Band 6, Heft 2 - Special Issue In Memory of Bruce Gardner 1942-2008: Contributions to Energy Economics and Policy Analysis

Bruce L. Gardner was a giant in the agricultural economics profession. He was a brilliant academician, and had a major influence on U.S. farm policy over several decades and a number of presidential administrations. This special issue contains eight papers in his memory. One paper deals with the interface between public and private research, another deals with the compensation principle as the basis for benefit-cost analysis, and six deal with energy and biofuels. The latter papers focus on manipulation of the oil market; the impact of biofuels on land use; and the role played by government subsidies, including tariffs on ethanol imports and ethanol processor subsidies. Important results are derived that add to the growing literature on the economic impacts of biofuels. While there are significant gains from biofuels, there are also associated large costs. The verdict is still out on whether the benefits outweigh the costs.

The US Congress has become concerned with the possibility that much of the recent rise in oil prices is due to speculation or market manipulation. We propose a theory of futures market manipulation that can potentially explain such manipulation and an associated price bubble. Our model involves a price-setting off-shore exporter (e.g., OPEC) of a commodity (e.g., oil) with price-taking domestic production and consumption sectors. If domestic next-period price expectations are linked to futures prices, then OPEC may drive up current prices through manipulative buying in the futures market, achieving an increase in market power for their cash-market exports. An increase in future price expectations increases storage, artificially driving up current market prices. We explore the conditions necessary to make this an optimal strategy for OPEC.

Lawyers and philosophers have used the Scitovsky paradox to discredit cost-benefit analyses. His paradox is used as a criticism of the potential compensation criterion. But the occurrence of reversals is severely limited. The Compensation Principle, even with its potential nature, requires that compensation actually could be paid. Based on many empirical cost-benefit studies, the actual cost of compensation, which includes transaction costs, can be large. The attempt at actual compensation could turn a highly desirable project into a highly undesirable one, as the benefit-cost ratio could change from greater than one to less than one. The proper justification for using BCA is the Pareto principle considered across a portfolio of projects not the Compensation Principle.

The basic concern of this paper is the effect of private sponsorship of university research on the allocation of expenditures between public good research and commercial applications. Throughout the land-grant university system, there is much concern that as a result of reduced government funding, fundamental research will be neglected at the expense of research that is geared toward commercial applications. This paper attempts to shed some light on the relationship between research priorities and the availability of public funding for university research. In particular, we use both a static and a dynamic model to investigate the conditions under which university/private research partnerships can crowd-in or crowd-out basic science research as public funding becomes scarcer.

We use a CGE model to investigate the potential of second generation biofuels production under possibilities of land use conversion from natural areas to agricultural land in the U.S, considering the recreational value of forests. We introduce recreational benefits of natural forests through "household" production sectors for hunting and fishing, for wildlife viewing in reserved areas, and wildlife viewing in other forest areas, based on extensive data available in the U.S. about those activities. We test the model assessing the land use changes and welfare impacts from a U.S. climate policy scenario. The new approach resulted in similar land use change as earlier work where land conversion was limited by an elasticity based on observed land supply response. The advantage of the new approach built here using recreation data is that it provides an obviously improved measure of welfare cost of policies that lead to land use change, because the preservation value of the land offsets the increased cost of the policy due to the restriction on use. The results are sensitive to the representation of people's willingness to substitute other inputs for natural land in their recreation experience, parameter not being well investigated empirically. The main contribution of the paper is not for its insights on biofuels potential but for the improved representation of welfare changes from models where the land supply response limits conversion.

U.S. import tariffs on ethanol are designed to offset a tax credit that benefits U.S. and foreign producers alike. The tax credit is an ethanol consumption subsidy but ethanol market prices increase by almost the full amount of the credit as the impact on world oil prices is small. Therefore, removing the tariff has a small impact on U.S. ethanol prices but increases the world price by almost the full tariff. Eliminating both the tariff and tax credit has the exact opposite effect: U.S. prices decline by almost the tariff (equal to the tax credit) while world prices remain essentially unchanged. With a mandate instead, an import tariff equal to the initial premium will necessarily result in a further increase in domestic ethanol prices as the resulting decline in imports requires more domestic supply to fulfill the mandate. This moderates the world price depressing effects of the tariff. For a given import tariff and price premium of ethanol over gasoline, exporters like Brazil therefore prefer mandates over tax credits but ideally only a mandate and no tax credit or tariff.

Iowa's farmland consists of over 16% hay crops and pastureland, a significant portion of which is under cash rental contracts. This study investigates the comparative relationships between cash rental rates for cropped land and non-cropped land, where the latter includes hay and pastureland. We find that higher crop prices resulting from biofuel demand induces land use conversion from non-cropped land to crop production and thus bids up non-cropped land rents. Compared with changes in cropped land cash rents, non-cropped farmland rents could increase by a higher percentage. Non-cropped land cash rental rates are largely determined by crop and feeder cattle prices, population density, soil quality, and proportion of non-cropped land in a specific area. A primary effect of ethanol subsidies is the redistribution of income between corn growers and livestock producers, whereby higher livestock feed costs together with increasing hay and pastureland cash rents harm the dairy and feedlot beef sectors. Our study shows that, because of the positive effect on rents, the policies have an indeterminate effect on landowners operating in the cow-calf sector.

This paper employs a partial equilibrium trade framework to show that biofuel policy can substitute for traditional agricultural policy intended to boost farm welfare. It also shows how food market volatility can induce periods of boom and bust in the ethanol industry, causing episodes of bankruptcy and reduced capital investment. This paper further models the effects of two specific technological innovations—cellulosic ethanol and agricultural biotechnology—on food and fuel markets and demonstrates that technology can reduce ethanol market volatility. A parameterized model is used to characterize the impacts of biofuels on food and fuel markets.

The biofuel industry has been experiencing a period of extraordinary growth, fueled by a combination of high oil prices, ambitious renewable fuel standards, subsidies, and import protection. This rapid growth has important consequences for the US and global economies. In this paper, we examine these consequences from partial and general equilibrium perspectives. We first examine US biofuel policy backgrounds to determine factors which caused the boom in the ethanol industry in recent years. Then we use a partial equilibrium model to investigate the economic consequences of further expansion in the ethanol industry for the key economic variables of the US agricultural and energy markets under alternative policy options which might be used to promote ethanol production in the future. Finally, we extend our analyses to examine consequences of further biofuel production at a global scale. One of the important conclusions of the research regards the importance of the link between energy and agricultural markets that has now come into being. That linkage has profound implications for the agricultural sector globally.