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The Biofuels Mandate and U.S. Corn Prices
Volume 15, Number 48: 28 November 2012

In a paper recently published in Nature Climate Change, Diffenbaugh et al. (2012) analyze the response of U.S. corn markets to climate volatility under various alternative energy futures, one of which envisions "a binding renewable fuels standard for corn ethanol and capacity constraints on ethanol absorption." Although this scenario was initially viewed as a strong positive element of both agricultural and environmental policy, the four U.S. researchers unfortunately found that a binding mandate of this nature likely "enhances the sensitivity to climate change by more than 50%," with the result that it could well "cause U.S. corn price volatility to increase by more than 50% in response to historical supply shocks in the domestic market," citing Hertel and Beckman (2011).

The underlying phenomenon that is responsible for this unwanted consequence is the fact, as Diffenbaugh et al. describe it, that a biofuel mandate will "amplify the price response to yield volatility by promoting market inelasticity." And they thus conclude that such policy decisions "could substantially exacerbate the impacts of climate change, even for the relatively modest levels of global warming that [they believe] are likely to occur over the near-term decades."

So what would happen if the risk-laden biofuel mandate were eliminated? Diffenbaugh et al. write that "in the context of the 2020 economy and low oil prices, elimination of the biofuels mandate reduces corn price volatility from 41 to 32% in the historic [past] climate, whereas elimination of the mandate reduces price volatility from 200 to 109% in the future-climate/low-oil-price scenario." And they thus conclude that some of the policy decisions the United States might make "could substantially exacerbate the impacts of climate change, even for the relatively modest levels of global warming that are likely to occur over the near-term decades."

Sherwood, Keith and Craig Idso

Reference
Hertel, T.W. and Beckman, J. 2011. In: Zivin, J.G. and Perloff, M. (Eds.). The Intended and Unintended Effects of U.S. Agricultural and Biotechnology Policies. NBER and University of Chicago Press, Chicago, Illinois, USA.