Greenhouse Gas Emissions, Biofuels, and Strategic Trade

For a long time Nobel Prize-winning economist Thomas Schelling has argued that implementing climate change policy involves an extraordinarily challenging bargaining problem between people in different parts of the world.  Besides the well-known commons problem, the essential issue is that today's rich countries will bear most costs of curbing CO2 emissions while today's poor countries will reap most benefits.

Coming from this vantage point, US stubbornness in international attempts to price carbon emissions or otherwise curb them makes a lot of sense.  We are rich enough to easily cope with a warmer climate.  Furthermore, since we're the world's biggest exporter of agricultural commodities--which lie on the front line of climate impacts--we're likely to gain if warming damages crop yields.  Prices are extremely sensitive to quantities and so price increases will more than compensate for yield losses. Our incentive to curb emissions is therefore weak at best.

But biofuel policy, however ridiculous from an efficiency standpoint, could be wonderful for the US from a strategic trade perspective.  It's a twofer:  We get to exploit our monopoly power as a world's greatest exporter of agricultural commodities while exploiting our monopsony power as one of world's greatest importers of oil (has China passed us yet?).   Using biofuels in place of some oil imports  helps to keep the price of oil we do import lower.  And using ethanol as an implicit means to restrict the quantity of agricultural exports drives up prices for the remaining exports.

I'm skeptical whether biofuels reduce GHG emissions at all.  It's not just that it takes so much energy to produce the stuff.  It's that, by driving up prices, it affects land use in both the US and around the world.  Since land use and agriculture generally cause somewhere between 10 and 30 percent of CO2 emissions (these estimate vary a lot), it's not hard to see how biofuels may actually increase emissions.  (See Searchingner et. al)

But reducing carbon emissions is not the point.  The point is to manipulate trade in order to exploit US market power.  The WTO wouldn't let us do this explicitly.  But doing it with biofuels is ingenious.  Never mind the destruction we're causing to the rest of the world.

Update:  I suppose I should acknowledge that this interpretation of events unlikely presents deliberate methodical strategy on the part of any individual or interest group.  But I think it is the effective result of our political economic system that has, more-or-less followed from private interests.

Update 2: R, in the comments, gets at just the issues that motivated this post.  I was trying to understand why agriculture seems so favored, especially relative to energy interests, in the political economy of biofuels and everything else.  For example, there's lots of talk about ending the ethanol subsidy but no talk of ending the mandate to produce some 15 bil./gal. per year of ethanol.  That would basically keep the implicit subsidy for agriculture but make the fuel companies pick up the tab rather than the U.S. government.

Of course there's the Iowa caucuses. And there's still two senators in every low-population agricultural state.   But more importantly, the masses really don't like high gas prices and (in the U.S.) they hardly notice the price of corn.  So keeping fuel prices a bit lower and agricultural prices a bit (or even a lot) higher, probably does suit the broader political economy.

So, does all this really amount to a good thing?  I don't think so.  For three reasons: (1) I think serving US interests in a very narrow and immediate sense could bite us hard in the future, which is something that is beginning to dawn on national (food) security wonks; (2) I think it's morally wrong to disregard the harm we do to those in other countries, especially if that harm exceeds our gain; (3) I've recently had the chance to learn more about so-called "life-cycle analysis" or LCA, which underlies the various renewable fuel standards.  If one scratches the surface, LCA begins to look ridiculously complex, and the only conclusion is to put a price on the freaking carbon already.

More on LCA another day....


  1. "We are rich enough to easily cope with a warmer climate. Furthermore, since we're the world's biggest exporter of agricultural commodities--which lie on the front line of climate impacts--we're likely to gain if warming damages crop yields. Prices are extremely sensitive to quantities and so price increases will more than compensate for yield losses."

    I'm not sure exactly what you mean by "we're likely to gain if warming damages crop yields"

    Over 97% of the U.S population is employed in non farm activity.

    Who is gaining? Of course farmers. Is the rest of the public gaining? Of course not.
    Not everyone in America is a farmer :)

    The gist of what you're trying to say is that politicians have no incentive to intervene because global warming "helps us"

    Your definition of "us" seems to include only the farmers. Granted they're somewhat powerful politically, but nearly enough to justify your statement.

    By the way did you see that global warming is killing the stars?

  2. Michael, I agree with your assessment of policy outcomes, but I see the political economy that leads those policies differently.

    Much of the U.S. domestic opposition to carbon pricing is from sectors with little exposure to agricultural prices (oil & gas, power, various industrials), but which fear carbon prices will hurt profitability (directly, and indirectly via reduced international competitiveness).

    And I see biofuel quotas and subsidies as sustained by a powerful but minority interest (15-20 farm states and their bipartisan group of Senators in particular), rather than a top-down decision by a monolithic political mastermind of what would be best for our economy.

    So the takeaway may be that first-best climate policy is even more difficult than Schelling's model would suggest, because various domestic constituencies oppose those policies for different reasons and must be appeased separately.

  3. P.S. Your "update" gets at this, but feels a bit at odds with your original post. Are you making the case that "[domestic] groups following their private interests" have led to a set of policies which is optimal for the U.S. and sub-optimal for the world? If so, I'm not sure that is all bad, given how often we bemoan minority interests leading to policies which are sub-optimal even at the national level!

  4. for me biofuel is really nice to use. . because it has a less effect to the environment. .'
    Vapor Recovery Unit


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