The political economy of bioenergy in the United States: A historical perspective based on scenarios of conflict and convergence

Energy Research & Social Science 27 (2017) 141–150

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Original research article

The political economy of bioenergy in the United States: A historical perspective based on scenarios of conflict and convergence Jorge Ernesto Rodríguez Morales ∗ , Fernando Rodríguez López University of Salamanca, Department of Applied Economics, Paseo Francisco Tomás y Valiente, s/n, 37007 Salamanca, Spain

a r t i c l e

i n f o

Article history: Received 24 October 2016 Received in revised form 27 February 2017 Accepted 1 March 2017 Keywords: Energy policy history Bioenergy transition Political economy Energy and transport

a b s t r a c t The paper analyzes the historical evolution of the production of liquid bioenergy in the US on the basis of the political economy of fuels for road transport, largely determined by the dynamics of the opportunity cost that arises from the connection between energy and agricultural markets. We have developed an analysis framework to build a set of scenarios suitable to explain the evolution of biofuel markets in the historical period analyzed. These scenarios, strongly associated with conditions of convergence and conflict between the regulatory state and the agro-industry, have then been statistically verified using an interrupted time series analysis. The analysis shows that the evolution of governance, institutions, and markets around bioenergy have been determined not just by the political goals of the US regulatory state, but also by private economic drivers related to agro-industry. This suggests that bioenergy transition in the US can be understood as the agricultural dimension of the political economy that underlies the sociotechnical regime of energy for transport in the US, characterized by institutional inertia and technological lock-in. © 2017 Elsevier Ltd. All rights reserved.

The process of energy diversification in road transport has been more complex and difficult than in other sectors. This is largely due to the low availability of competitive substitutes to liquid fossil fuels, which in great extent is the result of the road transport technology and infrastructure development, characterized by inertia and technological lock-in. This has represented a technological barrier to the use of other alternative energy products [1]. Biofuels can be considered as a feasible alternative for energy diversification in road transport, especially first-generation bioethanol and biodiesel, which represent the biggest share of total production in the US, Brazil and the EU. Unlike sugar cane Brazilian bioethanol, US bioethanol is obtained mainly from corn, a product traditionally oriented to food markets. The multidimensional nature that surrounds this industry necessarily imposes unravel the historical logic of economic and political phenomena, whose impact on the development of bioenergy for road transport seems to have been decisive. In this paper, we argue that market development of biofuels can be explained as the result of a complex relationship between the

regulatory state1 and the private agro-industry sector. We choice the US as a benchmark because it is the main biofuel producer in the World and because of its long record as a significant biofuel market, which reduces the likelihood and impact of possible external influences. Anyhow, the building blocks of the model are rather general, so it is possible to adapt it in order to explain the evolution of other major markets, especially those with huge agricultural endowments and an active agricultural policy. The main point is that, while it is true that biofuels have been closely related to energy policy applied to fossil fuels for transport, the variability of commodities markets as well as the institutional game rules in the agricultural sector have exerted an important influence on the development of biofuels industry development. Hence, the aim of this work is to contribute to grasping the political economy of the industry in the US, trying to explain how political, economic and institutional endowments related to the energy use of corn have interacted along the time, and how this dynamic relationship is connected to the historical development of biofuels. To this end, the first part of this article presents an analysis framework that can be used to explain the political economy behind the historical evolution of biofuel industry in the US, while the

∗ Corresponding author. Present address: Lars Ols Väg 1, 263 76 Lerhamn, Sweden. E-mail addresses: [email protected] (J.E. Rodríguez Morales), [email protected] (F. Rodríguez López).

1 Due to the historical approach and the origins and evolution of the regulation in the US since the late XIX, we refer to the regulatory state as the public intervention in firm’s decisions and in markets outcomes.

1. Introduction

http://dx.doi.org/10.1016/j.erss.2017.03.002 2214-6296/© 2017 Elsevier Ltd. All rights reserved.

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second part puts this framework in chronological perspective, building a successive chain of explanatory scenarios on the basis of historical milestones and setting specific testable hypotheses for each period. In the third part, the proposed hypotheses have been tested using interrupted time series analysis. The applied methodology is novel to the extent that it draws attention to the effective and real balances resulting from private and public interest in each period, applying elements of analysis from a variety of disciplines.2 Finally, the conclusions section presents a summary of the findings and the relevance of the approach to grasping the implications of the political economy that underlies bioenergy evolution in the US. 2. Analysis framework From a historical approach, the use of biofuels can be considered to have been influenced by political and economic decisions adopted by the main actors in the frame of certain institutional and technological endowments that are part of the socio-technical regime of the energy sector. The term socio-technical regime in the energy sector rises from the notion of interdependence between society and technology [2]. The assemblage of institutions, markets and other attributes of a society interacts dynamically with the restrictions that technology imposes on human behaviors, influencing choices at different levels of decision-making, which led to a non-linear process of co-evolution [3]. Thus, the decisions around liquid bioenergy have been determined by the influence of the related markets (energy and agricultural markets) as well as by its institutional structure, including embedded Institutions, institutional environment, and institutions that govern economic transactions [4]. On the basis of that historical information, an analysis framework has been developed to study the evolution of the biofuel industry, which is formally shown as a result of a dynamic relationship of convergence or conflict between private and public agents regarding the production and consumption of biomass as a renewable source of energy for road transport. It describes the persistent institutional tensions and contradictions that arise from the different degrees of institutionalization of competing energy sources along the time, as well as the stability of the system and the potential for change [5]. This relationship emerges from the interaction of the opportunity costs related to the use of food biomass as a renewable energy source for transport. On one side, the US regulatory state, able to intervene and to not intervene in the market according to its objectives or political interests; on the other side the agroindustry linked to the energy use of biomass, whose decisions affects the level of production of biofuels. Following this logic, we have identified three main types of scenarios, characterized by positive convergence, negative convergence, and conflict. Table 1 shows the possible underlying relations upon which the historical evolution of first generation biofuels in the US can be explained. The main vectors that have affected the political opportunity cost of the regulatory state related to fostering liquid bioenergy have been historically linked to the expectancy about the price of oil. Being this the main factor, studying environmental and agricultural policy has been relevant to explain the nuances of the public intervention’s cost in the fuels markets. Thus, when the price of oil is relatively high, the opportunity cost to support alternative energy sources such as liquid bioenergy decays and vice versa. This, in turn, has historically reflected the expectations about diverse variables as the domestic reserves (e.g. conventional or unconventional tight oil), the cost of dependency on energy imports, the

