Losses of Biofuel Production in Argentina

Transcription

1 Public Disclosure Authorized Policy Reserch Working Pper 6124 WPS6124 Public Disclosure Authorized Public Disclosure Authorized Potentil Gins nd Losses of Biofuel Production in Argentin A Computble Generl Equilibrium Anlysis Omr O. Chisri Crlos A. Romero Govind Timilsin Public Disclosure Authorized The World Bnk Development Reserch Group Environment nd Energy Tem July 2012

2 Policy Reserch Working Pper 6124 Abstrct Argentin is one of the world s lrgest biodiesel producers nd the lrgest exporter, using ybens s feedstock. Using computble generl equilibrium model tht explicitly represents the biofuel industry, this study crries out severl simultions on two sets of issues: (i) interntionl mrkets for biofuel nd feedstock, such s n increse in prices of yben, yben oil, nd biodiesel, nd (ii) domestic policies relted to biofuels, such s n introduction of biofuel mndtes. Both sets of issues cn hve importnt consequences to the Argentinen economy. The simultions indicte tht increses in interntionl prices of biofuels nd feedstocks would increse Argentin s gross domestic product nd cil welfre. Increses in interntionl prices of ethnol nd corn l cn benefit Argentin, but to lesser extent. The domestic mndtes for biofuels, however, would cuse smll losses in economic output nd cil welfre becuse they divert prt of biodiesel nd feedstock from exports to lower-return domestic consumption. An increse in the export tx on either feedstock or biodiesel l would led to reduction in gross domestic product nd cil welfre, lthough government revenue would rise. This pper is product of the Environment nd Energy Tem, Development Reserch Group. It is prt of lrger effort by the World Bnk to provide open ccess to its reserch nd mke contribution to development policy discussions round the world. Policy Reserch Working Ppers re l posted on the Web t The uthor my be contcted t gtimilsin@worldbnk.org. The Policy Reserch Working Pper Series dissemintes the findings of work in progress to encourge the exchnge of ides bout development issues. An objective of the series is to get the findings out quickly, even if the presenttions re less thn fully polished. The ppers crry the nmes of the uthors nd should be cited ccordingly. The findings, interprettions, nd conclusions expressed in this pper re entirely those of the uthors. They do not necessrily represent the views of the Interntionl Bnk for Reconstruction nd Development/World Bnk nd its ffilited orgniztions, or those of the Executive Directors of the World Bnk or the governments they represent. Produced by the Reserch Support Tem

3 Potentil Gins nd Losses of Biofuel Production in Argentin: A Computble Generl Equilibrium Anlysis Omr O. Chisri, Crlos A. Romero nd Govind Timilsin 1 Key Words: Biofuels, Energy Economics, Generl Equilibrium Modeling, Argentin JEL Codes: Q42, Q43, Q48 Sector: Energy 1 Respectively from Universidd Argentin de l Empres nd CONICET, Universidd Argentin de l Empres, nd The World Bnk, Wshington, DC. Jun Pblo Vil Mrtínez nd Jvier Mquieyr provided reserch ssistnce. The views nd findings presented here should not be ttributed to the World Bnk. We thnk John Nsh nd Henry Chen for their vluble comments. We cknowledge the Knowledge for Chnge Progrm (KCP) Trust Fund for the finncil support.

4 Potentil Gins nd Losses of Biofuel Production in Argentin: A Computble Generl Equilibrium Anlysis 1 INTRODUCTION Argentin is competitive producer of oilseeds nd hs developed world-clss vegetble oil industry. It is l n efficient producer of whet nd corn, its trditionl grins. Since the 1980s, the country hs emerged s one of the min exporters of oilseeds nd vegetble oil to the interntionl mrket, t the top of the exporters rnking in yben oil nd sunflower oil. Al, it is the second lrgest exporter of mize to the world. Due to this well-tested comprtive dvntge, the domestic producers nd procesrs of oilseeds in Argentin perceived the incresing interntionl demnd for biofuels s new business opportunity. Thus the privte sector engged in new investments tht put in plce n exporting industry in only four yers. At the sme time, the economy ws fcing declining nturl gs reserves nd pressures on environmentl issues. The government responded by pssing severl lws promoting the use of renewble energy urces, specificlly the blending of biofuels in trnsporttion fuels. At present, there re severl plnts lredy producing diesel using yben oil nd ethnol from corn or sugr cne, nd there is the expecttion tht their number will grow rpidly. The mndtory substitution hs been complemented with selective regime of subsidies to biofuel production. But the ctul effect on the industry scle nd dynmics depends on more subtle questions since other government ctions re indirectly t work. Will the industry be developed nd become sustinble by itself in country with cler dvntges for the production of lterntive griculturl products tht compete for the use of lnd, nd in which prices of griculturl goods hve gret influence on rel wges, externl trde blnce nd fiscl surplus? To nswer this question, chnges in reltive prices re relevnt since they hve the potentil to modify the vlue of projects nd subsequently determine whether the technologies of production of biofuels become fesible. The evlution of project vibility under endogenous reltive prices is one of the contributions of the generl equilibrium perspective to the nlysis. At present, biofuels do not represent significnt portion of the economy. But when we consider their potentil s substitutes of trditionl fuels, nd the interction with the griculturl nd oil industries vi input/output reltions, the results become relevnt s shre of totl GDP. In order to 2

