1. European Union andUnited States Biofuel MandatesImpacts on World Markets IADB seminar December 2nd 2010by Perrihan Al-Riffai, Betina Dimaranan,David Laborde Debucquet with the collaboration and support from IADB, ICONE and FIESP

2. Overview Introduction and Background Modeling Choices Database The Baseline Results Concluding RemarksINTERNATIONAL FOOD POLICY RESEARCH INSTITUTEPage 2 3. INTRODUCTIONINTERNATIONAL FOOD POLICY RESEARCH INSTITUTE Page 3 4. Goals of this study Assessing Economic and Environmental Effects Increase in yield Increased Increase in area Extension of cropL production land Reduction of othercrops A NewNReduced Hunger? Demand supply forfinal D consumers Substitution effects for crops Reduced supply for Feed Other sectorsU intermediate(agrifood, cosmetics)consumers Substitution effectsS Terms of trade effects (energy, biofuels) EINTERNATIONAL FOOD POLICY RESEARCH INSTITUTE Page 4 5. Previous conclusions: The Biofuels Mix matters Emissions uncertainties MARGINAL ILUC crop EU mandate (Monte Carlospecific simulations).Mandate 5.6% Land Use Emissions (gCO2eq/MJ) / 20 years Marginal Coef. gCO2/Mj100%Ethanol-49.6990%Ethanol Sugar Beet -35.8680%Ethanol SugarCane-53.9570%Ethanol Maize3.6460%Ethanol Wheat -7.0050%Biodiesel5.9540%Palm Oil (no peat land)-21.9830% EthanolRapeseed Oil 8.7620%Ethanol Free TradeSoybean Oil 24.07Biodiesel10%Sunflower Oil8.73 0% 0 204060 80100Al Riffai, Dimaranan, Laborde, 2010Laborde & Valin, 2010INTERNATIONAL FOOD POLICY RESEARCH INSTITUTEPage 5 6. MODELINGINTERNATIONAL FOOD POLICY RESEARCH INSTITUTE Page 6 7. Main Features Global CGE MIRAGE assume perfect competition Improvement in demand system (food and energy) -done in previous works Improved sector disaggregation New modeling of Ethanol sectors Land market and land extensions at the AEZ level Co-products (ethanols and vegetal oils) New modeling of fertilizers New modeling of livestocks(extensification/intensification)INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE Page 7 8. Disaggregation (Sectors) Sector Description SectorDescriptionSector Description Rice RiceSoybnOilSoy OilEthanolW Ethanol - Wheat WheatWheat SunOilSunflower OilBiodieselBiodiesel MaizeMaize OthFood Other Food sectors ManufOther Manufacturingactivities PalmFruit Palm Fruit MeatDairy Meat and Dairy WoodPaperWood and Paperproducts RapeseedRapeseed Sugar SugarFuel Fuel SoybeansSoybeans ForestryForestry PetrNoFuel Petroleum products,except fuel Sunflower SunflowerFishing FishingFertiliz Fertilizers OthOilSds Other oilseeds CoalCoal ElecGasElectricity and Gas VegFruits Vegetable &Oil OilConstruction Construction Fruits OthCrop Other cropsGas GasPrivServ Private services Sugar_cbSugar beet orOthMinOther minerals RoadTransRoad Transportation cane CattleCattle Ethanol Ethanol - Main AirSeaTran Air & Seasectortransportation OthAnim Other animalsEthanolCEthanol - SugarPubServPublic services (inc. hogs and Cane poultry) PalmOil Palm Oil EthanolBEthanol - Sugar Beet RpSdOil Rapeseed Oil EthanolMEthanol - MaizeINTERNATIONAL FOOD POLICY RESEARCH INSTITUTEPage 8 9. Disaggregation (Regions)RegionDescriptionBrazilBrazilCAMCaribCentral America and Caribbean countriesChina ChinaCIS CIS countries (inc. Ukraine)EU27European Union (27 members)IndoMalay Indonesia and MalaysiaLAC Other Latin America countries (inc. Argentina)RoOECDRest of OECD (inc. Canada & Australia)RoW Rest of the WorldSSA Sub Saharan AfricaUSA United States of America But: Land markets at the AEZ levelINTERNATIONAL FOOD POLICY RESEARCH INSTITUTE Page 9 10. Production Tree for an Ag. Sector ChangesINTERNATIONAL FOOD POLICY RESEARCH INSTITUTE Page 10 11. Yield Changes in the Model Exogenous technology: TFP in agriculture