2 The suggested methodology and the obtained results may help deal with some of the challenges posed by Sovacool [40], especially those related to institutions and energy governance, and sociology and history of technology.

strategic behavior of the international oil companies and the hostcountries, the technology improvements (e.g. hydraulic fracturing) or the negative externalities. As regards the opportunity cost of the agro-industry, it is mainly affected by different variables such as the fluctuations of prices in the international food markets, the level of protection embedded in the agricultural policy, the technology, the favorable environmental policy or the level of support to liquid bioenergy itself or to local feedstocks, many of them expressed in environmental regulations, bans, commodity pricing policies, tariffs, tax breaks, subsidies or international trade rules. All of these vectors interact dynamically leading to certain sort of scenarios of conflict and convergence characterized by diverse institutional and non-institutional conditions, which can be favorable or disfavorable to the development of liquid bioenergy (Table 2). Based on the conditions for each scenario, the impact on market development can be identified as expansion (moderate or strong) or contraction (moderate or strong) (Table 3). Influenced by a series of vectors of economic, political and institutional nature, the opportunity costs of the different stakeholders tend to increase or decrease in time, and the resulting underlying relationship becomes essentially a dynamic process. Because of this dynamic nature, the relationship can be synchronous or asynchronous, and its evolution can be understood as a sequence of scenarios of convergence and conflict that have affected bioenergy transition over time. Consistent with this formulation, we suggest as a general hypothesis that the historical evolution of biofuel industry in the US is not determined by the state action alone or by private sector decisions adopted in an autonomous manner, but by complex scenarios of convergence and conflict influenced by vectors that emerge from within and outside the socio-technical energy regime, which have determined the governance patterns and markets development of liquid bioenergy. In this context, governance is understood as the numerous processes through which a group of people sets and enforces the rules needed to enable that group to achieve desired outcomes [6]. The governance structure is composed of a number of institutions with certain features of resilience and adaptability, which are part of the socio-technical regime of the energy sector [7]. 3. Scenarios of convergence and conflict, and the evolution of bioenergy for road-transport in the US In our approach, the different combinations of opportunity costs are what determine the successions of convergence and conflict scenarios. On the public sector side, the opportunity cost is affected by the cost of energy and by the institutional endowments around biofuels governance. In a broad scope, that includes national laws and regulatory policies, as well as international rules and third countries policies related to energy, agriculture, or environmental dimensions of bioenergy. On the private sector side, the opportunity cost is related to the historical evolution of agricultural and energy markets as well as the institutional protection of the agroindustry. As noted above, even when we can observe key regulatory milestones along the development of biofuels in the US, the liquid bioenergy industry evolution in the US can be better understood as a sequence of convergence and conflict underlying relationships. 3.1. First period: from early 20th century to the end of World War II. Conflict scenario for liquid bioenergy expansion: (−) regulatory state (+) agro-industrial sector During the early years of the 20th century, agriculture was a labor-intensive industry employing about 41% of the workforce in a large number of small, diversified farms located largely in rural

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Table 1 Scenarios of convergence and conflict underlying the evolution of biofuel industry in the US. Opportunity cost

Private sector US agro-industry (A)

Private/public

Public sector

US regulatory state (S)

Low political opportunity cost (to set policies to foster biofuels)

High political opportunity cost (to set policies to foster biofuels)

Low economic opportunity cost (to increase production for energy markets instead of food markets)

Scenario of positive convergence: ±(A) ±(S) The agro-industry maximizes profits by increasing production of biofuels in relation to food products. The regulatory state reaches its political objectives encouraging the production of biofuels. Convergence of forces on the expansion of the biofuels market.

High economic opportunity cost (to increase production for energy markets instead of food markets)

Scenario of conflict: −(A) ±(S) The agro-industry maximizes profits by reducing production of biofuels in relation to food products. The regulatory state reaches its political objectives encouraging the production of biofuels. Expansion of biofuel production is limited by the agro-industry behavior.

Scenario of conflict: ±(A) −(S) The agro-industry maximizes profits by increasing production of biofuels in relation to food products. The regulatory state achieves its policy objectives by reducing the incentives for biofuel production. Expansion of biofuel production is limited by the government behavior. Scenario of negative convergence: −(A) −(E) The agro-industry maximizes profits by reducing production of biofuels in relation to food products. The regulatory state achieves its policy objectives by reducing the incentives for biofuel production. Convergence of forces on the contraction of biofuels markets.

Source: Author’s elaboration based on the historical analysis of the law, policies, regulation and markets for agricultural and energy products for transport in the US. Symbols (+) and (−) indicate interest or lack of interest in enhancing the biofuel industry.

