Biofuel Industry Gets Rich at the Expense of World's Poor

By their very nature, government policies that artificially encourage the use of “biofuels” (such as ethanol) distort resource allocation and make consumers poorer than they otherwise would be. Of course, fans of the free market have been leveling such a criticism against biofuel mandates and subsidies from the beginning.

Yet over the last few years, even many left-leaning groups have realized the harm of these programs. In particular, biofuels divert agricultural products and lands out of food production and into energy production, thereby driving up food prices. We have already written here about the Renewable Fuels Association’s celebratory document explaining the boost to farm income (and higher prices for consumers) provided by the Renewable Fuel Standard (RFS). But now a new scholarly article by Brian Wright in The Journal of Economic Perspectives provides additional insight into the connection between biofuel policies and food prices.

Wright is Professor of Agricultural and Resource Economics at UC Berkeley. His paper explores the reasons for the large increase in prices of wheat, rice, and corn over the last five years, which is at first puzzling since these are textbook competitive markets. Wright argues that “[t]he price jumps since 2005 are best explained by the new policies causing a sustained surge in demand for biofuels.” In other words, subsidies and mandates for biofuels are making food more expensive, particularly for the poorest among us. He goes on to write:

The rises in food prices since 2004 have generated huge wealth transfers to global landholders, agricultural input suppliers, and biofuels producers. The losers have been net consumers of food, including large numbers of the world’s poorest peoples. The cause of this large global redistribution was no perfect storm. Far from being a natural catastrophe, it was the result of new policies to allow and require increased use of grain and oilseed for production of biofuels. Leading this trend were the wealthy countries, initially misinformed about the true global environmental and distributional implications.

Wright’s analysis shows that the problem of biofuel policies is not limited to the United States; wealthy countries around the world are embracing these flawed policies in the name of protecting the environment. Yet perversely, the full impact of these policies falls on the poorest people of the world, who are hurt the most by increased food prices.

Even groups who initially supported the RFS and similar policies are realizing its perverse consequences. We have earlier discussed the ethanol “blend wall” which threatens to actually harm vehicle engines and make fuel more expensive for American motorists. Now we can add increased global food prices to the list.

IER Senior Economist Robert P. Murphy authored this post.