Endogenous effects: Factor accumulation: More capital and labor by unit of land FertilizersINTERNATIONAL FOOD POLICY RESEARCH INSTITUTEPage 11 12. Fertilizers Price elasticities calibrated from the IMPACTmodel Logistic approach for yield effectsINTERNATIONAL FOOD POLICY RESEARCH INSTITUTE Page 12 13. Livestock Sector and IntensificationTraditional approach Intensification approach Feedstock Intermediate Like fertilizersconsumption Ratio price of land/price of Intermediate consumption & feedstocks Producer choiceValue Added (including Land) Increase in price of feedstock complementarySubstitution effect = Increase in feedstock prices Intensification + Overall priceIncrease in production cost effect = reduction in productionDecrease in demand Overall, potential increase inDecrease in production Land useDecrease in Land UseINTERNATIONAL FOOD POLICY RESEARCH INSTITUTEPage 13 14. Biodiesel ProductionOilCrops sector Biofuel (+meals) Sunflower Sunflower seed oil SoybeanSoybean oil Biodiesel Rapeseed Rapeseedoil Palm fruit Palm oil & KernelINTERNATIONAL FOOD POLICY RESEARCH INSTITUTE Page 14 15. Ethanol Production BiofuelsCropsBlending (+ DDG)EthanolWheatWMaizeEthanol MSugar Ethanol B EthanolBeetSugar Ethanol CCane ImportedImported Ethanol*Ethanol*INTERNATIONAL FOOD POLICY RESEARCH INSTITUTEPage 15 16. Land Markets at the AEZ LevelWheatCornOilseedsCET Sugar Substitutable VegetablesOtherLivestock1LivestockN cropscrops and fruits crops CET CET Cropland Pasture CET AgriculturalManagedlandforest CET Land extension Unmanaged land Managed land Natural forest - GrasslandsINTERNATIONAL FOOD POLICY RESEARCH INSTITUTE Page 16 17. DATAINTERNATIONAL FOOD POLICY RESEARCH INSTITUTE Page 17 18. Major Efforts on Data: from Values to Quantities Improvement from GTAP7 Split for fertilizers and fossil fuels Disaggregation with specific procedure for Maize, Soybeans, Sunflowerseed, Palm fruit, Rapeseed + relevant Oils + Co-products Production targeting (FAO) for all relevant crops Creation of a harmonized price database for calibration Case of co-products Creation of Ethanol and Biodiesel (2008 trade and production structure). Correction of some I-O data (e.g. China) Land use (AEZ GTAP database 2001 2004, + consistency withFAO and M3) Correction for Sugar cane AEZ in BrazilINTERNATIONAL FOOD POLICY RESEARCH INSTITUTEPage 18 19. BASELINEINTERNATIONAL FOOD POLICY RESEARCH INSTITUTE Page 19 20. Defining a Relevant Baseline Macroeconomic targets Growth Oil prices EU fuel consumption for Road transportation Technology and yields Policies Trade policies Ag policies Biofuel policies: EU and US: 2008 blending rate Brazil (Biodiesel mandate, flex for ethanol) Mandate in China, ASEAN and Rest of OECD One issue: exchange rate USDINTERNATIONAL FOOD POLICY RESEARCH INSTITUTEPage 20 21. Effects EU AD/CD on US Biodiesel 2.00 1.80Million Tons of Oil Equivalent 1.60 United States 1.40Rest of OECD 1.20 (Mtoe)Other Latin American Countries 1.00 (inc. Argentina) 0.80 Indonesia and Malaysia 0.60 China 0.40 Brazil 0.20 0.0020082020INTERNATIONAL FOOD POLICY RESEARCH INSTITUTEPage 21 22. Annual Growth in Yields (baseline) 4 3 2 1 0-1Land allocationFertilizerFactor intensityTechnical progress-2 EU EUEU EUEU EU USUSUSUS USUSBrazilBrazil BrazilBrazil BrazilBrazil MaizeRapeseed Soybeans Sugar cane SunflowerWheator beetINTERNATIONAL FOOD POLICY RESEARCH INSTITUTEPage 22 23. RESULTSINTERNATIONAL FOOD POLICY RESEARCH INSTITUTE Page 23 24. Defining a Central Scenario Scenario 1 - Mandate Policy: Implementation of the EU [6% of anoverall fuel consumption of 316 Mtoe, of which 40% will be ethanol]and US [RFS2] biofuel mandates of targeted consumption of ethanoland biodiesel in 2020, under a Business as Usual