Table 2 Features of the scenarios of convergence and conflict in relation to the conditions for liquid bioenergy expansion. Public sectorUS regulatory state

Private sectorUS agro-industry

Type of scenario

Institutional and non-institutional conditions features

(+) (−) (+) (−)

(−) (+) (+) (−)

Conflict Conflict Convergence (+) Convergence (−)

Restricted Restricted Maximized Minimized

Source: Author’s elaboration. Table 3 Hypotheses on liquid bioenergy production according to the analysis framework (AF). From

Toward

Expected effects on liquid bioenergy production

Convergence (+) Convergence (+) Convergence (−) Convergence (−) Conflict (+) (−) or (−) (+) Conflict (+) (−) or (−) (+) Conflict (+) (−) or (−) (+)

Conflict (+) (−) or (−) (+) Convergence (−) Convergence (+) Conflict (+) (−) or (−) (+) Convergence (+) Convergence (−) Conflict (+) (−) or (−) (+)

Moderate contraction Strong contraction Strong expansion Moderate expansion Strong expansion Strong contraction Not forecasted by the AF

Source: Author’s elaboration.

areas, where more than half of the US population lived [8]. Global markets became progressively more important to US farmers, and exports helped to raise prices leading to a “golden age” of US agriculture between 1900 and 1914. However, after WWI prices started to decline as well as European demand for agricultural products. This finally led to the collapse of prices in the early 1920s, and a huge economic crisis in the agricultural sector. This slump was followed by the great depression of the 1930s, which worsened the crisis and the living conditions of farmers [9]. The federal government responded to the crisis with a bundle of market interventions, tariffs and emergency programs for industrial and agricultural sectors,3 as part of the economic policy known as the New Deal. The protection of the agro-industry enlarged thenceforth [10]. However, the New Deal programs did not resolve the problem of low prices, which were the result of the conditions of supply and demand triggered by the global economic downturn. Some scholars consider that certain measures of the New Deal were even counterproductive. The price protections led to a production growth, but also to a demand reduction. Even if farmers had a relief in the short term, these measures exacerbated the problem of overproduction

3

Including the first “Farm Bill” of 1933.

of grain crops such as corn, which eventually affected the prices of agricultural products and consequently the income of farmers [11]. As regards the energy sector, the emerging US automobile market enhanced progressively the demand for liquid fuels, while oil derivatives started its expansion process competing with other energy alternatives, including bioethanol, whose competitiveness had increased with the repeal of the ethanol tax in 1906 and the high production capacity of corn. Although gasoline was gaining a strong position among road transport fuels, the fossil fuel market was still under development, although its demand was increased pushed by wars and the military industrial use [12]. In this context, bioethanol began to be consumed in gasoline blends of high proportions in order to cover fuel demand, as well as an additive to upgrade gasoline octane (where it was a competitive substitute to tetraethyl lead based additives). This generated an alternative market for corn, especially in the Corn Belt states. Energy demand pushed food prices up, and by 1930, about 2000 service stations in the Midwest Corn Belt states sold gasohol blends containing between 6% and 12% of bioethanol, with a more modest presence in some other jurisdictions and almost nonexistence in the oil-producer states [13]. During this period, the energy policy was focused on increasing the domestic production of crude oil to feed the development of

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US road transport. To this end, a number of economic instruments were set to reduce the costs of exploration, extraction, and production of fossil fuels for the companies operating in the country. The government subsidized the oil industry, and the development of infrastructure and transport technology was consistent with this energy policy option. Later, energy markets and energy supply underwent a natural development due to the intensification of competition among American and European International Oil Companies (IOCs). With these institutional and market conditions, the competitiveness and expansion capacity of bioethanol decreased significantly [14]. In a context where energy policy was focused on fossil fuel development and where agricultural market protection could not fully solve the crisis in the agricultural sector, the underlying relationship of opportunity cost led to a conflict scenario for the progress of bioenergy industry.

vectors in energy and food markets gave rise to a scenario of negative convergence or exclusion of the biofuel. In this new scenario, there was no interest in the use of corn and other crops for biofuel production. Neither the US regulatory state considered necessary to promote alternative fuels, nor the agricultural sector needed an alternative energy outlet for placing corn surplus. This practically caused the disappearance of bioethanol from transport fuel market, at least until the start of the oil crisis in the 1970s, when the conditions in the opportunity markets started to change [18].

3.2. Second period: from the end of WWII to the first oil crisis. Scenario of negative convergence for liquid bioenergy expansion: (−) regulatory state (−) agro-industrial sector

