On the direct, indirect and induced impacts of public policies: The European biofuel case

This paper deals with the controversial indirect land use changes of the European biodiesel policy. Two studies sponsored by the European Commission finds significant, but contrasted, land use effects for the different vegetable oils used for biodiesel production. The first study uses an aggregate computable general equilibrium model capturing direct, indirect and induced effects. The second recent study uses a biotechnical partial equilibrium model offering a detailed representation of the indirect effects occurring through the livestock sectors. We develop an original economic emulator to understand the diverging key results of these studies and test their sensitivity. We find that the direct and indirect effects on vegetable oil markets explain most of the differences. We also find that indirect effects on the livestock sector and the induced effects do not significantly influence the biodiesel results. However results are critically sensitive to crop yield responses that are considerably underestimated in both studies. The cropland displacement due to the biodiesel policy computed by the recent study is overestimated by a factor of 5.