5 ddress these issues, this pper presents the results of the nlysis of the biofuel sector in Argentin using Computble Generl Equilibrium (CGE) model. Up to now, most of the climed positive results of the development of this industry in the country re conjecturl or bsed in sectorl studies (Cámr Argentin de Energís Renovbles, 2009; Chisri, 2009). Our objective is to evlute the gins nd losses of the production of biofuels for Argentin, tking into ccount opportunity costs of reurces nd overll impct on economic performnce. We focus in the ssessment of costs nd benefits in n economy which cn be chrcterized by the following stylized fcts. Firstly, biofuels re lredy being produced, but there re cler differences between biodiesel nd bioethnol in terms of development of the industry nd competitiveness (with respect to other countries, such s Brzil). Secondly, Argentin hs comprtive dvntges for severl griculturl products t the interntionl level, fct tht cretes opportunity costs for lnd use nd for direct exports of crops. Al, the country hs developed oilseed industry, with potentil complementrities with biofuel production. Additionlly, there is complex tx structure, tht hs direct incidence on griculturl exports, nd tht is subject to chnges tht ccommodte fiscl results nd the need of sustining positive trde blnce. Finlly, the cost of cpitl hs been structurlly high bsiclly due to the country risk component nd hs discourged investments in generl nd biofuel projects in prticulr. The pln of the pper is the following. In section 2, we summrize the bsic fcts of the biofuels industry in Argentin. Then, the third section presents the dtbse required for implementing the CGE model, orgnized in Socil Accounting Mtrix. Most of the sectors in the vlue chin of bioethnol nd biodiesel re disggregted nd introduced explicitly. After tht, we discuss the min fetures of the CGE model (section 4) nd we conduct severl counterfctul experiments, in section 5, to study the response of the biofuel industry to policy shocks nd to chnges in interntionl prices, s well s to pprise the rection of the economy nd of industries relted to biofuels vi substitution or complementrity reltions. The finl section concludes with min lesns obtined from the nlysis. 2 THE BIOFUEL INDUSTRY IN ARGENTINA Oilseeds production hs been growing in Argentin since the lte 1980s. This trend corresponds to long-term pth tht ccelerted in the lst five yers. Production growth nd re expnsion were 3

6 minly due to the vilbility of new technologies in yben production (GMO seeds plus the diffusion of zero tillge techniques 2 ) tht were importnt s to increse the profitbility of the griculturl sector on verge. Biofuels plyed minor role in this development, though gining me importnce in recent yers. Environmentlists nd griculturl experts hve rised concerns bout the deforesttion tht ccompnied the expnsion of yben re in the Northern provinces of Argentin. In their opinion, the expnsion of y production over the pst severl yers hs fuelled deforesttion, poor wter reurce mngement nd incresed lnd degrdtion (World Bnk, 2009). In response, producers orgniztions hve pointed out tht rottion prctices hve not been bndoned nd tht the spred of zero tillge prctices compenstes for the dmges when combined with dequte fertilizer nd grochemicls doption. However, the growth of yben re in comprin to cerels or livestock creted concerns on the possibility of persistent mono-cropping. These fcts prompted interventions in the mrket through subsequent increses of export txes on yben grin, thus reducing price incentives to production of the crop. At the sme time, due to the rlly in interntionl food prices, whet nd corn exports were bnned trnsitorily. As result, the effects on whet nd corn outweighed the diminished yben profitbility nd yben crop shre kept its incresing trend in production. Argentin strted biodiesel production on lrge scle in Bioethnol from sugrcne or corn did not strt to develop until Previously, only necdotl cses of biofuel production could be found. They consisted of few producers tht used own grins nd oilseeds s fuels for selfconsumption through simple trnsformtion methods. In the cse of ethnol from sugr cne, previous filed experience of mndtory blending took plce between 1984 nd The rpid development of biodiesel in comprin to ethnol shows cler response of economic gents involved in the gro-industril ctivity to mrket incentives. These incentives becme pprent to investors in the erly 2000s nd were the following: (i) incresing interntionl prices of biofuels ttrcting new investments to the vlue chin of n lredy highly competitive domestic industry of yben oil, (ii) ttrctive (but not fully secure) demnd from mrkets such s the EU, with 2 Zero tillge is plnting system to improve il conservtion where the new crop is plnted stubble of the previous crop with even less il disturbnce thn with minimum tillge. The importnce of this gronomic prctice in Argentin is reflected by the existence of n influentil NGO of producers promoting its doption: 4

7 trditionl commercil ties with Argentine oilseeds exporters, (iii) excess domestic demnd of diesel for trnsport uses covered through costly imports, (iv) incresing shre of oilseed production in the griculturl ctivity, (v) scrce feed grins nd sugr cne long with gline surplus tht inhibited mrket incentives in the cse of bioethnol nd (vi) segmenttion of the biofuels domestic mrket by Lw in order to promote exclusive prticiption of smll nd medium enterprises (SMEs). Brzil s competitiveness in the bioethnol interntionl mrket hs l opened question on the role of Argentine potentil supply, its costs nd complementtion/competition with the MERCOSUR min prtner. Notwithstnding, me nlysts 3 consider tht bioethnol production will be orgnized in Argentin in view of the potentil future constrints on gline. Currently this constrint is not binding, wht my explin why oil distilleries re more interested in biodiesel reltive to bioethnol mndtory blending. A new policy scenrio tht could re-lunch investment in gs nd oil could hve retrding effects on the biofuels incipient domestic mrket. Biodiesel exports pper to be rther independent of this outcome but crucilly dependent on EU regultions on biodiesel stndrds. 4 As regrds the domestic mrket, diesel nd gline prices re mong the lowest in the Western Hemisphere. Noticebly, in spite of low diesel retil prices in Argentin, biodiesel costs re not much prt. In fct, the reltion between these two fuels highly depends on the price of yben vegetble oil, which entils the mjority of biodiesel cost. Subsidized trnsport nd fuels hve sustined n incresing demnd for ll rts of fuels. Fuels consumption hs l been ffected by the increse in demnd derived from Argentine rpid growth since 2003 nd the fst growth of the griculturl ctivity. Finlly, mndtory blending requirements hve l plyed n importnt role in the surge of domestic demnd for biofuels. Biofuel technology in Argentin is relted to the qulity stndrd. In generl, the qulity stndrd hs followed the Europen requirements, considering tht most of the industry exports were oriented towrds the EU mrket. Regrding environmentl concerns, the scheme lunched by the lw promoting the sector of biofuels suggests tht the government is more interested in the promotion of smll scle investments nd job cretion t the regionl level thn in the reduction of CO 2 emissions. Though the lw promoting 3 The Argentine Chmber of Renewble Energies (CADER), in its periodic review of the biodiesel sector. 4 This ssessment ws confirmed in n interview with mngers t one of the mjor biodiesel exporting compnies. 5