The socio-technical evolution of the energy industry during the preceding periods had risen substantially the oil dependence in the US, while energy demand was being progressively covered by imports from international markets. The lack of energy diversifying policy and the Obsolescing Bargain model issues intensified energy security risk once structural conditions in the international oil market changed, especially those related to vertical integration. Because of the rise of nationalism (and its impact on energy and natural resources) in producing countries, the IOCs began to lose control of the market. The growing conflict between Western companies and host countries increased uncertainty in energy markets, revealing the vulnerability of the US economy in relation to security of supply and the risk associated with energy cost fluctuations [19]. The shock on the US economy due to the oil crisis had a profound impact on its energy policy. The high dependence on oil imports and low demand elasticity exacerbated the effects of the sharp rise in energy prices, while the gradual loss of vertical integration of the IOCs caused instability in the energy supply to Western economies [20]. The supply shock triggered a policy discourse for energy independence and diversification of sources and supply, establishing for the first time a series of measures for the development of alternative and renewable energy sources with the aim of reducing the economic cost and risk of energy imports. With the spread of bioethanol as an oxygenate in gasoline and a substitute for lead, the government decided to set economic instruments such as tax exemptions and tax credits to encourage production of bioethanol. In 1978, a partial tax exemption of 4 cents per gallon of gasohol blended with 10% ethanol, or 40 cents per gallon of pure bioethanol, was established on the excise tax on gasoline. In addition, a tax credit on income tax was granted, and in 1980 a tariff on imports of fuel ethanol was established in order to restrict foreign competition. These measures would lead to a gradual development of the market for gasoline additives (other than lead), paving the way for corn bioethanol.4 However, the situation in food markets would reduce the impact of these measures. From the point of view of the agro-industry, the high level of protection implemented by the US agricultural policy added to the boom period for food commodities in global markets, kept the opportunity cost of the energy use of corn relatively high during this period. Given the institutional inertia of protectionism and the favorable economic context, energy markets would not represent a need for corn farmers. Even when there were a number of adjustments, the amendments to US agricultural policy were relatively modest in relation to the basic protectionist structure of

After the 1930s crisis, institutional changes and the government support through the new agricultural policy were formally set in the legal system through the Farm Bills, which granted the agricultural sector a quite comfortable position. Institutional inertia in agricultural policy was unfavorable for bioenergy since it increased the cost of the energetic use of grains such as corn. For the government, the answer to the farm crisis would not include biofuels as an alternative energy, given that the energy policy was centered on the production and consumption of oil products. The new policy of agricultural protection and the long period of low oil prices, the Golden Years of Oil, removed the necessary and sufficient conditions for the expansion of bioethanol production. With low prices of fossil fuel energy and a relatively low energy efficiency, the competitiveness of biofuels was seriously affected, which led to its vanishing from the fuel market. The period between the end of World War II and the arrival of the oil crisis was essential for the consolidation of the fossil fuel in the energy mix of industrialized countries. The increased domestic supply and the expansion of the IOCs led to a reduction and stabilization in the cost of oil consumption. Energy policy, based on opening markets and increasing oil imports turned as economically infeasible any other energy alternative source. The IOCs, vertically integrated, controlled the international supply of oil and kept the cost of energy relatively low in order to feed the economic growth of western democracies and according to the political aims of energy policy. The aim of US policy, as other European countries, was to keep oil prices as low as possible, which resulted in a progressive oil dependence in all sectors and especially in road transport. In a context that lacked environmental concerns, the incentives for energy diversification and political support for the use of alternative sources of energy were precarious [15]. During this period, corn farmers had little incentives to invest in the production of biofuels. On one hand, the sector was in a better situation due to the stabilization of national and international markets and to the great expansion of commodities exports [16]. On the other hand, the exclusion of agriculture from the GATT allowed stronger protection policies for the agricultural sector and a high level of government intervention on markets [17]. Even when biofuels production had been the outlet for the grain agro-industry problems during the previous period, in this period it showed a higher opportunity cost due to the protectionism of food products, as well as the domain of US exports in global food markets. Given the conditions in energy and agricultural markets, bioethanol was not an economically rational alternative for corn growers, nor a politically profitable energy alternative for the energy policy of the federal government. Changes on exogenous

3.3. Third period: from the energy crisis of 1973 to mid-1980s. Scenario of conflict for liquid bioenergy expansion: (+) regulatory state (−) agro-industrial sector

4 See the Energy Tax Act of 1978, the Crude Windfall Profit Tax Act de 1980, the Surface Transportation Assistance Act of 1982, and the Deficit Reduction Act of 1984.

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the aid programs.5 Protection policies largely remained as part of a “permanent agricultural law”, coming from the Agricultural Adjustment Act of 1938 and the Agricultural Act of 1949, that jointly set a high level of intervention and protection [11]. Even with the establishment of economic and regulatory incentives to expand the use of additives in gasoline, the opportunity cost of allocating a larger share of agricultural commodities to supply energy markets was quite high. The resultant underlying scenario of conflict between the US regulatory state and the agro-industry can explain reasonably well how, even with the oil shock and the subsequent economic stagnation, the expansion of biofuels in the US during this period was less than modest.

3.4. Fourth period: from the mid-1980s to the early years of the 21st century. Conflict scenario for the production of biofuels in the US: (−) regulatory state (+) agro-industrial sector From the second half of the 1980s to the early years of the present century, international energy markets recovered dynamism and the cost of energy was relatively low in average. On one hand, the difficulties for cooperation and productions control of the OPEC increased oil supply lowering prices. One other hand, the dynamics of the international markets of crude oil and products boosted more competition and energy supply sources [21]. Even when environmental sustainability and climate change became stronger issues in the political discourse, during the 1990s the support for renewable energy and biofuels augmented just marginally,6 while others alternative fuels as LPG and LNG and pure methanol fuels had a higher taxation than gasoline [22]. This scarcity of political support to renewables and energy reform was partially due to the period of low oil prices and the institutional inertia of the energy system. The price of domestic crude oil was one of the lowest in history, around USD 10 per barrel in the winter of 1998–1999, with an average price between 1986 and 1999 of just USD 17 per barrel. The low prices would not only affect the oil producers and refiners but would also rise technological inertia in road transport, increasing the risk for investment in low carbon technologies, energy saving and efficiency, as well as in the market of alternative and renewable energy [23]. The low energy prices had risen the opportunity cost of the government and reduced the support to biofuels and other alternative energies. It was not the time for large environmental policy reforms, yet some of them paved the way for the future scenario of expansive convergence. The main measures adopted during the 1990s were mainly economic instruments as tax incentives for the energy industry but were set for conventional energy as well as to renewable and alternatives sources. As regards alternative fuel, the law expanded the credit for unconventional fuels and introduced a tax credit for small producers of bioethanol, set at 10 cents per gallon of bioethanol and limited to the first 15 million gallons. Likewise, tax incentives were established for energy efficiency and saving. There was an increase of USD 0.05 per gallon in the gasoline tax, and the gas-guzzler tax doubled. As regards oil and gas, the law had set a tax credit of 10% to extend the recovery of “oil spend”. In addition, some of the restrictions on deductions, known as “Percentage Depletion allowance”,

