Biomedical Engineering Reference
In-Depth Information
country's policy and market situation determines the world biofuel price. The world
biofuel market price is linked to the gasoline/diesel (oil) price through a tax credit
(or tax exemption) and is determined in the country with a combination of the
highest consumer price paid for gasoline (diesel) and the highest net subsidy (the
combination of the lowest fuel tax and highest biofuel tax credit/tax exemption).
Alternatively, the world biofuel market price can be determined by a binding
mandate in the price leading country. This happens if the induced biofuel price
under the mandate is higher than under the tax credit (tax exemption). In addition,
this price has to be the highest internationally.
In other words, the price leading country sets the world biofuel price if its biofuel
policy generates a price that is higher than in other countries. This is because the net
subsidy on a biofuel in the price leading country provides the most favorable
biofuel price at the world level; this price is expected to be followed by other
countries. The arbitrage in biofuels will lead to equalization of prices across
countries, up to transportation costs and tariffs (which lower the biofuel price in
non-price leading countries). These costs do not, however, affect the direction of
causation of the price relationships between countries; they may only weaken these
relationships [
52
]. For example, if the United States is the price leader for ethanol,
then ethanol prices in other countries are likely to be lower by the sum of trans-
portation costs and tariffs or may be independent of the U.S. price if the transpor-
tation costs or tariffs are prohibitive. Naturally, the price leader can be only a large
country, such as the United States, Brazil, or the European Union, able to absorb
large amounts of biofuels.
The empirical evidence on the biofuel price formation and on the price leader-
ship (partially) confirms these theoretical predictions. However, it also suggests that
the price leadership may switch between countries, depending on which policy is
binding. Rajcaniova et al. [
52
] empirically find that the U.S. and Brazilian ethanol
polices (mostly the U.S. blender's tax credit and Brazilian tax exemption) have
historically shared the price leadership, but the Brazilian impact appears to be
stronger. Similarly, for biodiesel, the authors support the prediction of de Gorter
et al. [
40
] about the European Union's price leadership.
Biofuels' Impact on Food Prices
Bioenergy has a direct effect on agricultural sector and food prices because biomass
is used as feedstock for biofuel production. The demand for agricultural commod-
ities for biofuels competes with the food demand; given the limited availability of
agricultural land, this competition leads to price escalation especially in years when
supply shocks occur in agricultural production (e.g., the drought of 2012).
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Key
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It is expected that the second-generation biofuels may have lower impact on food prices than
first-generation biofuels because of having less intensive demand for agricultural land due to their
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