8 lterntive energy urces might hve me bckground in the environmentl concerns, it l reflects the interest in the brodening of lterntive energy urces in context of future energy supply constrint. 3 THE SOCIAL ACCOUNTING MATRIX INCLUDING BIOFUEL SECTORS The bsic dt for the model re obtined from cil ccounting mtrix (SAM) tht in this cse l iltes sectors relted with biodiesel nd bioethnol production from the other ccounts. Here we summrize the most criticl spects of dt collection nd tretment. The initil mtrix of intermedite purchses is bsed on the 1997 dt (INDEC, 2001); it ws updted in Chisri et l. (2009). For this study, we used sectorl informtion to updte it s of The distribution of the fctor income cross income groups is bsed on the distribution observed in Argentin in 2006 ccording to household income surveys. The distribution of the consumption bsket per type of goods nd services is bsed on ggregtes from new household consumption survey for In both the input nd output mtrix nd the household consumption, consistent dt on consumption nd production were obtined through the cross-entropy method (Robinn, Cttneo y El-Sid, 2001). As for the government expenses, distribution between goods nd services dt re vilble for 2006 for the ntionl nd provincil governments. Municipl expenditures re ssumed to be distributed in the sme proportion s the verge for the two other government levels. Aggregte demnd nd supply in the SAM re consistent with ntionl ccounts. The model includes 29 production sectors, four for griculture, one for petroleum nd mining, 16 for goods nd eight for services. In ddition to the usul ctivities, the SAM identifies sectors relted to the production of biofuels s seprte sectors: y, corn, sugr cne, y oil, industril sugr, refined gline, diesel, biodiesel nd bioethnol. Four fctors of productions re ccounted for: lbor, lnd, physicl cpitl nd finncil cpitl. Both lbor nd finncil cpitl re mobile cross sectors while physicl cpitl is sector specific. Lnd is mobile within vrious griculturl sub-sectors. Tble 1 presents prticiption of ech sector in terms of vlue dded, expenses in inputs nd gross output. The sectors Textiles nd others, Other mnufcturing industries nd Services re disggregted in our complete SAM nd ccount for 13 sub-sectors. 6

9 Tble 1: Argentin, Production nd vlue dded Structure s percentge of totls Sectors Vlue Added Domestic Intermedite Consumption Imported Intermedite Consumption Lbor Cpitl Gross Output Soy Mize Sugr cne Rest of griculture Petroleum nd Mining Soy oil Other vegetble oils Sugr Rest of Food, Beverges nd Tobcco Textiles, Lether, Wood, Pper & Editing Gline Diesel Biodiesel Bioethnol Refineries: other products Other mnufcturing industries Trnsport Trde, construction & Services Totls Source: Own elbortion bsed on INDEC Biodiesel is smll sector ccording to 2006 dt, but is growing stedily. Though there were mny investment projects ongoing, there ws no production of bioethnol yet for tht yer 5. Hence, to perform simultions considering future production of this product, we hve included ltent industry of bioethnol (see Tble 1) in which the proportions of vlue dded, lbor nd cpitl costs, nd intermedite costs re coincident with those of the current vilble bioethnol technology. This virtul or ltent sector is redy to grow if the simultions give the proper incentives. Tble 2 shows the intermedite trnsctions s percentge of totl intermedite costs for the sector included for the specific purposes of this nlysis. The biodiesel nd bioethnol cost structures re bsed on own estimtes. Regrding the demnd side, domestic consumer groups re divided by income decile, the government, one foreign consumer nd one foreign producer. The smll open economy ssumption is dopted, implying tht Argentin is price tker in the interntionl mrkets. 5 As of 2006; there were me bioethnol plnts lredy in opertion nd severl nnounced investments. 7

10 Sectors Soy Mize Tble 2: Argentin, Intermedite cost structure (%) Sugr cne Soy oil Other vegetble oils Sugr Gline & Diesel Biodiesel Bioethnol Soy Mize Sugr cne Rest of gricultur Petroleum nd Mining Soy oil Other vegetble oils Sugr 1.89 Rest of Food, Beverges nd Tobcco Textiles, Lether, Wood, Pper & Edit Gline Diesel Biodiesel Bioethnol 0.00 Refineries: other products 1.76 Other mnufcturing industries Trnsport Trde, construction & Services Totls Source: Own elbortion Informtion on the government ccounts ws obtined from the Ministry of the Economy (Oficin Ncionl de Presupuesto) 6. Income nd expenditures of the public sector re conlidted results for the federl dministrtion, the provinces nd the municiplities. Considering expenditures, government consumption represents round 14% of GDP followed by household trnsfers (10% of GDP). The informtion on ntionl nd locl txes ws provided by the Administrción Federl de Ingres Públicos nd Provincil ministries, respectively. The SAM l ccounts for the positive result of the trde blnce nd the current ccount observed in The informtion on the blnce of pyments ws obtined from the Bnco Centrl de l Repúblic Argentin. A summry of the SAM of the Argentine economy of 2006 is shown in Tble 3. This simplified SAM hs three ctivity sectors, two fctors (with cpitl representing n ggregte of lnd nd physicl nd finncil cpitl), txes, public nd privte investment nd the rest of the world (ROW)

