International Policies on Bioenergy and Biofuels - Industrial Crops: Breeding for BioEnergy and Bioproducts - page 380

group includes consumption subsidies (e.g., tax credits or tax exemptions) and
mandates, while the latter encompasses production subsidies (for biofuels and
feedstocks), import tariffs and quotas, and the zero/one sustainability standards
whereby a certain reduction in carbon emissions of biofuels (ethanol or biodiesel) is
required relative to fossil fuels (gasoline or diesel) that biofuels are assumed to
replace [ 4 ]. The choice of particular instrument is a result of comparative advantage
in biofuel production, political process, and pressure from interest groups. There is
no significant cooperation among countries to harmonize their biofuel policies,
although spillover effects due to the learning process among countries cannot be
excluded.
Biofuel policies have been shown to be the key driver of biofuel production [ 11 ,
12 , 16 ]. This naturally poses a question if there could ever be production of biofuels
in the absence of biofuel policies. The answer is positive, but the conditions for that
to happen have not historically been met. To illustrate, consider corn ethanol. The
ethanol supply curve is given by the difference between the corn supply curve and
the non-ethanol demand curve at any corn price. Hence, its intercept - the point
representing the minimal ethanol price required for ethanol production to occur -
corresponds to the intersection of the corn supply curve with the non-ethanol corn
demand curve (i.e., the market price of corn in the absence of ethanol production).
But when no biofuel policy exists, ethanol will only be demanded if the price a
consumer pays per mile traveled is the same as for gasoline (ethanol and gasoline
are assumed to be perfect substitutes in consumption). This results in a free market
ethanol price that is typically much lower than the intercept of the ethanol supply
curve; hence, no ethanol production without a government policy (e.g., a high
enough blender's tax credit or a mandate) will likely exist.
The most common instruments used to support biofuel consumption/production
are biofuel mandates, followed by consumer subsidies (tax credits/tax exemptions),
subsidies to feedstock production (e.g., corn production subsidies), and tariffs and
quotas. The rest of instruments are implemented sporadically.
The total support worldwide is estimated to be $20 billion in 2009. Most of the
support goes to ethanol (more than $13 billion in 2009), and the largest share is
carried by the United States ($8.1 billion), followed by the European Union ($7.9
billion), and Brazil ($2.6 billion) [ 25 ].
Biofuel Mandates
Biofuel mandates have become a preferred policy mechanism to induce biofuel
production and have been introduced in at least 30 countries [ 33 ]. The main
principle of the mandate is to establish a minimum content of a biofuel relative to
a fossil fuel (gasoline, diesel) used. A biofuel mandate is used in two forms: a