Sunday, April 13, 2008

Biofuels, Food Prices and the Cost of "Fighting" Global Warming

The Stern Report argued that the cost of "fighting" global warming is low compared with the long term effect of rising temperatures while the most recent IPCC report argued that the cost of "inaction" on global warming was high. It is also suggested that tens, if not hundreds of millions of people may in time be negatively affected by inaction on the threat of global warming and that the world's poor are likely to be the one's most affected. Unfortunately, the immediate impact of converting food for fuel on global food prices, supposively to "fight" global warming, is in the short run threatening the well being of likely hundreds of millions of people, particularly the poor. As the Economist noted in a recent article, a dramatic increase in the use of corn for ethanol in the United States is likely responsible for the dramatic increase in the price of food across a number of food staples in the past year.

The increase in food prices has a disproportionate effect on the world's poor since the poor spend a higher percentage of their income on food. The steady decline in global food prices (more than 50% in real terms between 1960 and 2005) meant that the well-being of the world's poor increased significantly over that period. Unfortunately, the increase in global food prices since 2005 as a direct effect of the American biofuels program has wiped out more than half of the real decrease in global food prices since 1960. The effect of rapidly rising food prices has caused food riots in a number of poor countries around the world. Unfortunately, governments in a number of countries have responded by restricting food exports. While restricting food exports may have a modest effect on lowering food prices in such countries in the short term, the mid-term effect will perversely be to reduce incentives for farmers to increase food production thus resulting in higher prices for food than what otherwise would have been the case. The case of Ukranian farmers destroying $100 million worth of food earlier this year because they were prohibited from exporting their production is a very visible case in point of such policies.

We thus have a clear and early acid test of the eventual cost of "fighting" global warming. The "low" cost of "fighting" global warming has upfront been revealed to have a very high cost indeed, with this cost disproportionately being borne by the world's poorest people. Of course, environmentalists argue that the "right" policies can ease the transfer from fossil-based fuels to more green sources of energy. While it is impossible to argue against the good intentions of such people, in reality policy initiatives produce winners and losers and the winners are the ones better organized to shape the policy in the first place. As more policy is developed to "fight" global warming, the benefits of this policy will accrue to the well off and the costs will be apportioned to the world's poor.

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