11 Columns show the decomposition of sles of the budget of every gent, while rows represent mrkets. ROW Activity Sectors Fctors Txes S S S L K IM IVA Indi IX IL IK IH H H Government Tble 3: Argentin, Aggregted SAM (Millions of $) Activity Sectors Fctors Households Government Priv Investment Txes S01 S02 S03 L K H1 H2 Pub Households Investments Priv Pub ROW S BNI Totls Activities: S01: Agriculture nd Mining, S02: Mnufcturing industry, S03: Trde, Construction nd Services. Fctors: L: Lbor, K: Cpitl nd Lnd. Households: H01: first 5 income deciles (poorest), second 5 income deciles (richest). Investments: Priv: Privte, Pub: Public. Txes: IM: import triffs, IVA: vlue dded tx, Indi: rest of indirect txes, IX: tx on exports, IL: Lbor txes nd contributions, IK: txes on cpitl, IH: txes pid by households. ROW: Rest of the World. Totl mounts of intermedite sles nd purchses were required to estimte the new input-output trnsction mtrix, using cross entropy. Besides, totl purchses of consumers nd their respective disposble income were necessry to estimte the new consumption expenditure mtrix, l using cross-entropy. The input-output mtrix is the sub-mtrix of the SAM tht represents trnsctions between ctivity sectors (ctivities, ctivities). Below this, the mtrix of fctor demnds is presented (fctors, ctivities), followed by the mtrix of txes pid by ctivity (txes, ctivities). The SAM seprtes txes pid by exports, intermedite uses, finl consumption nd investments. Finlly, the mtrix of imported purchses is included (ROW, ctivities). Totls of rows nd columns of ech sector re the respective gross output vlue. 9

12 The fctors ccount shows the income distribution mtrix (households, fctors), tht distributes the remunertion of fctors to households. Prt of the cpitl is owned by the rest of the world. For the demnd side, we summrize the mtrix of household expenditures (ctivities, households), government consumption (ctivities, government), privte nd public investments (ctivities, investments) nd the vector of exports (ctivities, ROW). The mtrices (household, household) nd (household, government) correspond to trnsfers between gents. Privte svings, public svings nd foreign svings re dded up to finnce investments. The row BNI closes the model nd it represents the supervit/deficit of every gent; it corresponds to finncil trnsctions s of BASIC CHARACTERISTICS OF THE GENERAL EQUILIBRIUM MODEL Our model is orgnized in ten representtive households, 29 production sectors, one conlidted public sector nd the rest of the world, nd thorough decomposition of the tx structure nd regultory regimes. It tkes into ccount different degrees of fctor mobility nd severl technologies tht compete to produce the sme good or service. The informtion hs been updted s of 2006 nd it includes dynmic recursive component to tke into ccount economic growth. Al discussed here re specific chrcteristics of the economy of Argentin, like unemployment nd significnt export txes for crops nd oil 7. It llows simulting the economy-wide impcts of lrge scle production of biofuels in the country. The model is numericlly lved using GAMS/MPSGE 8. A more detiled description of the model is presented in Appendix A. Since it is necessry to tke into ccount the opportunity costs of lnd nd lterntive lloction of crops (producing vegetble oil or exporting grin directly) the model is structured to hve more detiled nd relistic representtion of the biofuel industry nd the potentil trde-offs nd opportunity costs, focusing specilly on lterntive uses of lnd. A detiled representtion of 7 The model is flexible to ddress different elsticities nd prmeters, s well s different degrees of fctor mobility. Al, different mobility of fctors cn be tken into ccount in the model; this is relevnt for cpitl in griculture which is tken s mobile only mong griculturl sectors. 8 The lution of the model is obtined using the representtion of Generl Equilibrium nd using the Mixed Complementrity Approch see Ferris nd Png (1997) for survey of the mthemticl method nd Böhringer nd Rutherford (2008) for recent description on the usefulness to model energy sectors in CGE. The model is developed in the environment of GAMS/MPSGE (see Rutherford (1999)). At present it cn be used in interfce with GAMS (see Brook et l,1992). 10