trade policyassumption; Scenario 2 - Mandate and Trade Liberalization: Implementation ofthe EU and US biofuel mandates of targeted consumption of ethanoland biodiesel in 2020, with the assumption of full, unilateral, tradeliberalization in biofuels in both countries; Scenario 3 - Mandate without Sugarcane Ethanol:Implementation of the EU and US biofuel mandates of targetedconsumption of ethanol and of biodiesel in 2020, without sugarcaneethanol imports, under a Business as Usual trade policy assumption.INTERNATIONAL FOOD POLICY RESEARCH INSTITUTEPage 24 25. Domestic Biofuels Production (2020 compared to baseline) 200% + 578% 150%% Change over baseline 100%50% 0% -50% -100% BiodieselEthanol Mandate Mandate and Trade Liberalization Mandate without Sugarcane EthanolINTERNATIONAL FOOD POLICY RESEARCH INSTITUTEPage 25 26. Price changes (2020, compared to baseline) 8% 7% 6% 5% 4% 3% 2% 1% 0%Mandate Mandate and trade liberalization Mandate without sugarcane ethanolINTERNATIONAL FOOD POLICY RESEARCH INSTITUTE Page 26 27. Regional Food Prices (2020, compared to baseline) 1.0% 0.8% 0.6% 0.4% 0.2% 0.0% -0.2% Mandate Mandate and trade liberalization Mandate without sugarcane ethanol -0.4% All Animal Primary All Animal Primary All Animal Primary crops food crops food crops foodEU27 SSA USINTERNATIONAL FOOD POLICY RESEARCH INSTITUTEPage 27 28. Agricultural Value Added (compared tobaseline, 2020)INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE Page 28 29. Oil Prices Mandate10% Mandate and Trade8% Liberalization6% Mandate without Sugarcane Ethanol % Change over Baseline4%2%0%-2%-4% OilFuel Price-6%-8%WorldBrazil European Union United StatesINTERNATIONAL FOOD POLICY RESEARCH INSTITUTEPage 29 30. Real Income and Terms of TradeReal Income (%)Terms of Trade (%)US US SSASSA Mandate Mandate LACLAC Mandate and tradeIndoMalayliberalizationIndoMalayMandate and Mandate withouttradeEU27 sugarcane ethanol EU27 liberalizationCIS CIS Mandate withoutsugarcane ChinaChina ethanolCAMCarib CAMCaribBrazil Brazil-1.0% -0.5%0.0% 0.5% -2.0%-1.0% 0.0% 1.0% 2.0% 3.0% INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE Page 30 31. Cropland extension (Mha)INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE Page 31 32. Source of crop land extension Pasture Managed forest Savannah/cerrado/grassland Primary forest100% 90% 80% 70% 60% 50% 40% 30% 20% 10%0%MandateMandate andMandateMandate Mandate and Mandate tradewithouttrade without liberalizationsugarcane liberalization sugarcaneethanolethanolBrazil WorldINTERNATIONAL FOOD POLICY RESEARCH INSTITUTE Page 32 33. Carbon Balance Sheet Mandate andMandate without tradesugarcaneMandateliberalizationethanolTotal carbon releasefromland use845.2 801.9 818.4(MtCO2eq)Marginalcarbonreimbursementrate-74.3 -81.4 -40.6(MtCO2 per year)EU+US Consumptionof biofuel in 2020 250225242069(million GJ)Annual carbon releasefromland use 38.836.2 57.81(gCO2eq/MJ)Annual direct savings(gCO2/MJ)-59.6 -64.2 -49.9Total emission balanceover a 20-year period-20.8 -287.92(gCO2/MJ)INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE Page 33 34. Conclusions EU and US biofuels policies slightly costly interms of Real Income for the World For both regions, the oil price effects is critical toassess the economic effects Brazil will be the main winner [under our assumption,especially about ethanol on the EU market] and theregion the most affected in terms of land use change Sugar Cane Ethanol plays a key role to: Limit the effects on food prices Improve gains for the consumers at the pump Reach a positive environmental outcomeINTERNATIONAL FOOD POLICY RESEARCH INSTITUTE Page 34 35. To Sum Up:INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE Page 35