Climate Change Policy of Bio-Energy: A Computable General Equilibrium Analysis

Abstract: This paper explores the intersectoral and land-use dynamics behind bio-energy???s development as a climate change policy. Bio-energy from agriculture and forestry can potentially mitigate the emissions of carbon dioxide (CO2) from energy use and land-use changes (LUC) by its substitution to fossil fuels and its diversion of land-use to biomass plantation. Two major issues concerning its interplay with the other sectors of the economy and other land-use options are mapped in the study, namely its competition with other energy sources and sectors of similar production structure such as the crops and livestock sector; and its competition for land with other land-use based CO2 mitigation option of afforestation. By employing a computable general equilibrium with a land-use change model, the study was able to depict the various interfaces of bio-energy with the rest of the economy and with the land market. Moreover, the model enabled the mapping of policy implications upon the economy, welfare, and pattern of land-use changes and its subsequent contribution to CO2 emissions. The main policy considered in this study is the carbon taxation with revenues geared towards the reduction of direct taxes and towards the finance of bio-energy subsidy. Results showed that the carbon taxation per se does not ensure the growth of the bio-energy sector, unless the tax base is extended to land-use changes and unless the proceeds are directed to subsidize the sector or to buttress the incomes and consumptions of rural households; the main users of bio-energy. Investment in bio-energy as a complementary mitigation policy to carbon taxation has resulted into the improvements in the domestic capacity for energy sourcing and the welfare of the rural households. It successfully lowered the cost of mitigation by shifting reliance away from fossil fuels and by inducing land-use conversion to bio-energy and forestry purposes, without instigating dramatic transformations in the land-use system and without producing catastrophic burden upon the agricultural sector. Moreover, despite the competition for scarce land resource of the different land-use based mitigation options, synergies between developing carbon offset through bio-energy and building carbon sink through afforestation can be achieved through the market mechanism. The same benefits are presented by integrating land-use changes emissions into the carbon tax coverage.

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