Perspectives on Indirect Land Use

AgMRC Renewable Energy Newsletter
November 2009

Don HofstrandDon Hofstrand
Professor Emeritus Agricultural Economist
Iowa State University

The concept of “indirect land use change” (iLUC) has received considerable attention in the renewable fuels industry.  It was introduced by individuals and organizations attempting to reduce the destruction of the world’s rainforests (and other forested and grassland areas) that subsequently results in the release of large amounts of carbon dioxide (CO2) into the atmosphere, the primary greenhouse gas (GHG) associated with climate change.

In addition, rainforests provide many other benefits to the world’s society.  The Amazon rainforest is said to be the “lungs” of the earth, breathing in carbon dioxide and releasing oxygen, which provides stability for the world’s climate.  It also provides an incredible array of plant and animal species that are found nowhere else on earth.  These species have the potential for medical and other technological breakthroughs.  However, once rainforests are destroyed, the ecosystem is extremely difficult to recreate, resulting in a permanent loss of the benefits that rainforests provide.  So, protecting the rainforests is critically important to the world community. 

Controlling the destruction of the rainforests is difficult.  Many of these forests are located in remote areas of the developing world.  Examples are the Amazon basin of Brazil and the rainforests of Indonesia.  Patrolling these vast areas with the limited resources of a developing country is difficult at best.  So, in the absence of successful direct controls to protect the rainforests, concerned citizens are attempting to reduce the incentives for rainforest destruction. 

Indirect land use change is a mechanism that attempts to control the incentives for rainforest destruction.  The basic premise states that rainforests are cut down to provide land for raising crops that subsequently provide profits for the destroyer of the rainforest.  If world grain prices are high, the incentive for converting rainforest to cropland is increased.  Conversely, if grain prices are low, the incentive is reduced. 

The iLUC proponents want to attach this premise to biofuels production.  In essence, if an acre of cropland is used for biofuel production (e.g. corn ethanol) rather than for food production, the price of grain will be increased because less grain is available for food, which subsequently increases the incentive to cut down an acre of rainforest to replace the acre that is shifted from food to biofuels.  So, the GHG emissions from destroying an acre of rainforest should be attached to the acre of corn for used for biofuels.  This means the acre of biofuels will carry the GHG emissions from producing the biofuels (direct emissions) plus the GHG emissions from the acre of rainforest that is supposedly destroyed as a result (indirect emissions).  

The U.S. mandates for the production of biofuels (corn ethanol, cellulosic ethanol, advanced biofuels, etc.) requires that biofuels must meet tests of reduced GHG emissions compared to gasoline.  When iLUC emissions are added to the direct emissions from biofuel production, the GHG reduction benchmarks are difficult to achieve.

To help us navigate through the logic, let’s examine the issue by asking the three following questions:

  1. Should iLUC be assigned to biofuels?
  2. If so, what else should iLUC be assigned to?
  3. Can we reliably assess the impact of biofuels on iLUC?

We will investigate each of these questions below.  

Should indirect land use be assigned to biofuels?

The iLUC premise is based on the concept that the individuals who destroy the rainforest are not held responsible for their actions.  So, the individuals who provide the economic incentive for the destruction of the rainforest should be held responsible.  This would hold even if these individuals did not intend to provide an incentive.

This is similar logic to thieves that rob a bank.  The thieves should not be held responsible for the robbery.  Rather, the bank is responsible because, by holding money, the bank provided an economic incentive for the thieves to rob the bank.  

Whenever we embark on the slippery slope of making one person responsible for another person’s actions, the results can lead to unintended consequences.  As individuals we learn at an early age that life is a series of choices.  When we make bad choices, we must take responsibility for these decisions.  Blaming our bad decision on someone else is not productive.  Likewise, when we are held responsible for the actions of others, we have limited ability to affect those actions, which leads to uncertainty and stress on our part.

Likewise, to stop the destruction of rainforests and the subsequent increase in GHG emissions, the polluter must be held responsible for his/her actions.  Can you hold a person in one country responsible for the actions of a person in another country? 