13 lterntive technologies for biofuel production nd uses is l included (ctul or ltent technologies to be selected for opertion by the economy depending on reltive prices). It is l possible to estimte how biofuel production nd its scited sectors (griculture, fuel nd food) could influence the performnce of the economy in terms of exports nd trde blnce, fiscl implictions, welfre nd growth. Reltive prices nd mobility of reurces cn explin why certin industries nd technologies expnd or contrct. Therefore in the model, production is neither mndtory nor inevitble; it is determined by mrket forces nd reltive prices. For every period, prices re computed to simultneously cler ll mrkets. The model used is recursive dynmic model tht simultes growth for the economy, bsed prtilly in the Computble Generl Equilibrium for Argentin presented in Chisri et l. (2009). It is not model of optiml growth; insted, gents mke svings decisions in period t using only informtion for tht sme period; then, svings re used in the following period t+1 s dditionl cpitl. This new cpitl is not specific by sector but mlleble, nd it is fully mobile between sectors of production. Therefore it is llocted t the sme time tht prices re being determined by the model; the finl lloction of brnd-new cpitl responds endogenously to the reltive profit opportunities nd it is rellocted until the rewrd to new cpitl is the sme in ll industries. Henceforth, the finl industril scle depends on mrket incentives determined by the model itself 9. From the supply side, the production function in ech sector is Leontief function between vluedded nd intermedite inputs: one output unit requires n x percent of n ggregte of productive fctors (lbor, physicl cpitl, finncil cpitl nd lnd) nd (1 x) percent of intermedite inputs. The intermedite inputs function is Leontief function of ll goods, which re strict complement in production. The Leontief formultion focuses the model on higher-level substitution issues. Vlue-dded is Cobb-Dougls function of productive fctors. Regrding fctor endowment, both types of cpitl re fully employed, while there exists lbor unemployment. Wges re ssumed to be fixed in rel terms. The modeling of unemployment is quite importnt for the cse of Argentin. The ssumption of full-employment could modify the evlution of benefits of trde liberliztion (see Dio et l. 2005); in full-employment models, incresed demnd for lbor (from incresed ctivity 9 The dynmic model ws clibrted for totl GDP of the economy growing t 4% for 2006, leving side exogenous shocks identified for the economy in The simultions ssume tht lbor force is not growing, this is neutrl ssumption tking into ccount tht wht mtters re the comprtive dynmics of the bsic scenrio of growth with respect to the simulted cses. 11

14 nd exports) leds to higher rel wges, such tht the origin of comprtive dvntge is progressively eroded; but in models with unemployment, rel wges re constnt nd the increse in exports is lrger. Finncil cpitl nd lbor re perfectly mobile while physicl cpitl is sector specific, involving the sme cost between sectors for the first two fctors nd sector specific cost for the lst fctor. Lnd is included s seprte fctor in this version of the model becuse of its relevnce in the nlysis of biofuels (see detils in Appendix A). The demnd side is modelled through ten representtive households, government nd n externl sector. Households buy or sell bonds, invest nd consume in constnt proportions (Cobb-Dougls) given the remunertion for the fctors they own (nd the trnsfers from the government). The choice of the optiml proportion of the consumption good is obtined from nested production function into the utility function, through process of cost minimiztion. Government is represented s n gent tht prticiptes in mrkets for investments, consumes nd mkes trnsfers to households nd hs Cobb-Dougls utility function; its min urce of income is tx collection (though it l mkes finncil trnsctions through the bonds ccount). The externl sector buys domestic exports nd sells imports, nd l mkes trnsctions of bonds nd collects dividends from investments. The model incorportes key sectors for the nlysis of biofuels. Biofuels, such s biodiesel nd ethnol nd biofuel feedstock, such s sugrcne, mize, yben, yben oil, refined sugr, other oilseeds oils, re explicitly modeled (see Tble 2). Biodiesel production uses yben oil s primry input, while bioethnol uses mize nd sugrcne. These re combined with other inputs (minly chemicls nd energy) nd vlue dded for production. See the Appendix A for detiled presenttion. Intermedite consumption is represented s nested Leontief production function. It is ssumed the elsticity of substitution between fuels nd biofuels (gline-ethnol nd diesel-biodiesel) is equl to 2. The rest of the goods re complementry nd the elsticity of substitution between them is zero. Figure 1 shows the structure of intermedite consumption. 12

15 Output Leontief Vlue dded CD Intermedite consumption Leontief Lbor Finncil cpitl Physicl cpitl Lnd CES D-B G-E CES Diesel Biodiesel Gline Ethnol Figure 1: Structure of Production Figure 1 l shows the incorportion of lnd s fctor in the vlue dded. This griculturl production fctor is ssumed mobile between griculturl sectors. Finl Consumption CD D-B G-E CES CES Diesel Biodiesel Gline Ethnol Figure 2: Households finl consumption Households decision on the composition of their bsket of fuels is represented similrly to intermedite consumption (see Figure 2). We dopted nested utility function with n elsticity of substitution equl to 2 between biofuels nd their fossil fuel counterprts nd n elsticity of one between the biofuels-fossil fuels composite nd the rest of the goods. As mentioned before, the version of the model presented here is recursive dynmic. Investments of yer t re dded to mobile cpitl t time t+1, nd it is llocted between sectors until its rewrd is 13

16 equlized see l Al-Riffi et l. (2010) for n exmple of Generl Equilibrium model which opertes in sequentil dynmic recursive set-up. 5 COUNTERFACTUAL EXERCISES The simultions re orgnized in two min ctegories: 1) interntionl mrkets chnges, nd 2) policy shocks. Specil ttention is pid to the results of the following scenrios: Chnges of prices of y, yben oil nd biodiesel in interntionl mrkets. Modifictions in levels of export txes on crops nd subsidies to biofuel production. Introduction of mrket bsed incentives for biofuel projects. Modifictions in non mrket bsed incentives (quots of biofuels in totl fuels used). Key results, prticulrly indictors showing impcts on mcroeconomic, distributionl, interntionl trde nd industril outputs, due to the bove mentioned simultions re presented below. Tbles in this section hve to be red in the following wy. Ech simultion includes two columns: y1 stnds for results of the first yer simulted nd y5 stnds for the lst yer simulted. Since the SAM corresponds to 2006, the first yer of the simultion is counterfctul representtion of mcroeconomic results for 2007, nd the lst yer of the simultions corresponds to 2012.Vlues shown in the tbles re the difference between the percentge chnge in the simultions nd in the bseline, i.e. the 1.2 of the GDP in the first yer in the yben simultion mens tht GDP incresed 5.2 percent in the simultion while it incresed 4 percent in the bseline. Percentge chnges for the indictors in ech yer (the five periods simulted) nd for ll the simultions re presented in Appendix B. The only indictor tht is not expressed s percentge chnge is the unemployment rte which is shown s percentge of people unemployed in ech scenrio. The bseline is clibrted with respect to the totl GDP of the economy growing t 4% for the first yer, out of exogenous nd policy shocks for the economy. Every yer gents mke sving decisions which re used in the following yer s dditionl mobile cpitl. Policies in the bseline scenrio re those tht were in plce in With regrd to biofuels, s mentioned, their production, consumption nd trde evolves endogenously determined by mrket forces nd reltive prices; this mens tht mndtory consumptions were not included for the bseline scenrio. 14