5 See the Agricultural Act of 1954, the Agricultural Act of 1956, the Food and Agricultural Act of 1965, the Agricultural Act of 1970, and the Agricultural and Consumer Protection Act of 1973. 6 See the Tax Law Reform de 1986, the Omnibus Budget Reconciliation Act of 1990, the Energy Policy Act of 1992 and the Omnibus Budget Reconciliation Act of 1993, and the Transportation Equity Act for the 21st Century of 1998.

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were liberalized, and the scope of the alternative minimum tax on oil and gas investments declined.7 In parallel, environmental regulations for oxygenation of fuels were established to reduce pollution in cities. The 1990s Programs of “Reformulated Gasoline” and “Fuels Oxygenates” would require at least 2% of oxygenates components blended with gasoline, which primarily expanded the demand for methyl tert-butyl ether (MTBE), a product from the hydrocarbon industry, and to a lesser extent the use of bioethanol as gasoline additive in the Corn Belt states.8 The construction of facilities for the production of oxygenates accelerated in the years that followed the establishment of this programs. By 1992, there were at least 33 refineries with facilities for the production of oxygenates, some of them as part of oil refineries and some others as installations located outside oil refineries. Two main types of additives were produced, bioethanol and MTBE [24]. At the beginning of 1991, the production capacity of these sources of oxygenates was 338,000 barrels per day, while in 1993 it reached 536,000 barrels per day. The production of bioethanol dominated the corn belt of agricultural Midwest Region, while MTBE was produced along the Gulf Coast facilities, with the biggest market share [25]. As regards agro-industry, a period of changes begun pushed by international food markets. After the end of the commodities boom of the 1970s the prices of agricultural products fell down considerably, and the claims against both the institutionalized protectionism in developed countries and the lack of international trade rules raised up notably. With a higher technological access and new competitors in the international market, a series of reforms gradually weakened the traditional protectionism system of US farmers. With pernicious effects on markets and foreign producers, agricultural policies became less sustainable in international trade grounds and more expensive for the federal government. Namely, the agricultural policy applied from 1985 to 1996 renounced to implement the mechanism of set-aside land, while using market prices mechanism as well as the public support for stocks accumulation, perpetuating overproduction problems, especially for the grains producers. With the Food, Agriculture, Conservation, and Trade Act of 1990 and the Omnibus Reconciliation Act, the government continued the path mapped by the policies implemented since 1985. Budgetary concerns and different political issues led to a reduction in payments, but the price support continued with a greater flexibility in the levels of agricultural production. These policies, together with demand measures to expand the use of oxygenated additives in gasoline, increased the level of bioethanol production in this period [26]. While agricultural subsidies had kept farmers’ incomes high, the measures caused an endemic overproduction pattern. Pressing down international prices and generating imbalances on internal and international markets, the Farm bills were worsening the economic development of many poor countries [26]. The political pressure of global competitors against agricultural protectionism in industrialized countries led to the Uruguay Rounds of negotiations from 1986 to 1994 and finally to the Agreement on Agriculture (AoA) and the creation of the World Trade Organization (WTO). The trade commitments were set to improve, gradually but effectively, a wider market access and a substantial reduction of trade-distorting subsidies in agriculture. The new international rules were introduced into the American legal system through the Public Law 103-465 of 1994. Even when a full market liberalization was not achieved, the AoA and the WTO became new binding instruments to control state

7

See the Omnibus Budget Reconciliation Act of 1990. See the Clean Air Act de 1990 and the Clean Air Act Amendments by the Public Law 101-549. 8