Is there cause-and-effect
Can we show a strong and direct relationship between increasing grain prices and deforestation?  Deforestation is caused by many factors.  The argument can be made that the world price of lumber provides an incentive for the destruction of rainforests.  The increased cutting of trees and production of lumber flows through both legal and illegal channels.  Also, the high poverty rates in many of these countries result in “squatters” who take up residence on land to practice subsistence farming and “slash and burn” agriculture where the forest is cut down to provide farmland.  After the land is farmed for a few years and the productivity is gone, it is abandoned and the farmer moves on to cut down more rainforest.  These actions are independent of biofuels development.  They are the result of poverty and the inability of these people to access existing farmland.  Because the world price of grain is only one of many factors that lead to deforestation, the size of its impact is uncertain.



What else causes indirect land use change?

Let’s assume for the sake of argument that world grain prices do significantly impact deforestation and grassland destruction and that biofuels should be held responsible for it.  Are there other actions that lead to increases in world grain prices?  If there are, should these factors be penalized in some fashion?  Below are some factors that fit this category.



Food Waste
Research indicates that from 25 to 30 percent of the food consumed in this country is disposed of at the point of consumption (see AgMRC Renewable Energy article “Domestic Perspectives on Food versus Fuel”)  This loss does not include the amount disposed of earlier in the food supply chain.

Food waste includes food purchased by consumers but not eaten, unsold food disposed of from food service facilities, and other means of disposal.  If food waste is reduced to a more reasonable level (e.g. 10 percent), you could make the argument that grain prices would be lower.  So, this large amount of food waste increases grain prices which subsequently increases rainforest deforestation.  As a result, due to the premise of iLUC, every time consumers don’t eat all of the food on their plate, they are responsible for deforestation.  Also, every time a buffet prepares more food than is consumed by its customers, it is responsible for deforestation.  Taking it a step further, if you are obese or even just a little overweight, you have eaten more food than your body requires and you are responsible for deforestation. 




Food versus feed
A common misconception is that using a bushel of corn to produce ethanol takes away a bushel of corn that people otherwise would have eaten.  However, this is not correct.  Only about ten percent of the corn grain produced in this country goes into products where the corn is consumed directly.  The great majority of corn grain and virtually all of the corn for silage are used as animal feed.  From this feed comes the beef, pork, chicken, milk and eggs that we consume.  Half of the current corn crop is expected to be fed to livestock in this country.  Another 15 percent is expected to be exported, of which most will be fed to livestock overseas.  So, about two-thirds of our corn will be fed to livestock.  About one-fourth of the corn is expected to be processed into ethanol. 

However, livestock are rather poor converters of grain into meat, milk and eggs. When we consume livestock products, we consume more pounds of grain than if we had eaten the grain directly.  If we wanted to maximize the amount of food produced, we would consume the grain directly rather than processing it through livestock.  So, are meat, cheese and egg eaters responsible for deforestation of the rainforests?  How about milk drinkers?  Consuming meat, milk and eggs requires more bushels of corn than if we eat the corn directly.  Consuming livestock products drives up the prices of corn which leads to deforestation of the rainforest.




Horses and Pets
Although livestock are poor converters of feed, at least we eat the meat, milk and eggs that are produced.  How about the meat we don’t eat?  There are about nine million horses in the U.S. that consume feed grain and forage.  The majority of these are for recreational purposes and many are little more than pets.  These horses replace beef cattle that could be fed the grain and forage.  Once again, we could make the case that horse owners are driving up the price of grains and forage and contributing to deforestation of the rainforests. 

How about our pets?  Little Fido needs to eat also.  But, like our horses, we don’t eat Fido.  So it is diverting feed away from animals that provide milk, meat and eggs and subsequently contributes to rainforest deforestation. 




Farmland Conservation Programs
Over the years, USDA has introduced a number of farmland conservation programs.  The most popular has been the Conservation Reserve Program (CRP) which has taken large acreages of erodible and environmentally sensitive land out of production. 

These programs have been hailed as successes by environmentalists and the public in general.  But upon closer inspection, they have an iLUC impact.  As with corn ethanol, taking an acre of cropland out of food grain production and using it for something else (whether it is biofuels production or conservation makes no difference) falls into the iLUC trap.  So, do cropland conservation programs contribute to the deforestation of rainforests?  Should these programs be assessed a penalty for causing deforestation in Indonesia?