17 5.1 Interntionl mrkets Tble 4 presents the results of scenrios in which prices of y, yben oil nd biodiesel re chnging more or less in the sme percentge. The columns indicte the differences with respect to the bseline results for the initil nd finl yers. In the initil yer, 2006, the biofuels industry ws still in its initil steps for tht yer; therefore, the initil yer includes modifiction of the SAM to include the incipient industry. It cn be seen tht when export prices of y, yben oil nd biodiesel re incresed 20%, the result is n brupt growth of production (nd exports, not shown) of ll of them. Producers rect by rellocting reurces until mrginl benefits of selling y, yben oil nd biodiesel re equlized. Since production of those goods ttrcts cpitl, there is reduction of the ctivity level for mnufctures, s well s for other griculturl products. The fiscl sitution is improved due to the txes on exports, nd tht l hs impct on the welfre of the poor (for it is ssumed tht trnsfers to the poor re fixed proportion of totl revenue of the government). The trde blnce l shows better result s consequence of higher prices. The industry of biodiesel rects strongly incresing production. But one thing to tke into ccount is tht the response of the biofuels industries is more noticeble in the fifth yer becuse by yer four unemployment is negligible nd wges begin to grow (simultions ssume minimum rel wge under unemployment); since biofuels industries re not intensive in lbor, the rest of the economy experiences dditionl costs from the rise in rel wges, nd biofuels cn grow reltively more. Similr results re seen when the price of mize nd bioethnol re incresed 20%. Mcroeconomic indictors show cler improvements though the industril composition of the economy chnges, nd mnufctures reduce the ctivity level (though t smller extent thn in the cse of y nd biodiesel). It is interesting to see tht sugr cne production is reduced, even though it is possible to produce bioethnol with it; the costs of cpitl (ttrcted to the production of mize) nd the cost of opportunity of lnd (to produce mize gin) seem to previl over the potentil use for production of bioethnol s n input. 15

18 Indictors Tble 4: Impcts of 20% chnges in interntionl prices Soy, Soyben Oil & Biodiesel (20%) Mize & Bioethnol (20%) Soy, Soyben Oil & Other griculturl products (-20%) y1 y5 y1 y5 y1 y5 Mcroeconomic Indictors GDP Trde Blnce Fiscl Result Rte of Unemployment Welfre Indictors Poorest Household Richest Household Aggregte sectors Activity Level Agriculture Mnufctures Services Specific sectors Activity Level Soy Mize Sugr Cne Rest of griculture Soyben oil Diesel Gline Biodiesel Bioethnol Gs emission index N.B.: y1: 2007, y5: Figures re devitions from percentge chnge in the bseline of the corresponding yer. The lst column of Tble 4 shows insted reduction of prices of y, yben oil nd other griculturl products (not mize, sugr cne); it cn be seen tht the opportunity cost of biodiesel production is reduced, nd therefore the production of biodiesel is incresed. The result for bioethnol is the consequence of the reduction of the ctivity level of the economy (s it is reduced the demnd for gline) rther thn the effect of reltive prices We hve performed sensitivity nlysis to different degrees of cpitl mobility. The model ws clibrted to 10% of mobile cpitl, consistent with the observed economic vribles in the bseline growth scenrio. Considering n economy with 40% mobile cpitl, we hve observed tht mcroeconomic ggregtes do not present importnt chnges but t sectorl level, more flexibility in the cpitl hs more significnt effect in terms of the sectorl ctivity level. For instnce, in the simultions of chnges in interntionl prices the cpitl moves to the more profitble sectors. Hence, biofuels would hve lower growth rte when the cpitl is more mobile becuse they re reltively more intensive in use of cpitl. 16

19 GDP Welfre of households Level of ctivity: Bioethnol Level of ctivity: Biodiesel Soy, Soyben Oil & Biodiesel (20%) Mize nd Bioethnol (20%) Soy, Soyben Oil & Other gri products (20%) Figure 3: Chnges in interntionl prices: GDP, Welfre nd Activity level (% devitions with respect to benchmrk) 5.2 Policy nd fiscl interventions This group of simultions evlutes the effects of mndtory substitution of biofuels for fuels, nd increses of export txes levied on yben nd yben oil. The results re shown in Tble 5. Mndtory substitution. The mndtory substitution of fuels to rech 5% trget produces loss of welfre. This hppens even when the constrint is imposed using combintion of txes nd subsidies on fuels nd biofuels, respectively 11. There is perturbtion of reltive prices tht explins the slight loss of welfre. In the cse of biodiesel, the economy experiences loss in terms of GDP, since mrket bsed decisions re perturbed with constrint on the portion of biofuels to be used. 11 Two lterntive modelling strtegies were considered in this simultion. The one presented here enforces the 5% trget through combintion of virtul txes on fuels nd subsidies to the use of biofuels. In this modelling pproch substitution between fuels nd biofuels is permitted however the txes nd subsidies imposed imply complince of the 5% rtio. The other lterntive not shown here but with similr results is fixing biofuels demnd s 5% of totl fuel demnd by chnging the shres of biofuel in totl expenses of households nd input output coefficients nd not letting substitution between fuels nd biofuels (for more detiled explntion of how this constrins my be imposed in the model see ppendix A). 17

