On the Inclusion of Indirect Land Use in Biofuel Regulations

Although one of the major objectives of biofuel policy is to contribute to the reduction of greenhouse gas (GHG) emissions, the allocation of feed stocks, like corn, from food to biofuels production contributes to the increase in the price of food and may result in deforestation and the extra release of GHG emissions, often referred to as indirect land use change (ILUC). It is suggested that ILUC will be included in the calculation of GHG emissions in regulating individuals under policies such as the renewable fuel standard (RFS) and the low carbon fuel standard (LCFS). This Article identifies several reasons why regulators should avoid including ILUC in the calculation of life cycle–based biofuel policies like the LCFS and the RFS. First, attributing indirect effects to individuals violates the basic principal that regulations of externalities will hold individuals responsible for activities that they control, not activities controlled by others. Yet, policy parameters can be adjusted to changes in market conditions. Because ILUC is only one type of market-mitigated indirect effect of biofuel production, policy proposals that consider only this indirect effect while ignoring others have basic logical flaws. Second, biofuel ILUCs are unstable and may vary significantly over time and be affected by policy choices; therefore, they are difficult to compute and implement. This extra cost may reduce the gain from introduction of ILUC in regulations. Third, because of the high degree of instability associated with ILUC, its inclusion in biofuel regulation adds another layer of uncertainty that is likely to discourage investment in biofuel. It is expected that continuous investment in biofuels over time will lead to learning-by-doing and improvements of the technology. Reduced investment because of inclusion of ILUC in policies is likely to decrease the GHG emission reduction gains because of lessened technological improvements.Finally, global problems require global solutions. Therefore, partial policies like the LCFS and the RFS can be good transitional policies, but eventually they have to be replaced by global policies in which countries share responsibilities to reduce GHG emissions. Well-integrated global policies should not include double guessing in the form of regulating indirect effects; their inclusion in the transitional policies may establish precedents that negatively affect policy design in the long run. Recognition that short-term regulations of biofuel should lead to better policies in the long run should lead to a drop in the use of ILUC in biofuel regulation. Instead, governments may consider regulatory standards that become stricter over time and thus demand continuous improvements in performance over time. To conclude, we recommend against incorporating ILUC in biofuel regulation, even though it may benefit the current biofuel producers. Reexamination of the broader policy regime of subsidies and import tariffs and the enforcement of mandates during periods of high food prices is also warranted.

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