Rural Poverty
Essentially, iLUC leads to the conclusion that anything that raises grain prices is bad because it leads to the destruction of the rainforest.  So, the acceptance of this approach could lead to keeping grain farmers and the rural communities in which they live in a state of reduced income.

These are just a sample of the linkages that can be made to iLUC.  A thorough identification of all of the linkages that exist will create an enormously complicated web.



Can we reliably assess the impact on indirect land use?

The initial research on iLUC assumed that world agricultural production is a zero-sum game.  In other words, world agricultural production is fixed, regardless of price, so that a new acre of land is required to replace the acre lost to biofuels production.  However, even before the advent of biofuels production, grain yields have trended upward.  An example is U.S. corn and soybean yields as shown in Figure 1. 

Corn and soybean yield trends 
This increase in world grain production must be compared to the expected increase in world demand for food to see if there is room for biofuels production.  The two major factors driving world food demand are increases in world population and improved diets (more meat) as the world population moves from poverty to the middle class.  If supply growth exceeds demand growth, there will be room for biofuels without an iLUC impact.

For example, the trend-line increases in corn yields have already increased the production of corn in the U.S.  If the expansion of the ethanol industry had not occurred, excess stocks of corn and other grains would be piling up and prices would have sunk to low levels (AgMRC Renewable Energy article “Impact of Biofuels on Corn and Soybean Prices”).  If iLUC stops the expansion of the U.S. ethanol industry, trend-line corn yield increases will cause supplies to outperform usage resulting in falling prices, unless the corn export market takes up the slack.  Surplus corn acres will cause excess production capacity in the entire grain production sector, resulting in falling prices of all grains. 

What would happen if demand growth exceeds supply growth.  Under this situation there will be a supply response from biofuels production due to higher grain prices.  Higher prices attract investment into the agriculture sector that subsequently increases the productivity of the sector.  We can look at this response as “supply elasticity”.  Figure 2 shows the yield response from an increase in price.  If the supply response is elastic (a), an increase in price will lead to a large increase in yield.  An inelastic supply response (b) will lead to a small increase in yield.  Another supply response important to the analysis is the increase in land conversion from an increase in price.  Preliminary research is showing a huge variation in iLUC ranging from a large impact to a minor impact depending on the levels of these elasticities.  

Yield supply elasticity from a change in price 
The amount of iLUC is also heavily impacted by the type of land brought into production.  In general, deforestation leads to substantially more GHG emissions than grassland conversion.

Can we reliably assess the impact of biofuels on iLUC?  Probably not.  So, should we use imperfect research to establish the linkage, even though it is probbly wrong?  Or should we not include a linkage, which assumes that the correlation is zero and is probably also wrong?  More research is needed to improve the accuracy of this linkage.  In the meantime, the biofuels industry is struggling under a cloud of uncertainty.  This cloud drives away capital investments for research and technology that are needed to improve biofuels efficiency and reduce its direct emissions carbon footprint.   


Deforestation and the destruction of grasslands must be stopped.  Of special concern are the world’s pristine rainforests.  In addition to the intrinsic value of these ecosystems, the uncontrolled release of GHG and the resulting impact on climate change means that it cannot be tolerated.  This issue is not in question.   

Many of these forested and grassland areas are located in developing countries that do not have the resources to control the destruction.  So, individuals have focused on reducing the economic incentives for this destruction as a means of slowing the destruction.  This has lead to the concept of iLUC that is being assigned to the biofuels industry.  However, if the developed countries are committed to stopping the destruction, they must provide sufficient direct funding to the developing countries for regulating and policing these areas.  The issue is too important to be handled by any other way than direct intervention. 

In addition to regulating and policing these areas, limiting world greenhouse gas emissions can best be achieved with a world-wide cap-and-trade system where total emissions are limited and reduced over time.  Under this system, world markets will make the adjustments needed to meet the reductions in the most cost effective manner.  This will be more successful than trying to make one group responsible for the actions of another group. 

Trying to regulate deforestation and grassland destruction through the iLUC will, at best, only achieve partial results while imposing a heavy burden on the ability of the biofuels industry to provide renewable and low carbon transportation fuels.  We must work for better solutions that will satisfy both sides of the issue.