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intervention on agricultural trade, setting new legal limits to protectionism, gradual reduction and change in types of aids, subsidies and price mechanisms. Thus, the change in institutional and market conditions would affect farmers of traditional commodities such as grains, because the bulk of the farmer’s profits depended largely on the state support and protection [27]. But budgetary problems and an optimistic projection on commodities prices led to a policy adjustment for the agricultural sector. The Federal Agriculture Improvement and Reform Act of 1996 was a clear example of the institutional changes, to substantially reduce aid policies and price support payments to agricultural products. At the end of the 1990s, the farm aid program had been reformed considerably. For instance, the requirements for planting crops were reduced, and the price support mechanism removed, as well as the public support to storage for crop stocks and the set-aside programs [28]. Market and institutional changes affected the traditional comfortable situation of the industry and brought down the opportunity cost of energy use of food biomass, especially of grains as corn. With the level of supply and the new conditions in the opportunity markets, biofuels production turned from an unlikely alternative to the only feasible option to address the grain overproduction issues. However, the convergence of interests with the federal government in the relation to energy use of corn was affected by the low level of oil prices during this period. The asynchrony of the opportunity costs finally resulted in a conflict scenario that kept the use of liquid bioenergy relatively stagnant. Although in the political speech bioenergy was important for environmental reasons, as a way to support agricultural sector as well as for energy security and diversification policy, the low oil prices observed during those years had risen significantly the opportunity cost of the federal government, which limited the political support for bioenergy development for many years. 3.5. Fifth period: from the early years of the 21st century to the end of the first decade. Scenario of positive convergence for liquid bioenergy expansion: (+) regulatory state (+) agro-industrial sector The higher cost of oil imports, the environmental and climate concerns about fossil fuel and MTBE consumption, as well as the negative expectative in the agricultural commodity markets affected by low prices and institutional changes, led to a scenario of expansion for bioenergy. The convergence of political and economic interests of the regulatory state and the agro-industry resulted in an institutional change and the creation of a new energy demand for food biomass, as an expression of a socio-technical change in the energy industry that has also been observed in other jurisdictions [14]. On the one hand, the reduction of state aid and trade distorting mechanisms, adopted after the ratification of the AoA, limited the unrestricted character of traditional agricultural policy. On the other hand, the crisis of oversupply remained a problem not just for the domestic market but also for the global grain market [29]. In this context the sharp drop in food commodity prices in the late 1990s reduced substantially the opportunity cost of corn agribusiness, and led, along with the sufficient conditions in the energy arena, to redirect production toward energy markets. Thus, the solution to the problem of oversupply of grains was to reallocate big quantities of agricultural biomass from food markets to regulated energy markets [30]. The renewable nature of biofuels, the environmental expected gains and the benefits for energy security through energy source diversification were consistent arguments to avoid infringement the new rules of agricultural trade. This subsequently meant that subsidies for biofuels would not be considered as agricultural subsidies and, hence, the limits provided in the Yellow Box of the AoA would not be applicable. Bioenergy policy was a coherent

solution in the legal frame of the AoA since it allowed keeping the level of support to the agricultural sector; otherwise, state protection could be considered in conflict with the new international trade rules [28]. With an upward trend in energy prices during the early 2000s, energy policy fostered production and consumption of bioenergy through a series of economic and regulatory instruments. The convergence between energy policy and agro-industry can be fully observed in the total support for biofuels production embodied in the Farm Bill of 2002, where bioenergy was set for the first time under the specific title on energy. These measures represent the full support from the government to renewable energy for transport, as well as the formal institutionalization of the energy use of food crops. The RFS-1 was the first renewable fuel standard through which the federal state regulated the consumption of biofuels. The Energy Policy Act of 2005 would also establish a number of programs to support the investment in first generation biofuels in order to expand the production, which led to a greater reduction of opportunity cost for the agro-energy business. Several subsidy programs remained active to foster not just corn bioethanol production but also other biofuels and other alternative energy sources. The support for biofuels was extended with the Energy Independence and Security Act of 2007, setting standards for biofuel consumption higher than the Energy Policy Act of 2005. Even when the RFS-2 set a quantitative limit on the energy use of corn, the standard expanded the regulated demand for biofuels. Likewise, one of the aims of the Food Conservation and Energy Act of 2008 enlarged the support and extended many of the renewable energy programs originally authorized in the Farm Security and Rural Investment Act of 2002, although more focused on the developments of advanced biofuels [31]. The enactment of the Farm Bill of 2008 primarily supported efforts to develop cellulosic biofuels and new technologies for energy exploitation of biomass, whereas conventional subsidies to bioethanol industry were maintained. In addition, despite some changes in relation to the previous legislation, the Food Conservation and Energy Act of 2008 kept the provisions of aid to domestic agriculture, benefiting producers of agro-energy commodities such as corn and oilseeds.9 To sum up, the conditions in energy and agricultural markets at the beginning of the decade reduced the opportunity cost of both farmers and the federal government. This synchrony of opportunity costs resulted in a positive convergence scenario between the major stakeholders, which optimized the regulatory and nonregulatory conditions and, according to our hypothesis, gave rise to a strong growth of bioethanol production throughout the decade.

3.6. Sixth period: the second decade of the 21st century. scenario of conflict for liquid bioenergy expansion: (−) regulatory state (+) agro-industrial sector (corn) After the period of optimal convergence between the public and private sectors, changes in key political vectors, such as the environmental balance and socio-economic dimensions of the energy use of corn, the increase in domestic oil production (mainly tight oil) and the beginning of a downward trend of energy prices, rose up significantly the opportunity cost of the federal government to support liquid bioenergy expansion.

9 These programs included (among others) the Bioenergy Program for advanced Biofuels, the Repowering Assistance Program Capacity, the Rural Energy for America Program-REAP, the Biomass Assistance Program, the Biorefinery Assistance Program, and the Forest Biomass for Energy Program.

