2018 CARD Award for Best Ph.D. Dissertation in Agricultural, Environmental, and Energy Economics and Policy

Three Essays on Agricultural and Environmental Economics

Hyunseok Kim

Iowa State University

Three papers in my dissertation explore the effects of agricultural and environmental policies on relevant industries. Recognizing the significant influence of U.S. biofuel policies, the first two papers focus on examining the market behavior and welfare consequences under the U.S. biofuel policies. These two studies are in the line of CARD’s research on biorenewable policy. While current biofuel policies are primarily relying on mandates, the third paper focuses on understanding the performance of a different kind of market-based policies in reducing industry-wide emissions. This work is in the line of CARD’s research on resource and environmental policy.

The U.S. renewable fuel standard (RFS), initiated in 2005 and extended in 2007, has been rationalized as pursuing, for example, reduction of greenhouse gas emission and reduction of the U.S. dependence on foreign energy sources. While its effects on food prices and actual environmental benefits remain controversial, the first paper constructs a multi-market equilibrium model and assesses the current and future economic effects of the RFS. The model integrates the U.S. agricultural sector with the energy sector and explicitly considers both U.S. ethanol and biodiesel production. The model is parameterized to represent observed 2015 data as status quo and then simulated to analyze alternative scenarios. The results confirm that the current RFS program considerably benefits the agricultural sector but also leads to overall welfare gains for the United States. Implementation of projected 2022 mandates, which would require further expansion of biodiesel production, would lead to a considerable welfare loss (relative to the status quo).

While the abovementioned analysis relies on elasticities from the literature, the second paper directly quantifies the U.S. corn and soybean supply response. After modeling acreage choice based on a system of dynamic equations that is consistent with the role of crop rotation, the acreage and yield responses are estimated by using county-level panel data for the twelve Midwest states over 2005-2015. The results indicate that the acreage and yield responses are highly inelastic, where corn and soybean acreages respond more in the short run than in the long run. With relatively significant cross-price acreage elasticities, when corn and soybean prices move together, the response of the total acreage of these two key crops is very small. This result indicates that the ability of the U.S. corn and soybean production sector to accommodate the demand shock caused by the RFS is limited.

As alternatives to command-and-control-type policy instruments such as mandates, market-based policies, such as voluntary agreement (VA) and Pigouvian tax, can be used to fix environmental externalities. Given the globally increasing use of VAs, the third paper examines the relative performance between VA, relative to the practical alternative, tax policy, and laissez faire policy in achieving an industry-wide emission target. A three-stage game model under an oligopolistic market is considered, in which consumers care about the environmental friendliness of firms. It turns out that when the market is non-competitive, the VA, relative to other policy options, improves welfare despite suffering from free-riding behavior. It is also found that as consumers value the green good more, the VA increases the number of green firms and provides a less competitive environment for free-riders, who increase the price of regular goods. As a result, the total market under the VA becomes less covered, at some point, than the tax policy. Regarding implementation, the potential gains from of the VA are attainable provided the regulator’s threat is credible and sufficiently strong.

To sum, the first study of my dissertation can contribute to assess the comprehensive impact of U.S. biofuel policies on the United States. The second study helps us understand the supply response of U.S. corn and soybeans in the biofuel era, which is crucial to evaluate and/or forecast the consequences of U.S. biofuel policies at an international point of view. The third study can add to the literature by scrutinizing relative (de)merits between major market-based environmental policies—tax policy and voluntary approach—where they can be implemented at state or federal level by targeting firms in an industry.