20 The results of the computtion indicte tht the necessry dditionl supply to mtch the mndtory demnd is obtined not only from incresed production, but l through the reduction of exports. Diesel exports compenste for the reduction in biofuel exports in the trde blnce, since there re still profitble opportunities for producing diesel nd selling it to the rest of the world. There is l reduction in exports of yben oil, for it is used to produce biodiesel. It cn be seen tht there is strong increse in the domestic demnd (finl nd intermedite) of biofuels. Note tht this result is different from tht in Timilsin et l. (2010), which uses globl CGE model. The ren is tht this study uses single country model, which does not cpture the effect of expnsion of biofuel mrket in other countries. Timilsin et l. (2010) shows tht globl expnsion of biofuels cused by ntionl trgets nd mndtes would increse export demnd for biofuels in countries where biofuel industry hs lredy been estblished (e.g., Brzil, Argentin, Indonesi). This study ssumes the demnd for biofuels in the rest of the world remins constnt, thereby cusing cuts in exports of Argentinen biodiesel when the country introduces biofuel mndte. Quite similr results re obtined in the cse of extending mndtory requirements to gline 12. There re huge increses in production nd domestic use of bioethnol, while exports re cut to zero. However, the mcroeconomic indictors re slightly worsened s in the cse of biodiesel. Production of sugr cne is incresed, but in the cse of mize, the results indicte tht the economy prefers to cut exports, probbly due to the presence of export txes on mize. When both cses re tken together, we cn see n extrordinry increse in production of bioethnol. This is due to the limited size of the industry s of 2006 compred to the mrket to be ddressed. 12 According to the lw, 5% must be clculted in litres. However the energy content of biofuels, especilly bioethnol, is pproximtely 30% lower thn gline. When this is tken into ccount welfre levels decrese round 10% for poor households nd 20% for the richest. This dditionl reduction in welfre is originted in loss of qulity s mesured by the energy content. 18

21 Indictors Tble 5: Simultions of policy nd fiscl interventions Mndtory substitution for biodiesel (5%) Mndtory substitution for biodiesel & bioethnol (5%) Increse of export txes, Soy & Soyben Oil (10%) Compensted subsidy to sles of biofuels (20%) y1 y5 y1 y5 y1 y5 y1 y5 Mcroeconomic Indictors GDP Trde Blnce Fiscl Result Rte of Unemployment Welfre Indictors Poorest Household Richest Household Sectorl Activity Level Agriculture Mnufctures Services Specific sectors Activity Level Soy Mize Sugr Cne Rest of griculture Soyben oil Diesel Gline Biodiesel Bioethnol GHG emissions index Note: y1: 2007, y5: Figures re devitions from percentge chnge in the bseline of the corresponding yer. Export txes. There is slight reduction in GDP s well s investments, following the increse of export txes on yben nd yben oil, s expected becuse of the dditionl distortion imposed to the economy. On the other hnd, the increse in export txes on yben nd yben oil impcts positively on production of biodiesel: production of biodiesel increses by 6% for the first yer with respect to the benchmrk, nd exports grow lmost 12%. The response is stronger in the long run, since more mobile cpitl is vilble to be llocted to the production of biodiesel. These exercises illustrte the potentil relevnce of indirect policy instruments on the rection nd growth of biofuel 19

22 contribution. 13. There is l reduction in production of yben nd lnd is rellocted to the production of mize nd the rest of griculturl products. The increse in exports legl txes on yben nd yben oil results in net reduction in revenue for the government, since reurces re llocted to industries with lower level of tx contribution. 14 GDP Welfre of households Level of ctivity: Biodiesel Level of ctivity: Bioethnol Mndtory Biodiesel (5%) Mndtory Biodiesel & Bioethnol (5%) Export Txes Soy & Soyben (10%) Compensted Subsidy Biofuels (20%) Figure 4: Policies nd fiscl interventions: GDP, Welfre nd Activity level (% devitions with respect to benchmrk) Production of mize nd sugr cne do not show significnt chnges. The economy does not increse production nd reduces exports. But it compenstes the loss in exports of mize nd sugr with exports of biofuels. The model shows slight decrese in GDP nd welfre due to the distortion. 13 The elimintion of export txes would not necessrily hve symmetric effect, if mobile cpitl were ssumed to become sunk fter being instlled. 14 An dditionl simultion ws performed, regrding subsidy of 20% to sles of biofuels: The simultion ssumes tht it hs to be compensted with n increse in ll txes to keep constnt fiscl result in the first period. The subsidy is pplied to the vlue dded lthough it is presented s subsidy to sles (goods purchse intermedite consumption nd vlue dded to be produced) it hs to do with supply subsidy. The result is n increse in production of biofuels tht is fully exported. 20