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On the one hand, the low greenhouse gasses mitigation capacity resulting from life cycle analysis (LCA) and the indirect land use change impacts of corn bioethanol emerged as significant environmental issues. On the other hand, food security concerns arose related to biofuels expansion, rising a widespread controversy and the political cost of supporting biofuels. The social and environmental concerns led to a change in the course of renewable energy goals, setting a cap for corn ethanol use to achieve the RFS-2 standard, a struggle for agro-industry even before the relative increase in commodity prices [32]. Along with environmental and social issues, the energy policy and markets were determinant to understand the current scenario of conflict for liquid bioenergy. The high energy cost during the previous period not just boosted the expansion of bioenergy, but also spurred technology advances and investments on non-conventional oil. The combination of horizontal drilling and hydraulic fracturing provided access to large volumes of tight oil and natural gas that were previously uneconomic to produce from low permeability geological formations composed of shale, sandstone, and carbonate. The big expansion of tight oil has enhanced domestic capacity and production of oil, reduced imports and increased oil self-sufficiency, contributing to change the trend in international oil prices [33,34]. In the international grounds, global production including OPEC and non-OPEC countries expanded during this period. Among OECD countries, the largest output increases were achieved in the US (7.5% in 2015). Although demand was driven mainly by non-OCDE countries, it stayed relatively stable in OECD countries. As a consequence, nominal and real crude oil import costs and spot prices decreased steadily during this scenario, removing the optimal conditions for US bioenergy [35]. The trend change and the subsequent drop in energy prices, along with the socio-environmental concerns and the subsequent weakening of political support, affected bioethanol competitiveness and investment expectations. These conditions, including the blend wall concerns, generated considerable uncertainty in the agro-energy markets.10 The increase of idle capacity and the low level of investment in technology resulted in productivity loss, which slowed considerably the rate of expansion of biofuels market observed in the previous period. Although the RFS-2 set that the expansion of the regulated demand for biofuels in the US must be covered with advanced biofuels, in 2016 almost all the domestic consumption was still covered by corn bioethanol, due to the high production cost of secondgeneration bioethanol (mainly produced from cellulose). There is a significant risk for investments in the field of advanced biofuels, not just technological but also regulatory, their commercial viability depending not only on the relative prices of oil, but also on the stability of regulatory framework and the government support for R&D to reduce the high technological risk that inhibits the investments in advanced biofuels. The underlying relationship between the regulatory state and the agro-industry has then become a scenario of conflict in the second decade of the 21st century, where the sufficient conditions to expand the use of corn for the energy markets are absent. 4. Empirical analysis According to this historical approach, we consider that the historical development of bioenergy for transport in the US should not be understood as a simple causal effect of state regulation, but as the economic result of a sequence of scenarios of convergence

10 The term blend wall refers to short run technical constraints that act as an impediment to increased ethanol blend percentage. It is currently around 10%.

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and conflict between the agro-industry and the regulatory state. In order to assess the validity of the hypotheses, we have empirically tested whether the observed changes in the underlying relationship of convergence or conflict are consistent with historical periods of expansion or contraction of the market. The evolution of convergence and conflict scenarios is presented as a chain of structural changes in the underlying relationship whose effects can be seen in the changing trends that define the level of production in the market. The evolution of bioethanol market corresponds with six periods determined largely by scenarios of convergence and conflict between the regulatory state and the agro-industry (Table 4). The changes in the scenarios of convergence and conflict should reflect changes in trends of bioethanol production rather than specific variations or outliers related to the occurrence of certain irregular events, which we consider may be part of a determinant trend that results from the underlying relationship of convergence or conflict that characterizes the period (Table 5). The technique that was used for hypothesis testing is interrupted time series analysis, where the series are represented as Autoregressive Integrated Moving Average (ARIMA) models supplemented with transfer functions to reveal the connection between interventions (changes in scenarios) and effects (on production). Time series models are preferred in this context since its application does not require an underlying theory that attempts to explain production from technological, socioeconomic or market explanatory variables. Rather, it assumes that the explained variable (production in this case) follows some regular pattern, which may be adjusted as time series intervention models in order to analyze the impact of exogenous or independent variables (the transit from one scenario to other) that have potentially affected the behavior of the series over time (in this case, the evolution of the production of liquid bioenergy) [36]. In this sort of regression analysis, the likelihood of the impact of one predictor variable on a response variable determines the validity of the hypothesis. This is also suitable to validate the coherence of the suggested analysis framework, especially before auto-correlated data treatment [37]. The presence of an intervention phase corresponds to the interruption of the time series, and at this point is very important to study the variability, which can be detected in the trends changes [37]. Thus, according to the analysis framework, the change to a positive convergence scenario would have an impact in form of a strong expansion of production, with a significantly positive value in the corresponding estimator of the transfer function, while the change to a scenario of negative convergence will have the opposite effect (see Tables 3 and 5). In this methodological approach, the suitability of the model and the statistical significance of its coefficients determine whether there is an empirical basis for arguing that the biofuel industry has evolved according to the proposed scenarios, beyond the expected trend and the own endogenous patterns related to bioethanol production. In order to run the intervention analysis, we used a series of US ethanol production of 35 observations from the databases of the United States Energy Information Administration. There is not official data about ethanol production that covers previous years of the 1980s decade, so the empirical test is focused on testing the hypotheses for the last three periods (starting in 1981). Table 6 shows the evolution of bioethanol production by sub-periods. Hence we try to fit an ARIMA time series model with ramp effects in 2002 and 2011. It cannot be done for 1950 and 1973 (even though impacts might be expected according to the information in Table 5), due to the lack of data, and no ramp effect is considered for 1986 since it corresponds to a change between two conflict periods that cannot be identified with intervention analysis. The iterative process of identification and estimation [38] indicates that the best-fit ARIMA model is autoregressive of order 2 with ramp effects in 2002

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Table 4 Scenarios of convergence and conflict for first generation biofuel market evolution in the US. Period

US regulatory state

US Corn agro-industry

Type of scenario

Institutional and non-institutional features

1900–1950 1950–1973 1973–1986 1986–2002 2002–2011 2011–2016

(−) (−) (+) (−) (+) (−)

(+) (−) (−) (+) (+) (+)

Conflict Convergence Conflict Conflict Convergence Conflict

Restrained Minimized Restrained Restrained Maximized Restrained

Source: Author’s elaboration based on the historical study of the regulation and agricultural and energy markets in the US.

