Biomedical Engineering Reference
In-Depth Information
Biofuel Price Interlinkages and the Role of Biofuel Policies
The main focus in the literature studying the nexus between the biofuel price
formation, the role of biofuel policies, and where the biofuel prices are determined
has been on the United States, Brazil, and the European Union, as these countries
are the largest biofuel producers, accounting for 90 % of global biofuel production.
de Gorter and Just [
11
,
51
] developed a theoretical model explaining how the
biofuel price is determined under alternative policies: a blender's tax credit, a
biofuel mandate, or their combination. They show that the price of the biofuel is
determined either by a tax credit (tax exemption) or a binding (consumption or
blend) mandate, but never by both at a time.
If the tax credit,
t
c
(or a tax exemption), is the binding biofuel policy, meaning it
determines the biofuel market price, then the ethanol market price
P
E
is given by
[
51
]:
P
E
¼
λ
P
G
ð
1
λ
Þ
t
þ
t
c
ð
18
:
1
Þ
where the coefficient
represents miles traveled per gallon of ethanol relative to a
gallon of gasoline,
13
P
G
is the gasoline (oil) price, and
t
is the volumetric fuel
consumption tax. An implication of Eq. (
18.1
) is that any change in the tax credit
(fuel tax) is directly transmitted into the ethanol price with positive (negative)
correlation between them. Although the market ethanol price is linked to gasoline
(oil) price, the ethanol price can be lower, higher, or equal to the gasoline price,
depending on the magnitudes of other parameters in Eq. (
18.1
).
Although the economics of a consumption mandate differs somewhat from that
of a blend mandate [
11
],
14
a common outcome of the two forms of the mandate is
that - unlike with a blender's tax credit - the biofuel price is not fully linked to the
gasoline (oil) price: the link is completely severed under a consumption mandate
(because the biofuel market price is determined by the intersection of the ethanol
supply curve and a fixed mandate level), and it is partially severed under a blend
mandate insofar as a change in the gasoline (oil) price affects the fuel demand. The
intuition behind this result is that the biofuel price is determined more by the biofuel
supply than by the gasoline price for a given mandate quantity. In the case of a
blend mandate, only with an inelastic biofuel supply is the biofuel price tightly
linked to the gasoline price.
Identifying which country determines world biofuel prices is more complex.
This price determination is sensitive to market conditions in a given country and at
a given time. Kliauga et al. [
41
] and de Gorter et al. [
40
] hypothesize that only one
λ
13
For ethanol,
0.90.
14
It is important to note that the impact of biofuel policies (tax exemptions, tax credits, or price
premia due to biofuel mandates) on biofuel prices is not additive: the market price of a biofuel is
not determined by the sum of each country's tax exemption, tax credit, or a mandate price
premium.
λ
0.70, while for biodiesel
λ
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