23 Compensted subsidy to biofuel sles. For this simultion we ssumed tht biofuel sectors receive 20% subsidy on the vlue of their totl sles, nd tht this is compensted with proportionl reduction of ll txes. Though the sectors tend to grow s shown in Tble 5, the net effect for the economy is not significnt. 5.3 Sensitivity nlysis We crried out sensitivity nlysis on very importnt prmeter, the elsticity of substitution between biofuels nd their fossil fuel counterprts. This is becuse the biofuel industry is still in its infncy. Perfect substitution between biofuels nd fossil fuels is not possible s existing vehicle engines do not run on 100% biofuels. Techniclly, existing vehicle engines cn hndle 10-15% ethnol nd up to 30% biodiesel. Therefore, we considered low vlue of elsticity of substitution between biofuels nd fossil fuels bsed on existing literture. However, s biofuel industry mtures, vehicle fleet will chnge. In future, Argentin, like Brzil, might consider flex fuel vehicles which cn run on either only biofuels or only fossil fuels or ny mix of them. Therefore, it would be interesting to see the sensitivity of model results if this substitution elsticity is ltered. We double the elsticity of substitution between biofuels nd fossil fuels for the sensitivity nlysis. We find no chnge in results in ll scenrios except blending mndte. This is becuse it would be still economic to export biofuels to interntionl mrkets thn using it for domestic consumption. 6 CONCLUSIONS AND FINAL REMARKS Argentin hs developed world-clss vegetble oil industry since the 1980s. The country hs emerged s one of the min exporters of oilseeds nd vegetble oil to the interntionl mrket. By 2011, Argentin topped the world in exporting biodiesel, which is produced from ybens. Fluctutions in interntionl mrkets of biofuels nd feedstocks, nd ntionl policies relted to biofuels re of concerns to vrious stkeholders in Argentin including the government nd the industry. Developing computble generl equilibrium model for the Argentinen economy with n explicit representtion of biofuel industry, this study conducts number of simultions on two core issues: (i) chnges in interntionl prices of biofuels nd feedstocks to stimulte their exports, nd (ii) 21

24 regultory nd fiscl policy shocks imed to promote domestic consumption of biofuels. The ssessment includes impcts on GDP, household welfre, sectorl outputs nd trde blnce. Our study finds if the interntionl prices of biodiesel, y oil nd ybens increse, Argentin will gin in terms of GDP nd cil welfre. An increse in interntionl prices of ethnol nd corn is l beneficil to Argentin, but not s much s cused by the increse in price of biodiesel, ybens nd y oil. On the other hnd, mndtory use of biofuels to substitute their fossil fuel counterprts would cuse smll reduction in GDP nd welfre, s such mndte would divert exports of biofuels nd its feedstocks for domestic consumption. The negtive effect would, however, be declining over time. This finding differs from those in studies such s Timilsin et.l (2010), which simulte impcts of ntionl trgets nd mndtes introduced in forty plus countries round the world. This is becuse the interntionl mndtes nd trgets would cuse expnsion of globl demnd for biofuels. Our results l show how n incresed export tx either on biofuels or feedstock to increse government revenues reduces GDP nd cil welfre. This is becuse n increse in export tx would lower competitiveness of Argentinen biofuels nd feedstock in the interntionl mrkets. Rel wges re ssumed constnt, nd there is unemployment, t vrince with the stndrd neoclssicl model of full employment; however unemployment tends to dispper s result of economic growth thereby cusing rel wges to increse. Our results re sensitive to these ssumptions bout lbour mrket conditions. Additionlly, the model ssumes tht the economy is not forwrd-looking, nd therefore gents do not pln investments with enough nticiption, though brnd new cpitl is llocted endogenously (s prt of the lution of the model) between sectors following the higher rte of return The trde off between domestic consumption nd exports of biofuels is n importnt issue for Argentin s the former increses welfre nd GDP wheres the ltter reduces them. Finding n optiml mix between domestic consumption nd exports nd setting domestic biofuel trgets bsed on the mix could be n interesting expnsion of the current study. 22

25 7 REFERENCES Al-Riffi P., B. Dimrnn nd D. Lborde (2010). Globl Trde nd Environmentl Impct Study of the EU Biofuels Mndte. Study crried out by the Interntionl Food Policy Institute (IFPRI) for the Directorte for Trde of the Europen Commission, Mrch. BBVA Bnco Frncés (2008). Luces y mbrs de los Biocombustibles. Servicios de Estudios Económicos. Año 4/Nº13. Primer trimestre. Böhringer C. nd T. Rutherford (2008). Combining bottom-up nd top-down, Energy Economics, Brooke, A., D. Kendrick nd A. Meerus (1992). GAMS: A User s Guide, Relese 2.25, Scientific Press. Cámr Argentin de Energís Renovbles (2009). Estdo de l Industri Argentin de Biodiesel. Reporte Primer Trimestre 2009: mercdos débiles, incremento de conflictos comerciles interncionles y propuest de lución pr l Argentin, Abril. Chisri, O. (2009). Economic ssessment of gins nd losses of biofuels production in Argentin. Unpublished study prepred for the World Bnk. Chisri O. nd C. Romero (2009). Un modelo de equilibrio generl computble pr l Argentin, UNDP, Buenos Aires. Dio X., E. Diz-Bonill, S. Robinn, nd D. Orden. (2005). Tell Me Where It Hurts, An I ll Tell You Who To Cll: Industrilized Countries Agriculturl Policies And Developing Countries. IFPRI Discussion Pper 84. Wshington, D.C.: Interntionl Food Policy Reserch Institute. Ferris M. nd J. Png (1997). Engineering nd Economic Applictions of Complementrity Problems, SIAM Review, Vol.39, No.4, December, Folgr C. (2007) Argentin s Biofuels Policy. Energy Secretrit. Kore Biofuels Conference. September Fridfinnn B. nd J. Rude (2009). The effects of biofuels policies on globl commodity trde flows, CATPRN Working Pper , ICONE-Instituto de Estudos do Comércio e Negociçŏes Interncionis. Institute for Interntionl Trde Negotition (2008). Overview of the biofuel sectors in selected Asin nd Ltin Americn Countries. Asi ltin-americ Agri-Food Reserch Network (ALARN). IICA-Instituto Intermericno de Cooperción pr l Agricultur (2007). Atls de l Agroenergí y los Biocombustibles en ls Américs. 23