Table 5 Expected impacts of the changes along the explanatory chain of convergence and conflict scenarios for the US biofuels market. Year

Direction of the change

Expected impacts

1950 1973 1986 2002 2011

Conflict (−) (+) → convergence (−) (−) Convergence (−) (−) → conflict (+) (−) Conflict (+) (−) → conflict (−) (+) Conflict (−) (+) → convergence(+) (+) Convergence (+) (+) → conflict (−) (+)

Strong contraction Moderate expansion Not forecasted by the AF Strong expansion Moderate contraction

Source: Author’s elaboration.

Table 6 Fuel ethanol production in the US (in 1000 gallons). Period

Average yearly production

Minimum (start of period)

Maximum (end of period)

1981–1985 1986–2001 2002–2010 2011–2015

370,305.6 1,138,822.1 6,355,916.0 13,911,693.6

83,160 712,026 2,140,152 13,929,132

617,190 1,765,176 13,297,914 14,805,840

Source: US-DOE, Energy Information Administration [39]. Production grew every year within the analyzed period, except in 1990, 1996 and 2012.

Table 7 Testing hypotheses: estimation of model’s parameters. Autoregressive model AR (2, 0, 0) + interventions ramp type (2000/2011) Model parameter

Estimation

Standard error

T

Likelihood > T

Intercept Autoregressive, Lag 1 Autoregressive, Lag 2 Ramp type effect 2002 (first hypothesis) Ramp type effect 2011 (second hypothesis) Model’s variance (sigma squared) Fit range: 1981–2015

934,868 1.08529 −0.52640 1,360,193 −975,945 1.66208E11

186,151 0.1539 0.1528 59,717 260,000 *

5.0221 7.0504 −3.4459 22.7773 −3.7536 *

<0.0001 <0.0001 0.0018 <0.0001 0.0008 *

and 2011. The residual autocorrelation analysis (ACF, PACF, and IACF), as well as the white noise test (chi-square Ljung–Box statistics), show uncorrelated residuals, and there is no departure from normality or slow decay in ACF. The Augmented Dick–Fuller test shows that a unit root is not likely, and the null hypothesis that the model is nonstationary can be rejected. Likewise, the model presents the best goodness-of-fit indicators compared to other candidate models. The estimated coefficients and indicators are shown in Table 7. The signs of the estimates for the ramp intervention coefficients are consistent with the expectations, based on the underlying relationship of convergence and conflict scenarios. All the estimates are statistically significant at a confidence level of 0.05. As noted above, the scenarios of positive convergence should be most favorable for the development of the production of fuel ethanol, as these periods are characterized by the best regulatory and market conditions according to our general framework of analysis. This is the case of positive convergence scenario of the fifth period formulated for the US market. After the period of low oil prices during the 1990s, the increase in oil prices after 2002 and the development of renewable energy

policy set the sufficient conditions for the market expansion. The increase in the cost of energy, in a context of institutional changes, overproduction, and reduction of food commodity prices, favored full convergence between public and private decisions regarding the expansion of biofuels in the US. This synchrony of opportunity costs had not been observed in previous periods. On the other hand, the intervention parameters estimated for the year 2011 also shows high significance and consistency with the stated hypotheses, the end of the positive convergence scenario and the move to a new arena of conflict between the regulatory state and agro-industry. Social and environmental concerns, the economic viability of non-conventional technologies to exploit alternative fossil fuels sources as well as the subsequent drop of oil prices are among the vectors that have increased notably the political opportunity cost for the government in relation to bioethanol promotion, breaking the trend observed in the previous stage of strong expansion. As a final summary, Graph 1 shows the bioethanol production, the model AR(2) + Ramp 2002 + Ramp 2011, the underlying scenarios of convergence and conflict, as well as the forecasted production if there are not changes in the present scenario of conflict.

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Graph 1. Evolution and forecasting of bioethanol production in the US (1000 gallons). Source: Author’s elaboration.

5. Conclusions The present work has shown through a historical approach the persistent institutional tensions and contradictions that raise up in the socio-technical regime of energy for transport and their implications for liquid bioenergy development. The different degrees of institutionalization reveal the high influence of energy and agricultural markets along the time, which in turn indicates the stability of the system and the modest potential for major transitional changes in the sector. The historical development of road transport in the US has shown the high interdependency between society and technology around the use of oil. The institutions that determine energy policies and govern transactions in the sector remark the inertia and resilience of the regime. However, the same inertia produced by the infrastructure, the technological lock-in and the institutions around oil consumption have permitted the expansion of liquid bioenergy in road transport. To unravel the complexity of liquid bioenergy evolution, we have developed an analysis framework arguing that the changes in the opportunity cost of the main actors lead to different kinds of scenarios. These scenarios indicate the convergence or the conflict of interests between the regulatory state and the agro-industry, being featured by certain institutional and economic conditions, favorable and unfavorable to liquid bioenergy expansion. According to our hypotheses, these scenarios give way to the political economy that ultimately determines the level of biofuel production and, therefore, the historical market development. After testing the impact hypotheses using an interrupted time series analysis, we consider that the sequence of convergence and conflict scenarios may be not just a reasonable way to explain the historical development of the biofuel industry in the US, but also a general framework for analyzing other markets with similar starting conditions. For the US we can conclude that neither the private sector nor the public sector has been capable of generating an important expansion of first generation biofuels without the full cooperation of the other part. As the historical approach reveals, the political economy of liquid bioenergy is better understood when we integrate the agricultural policy as a vector in the process of governance of energy

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