Download The Impacts of Feedstock Supply and World Oil Price

The Impact of Alternative Domestic and Trade
Policies for Biofuels on Market Variability in
the United States
Yuki Yano (SLU), David Blandford (Penn State), and
Yves Surry (SLU)
The Economics of Alternative Energy Sources and
Globalization: The Road Ahead, Orlando, Florida
11/17/2009
Background
• Increasing attention on biofuel use
• Tighter linkage between agricultural
commodity markets and energy markets (Tyner
and Taheripour 2008)
• The impacts of biofuel policies on agricultural
markets, energy markets, the environment, and
social welfare
Existing Studies
• Little literature on the impact of multiple
policy instruments (de Gorter and Just 2008,
2009; FAPRI-MU 2009)
• Limited attention on the impact of variability
in petroleum price and feedstock supply
(Thompson et al. 2009)
• The impact of trade policies for biofuels on
market variability has not been assessed
Objectives
• Analyze the implications of U.S. domestic and
trade policies for biofuels for market
variability (corn price and ethanol use)
• Focus on how changes in policy measures
influence U.S. market variability
• Variability: unanticipated (short-run - annual)
fluctuations in the domestic supply of
feedstock (e.g., weather) and/or the price of
petroleum
Policies (No Trade in Biofuels)
• Domestic policy options
– Tax credit for blending ethanol with gasoline
(fixed in the short-run)
– An ethanol blending or consumption mandate
• Trade policy
– Prohibitively high duties on imported ethanol
Policies with Trade in Biofuels
• Domestic policy options
– Tax credit or production subsidy (only for
domestically-produced ethanol)
– An ethanol blending or consumption mandate
• Trade policy
– Non-prohibitive tariffs
1. A specific tariff (fixed in the short-run)
2. An ad valorem tariff (fixed in the short-run)
3. A variable tariff (counter-cyclical)
Key Assumptions for U.S. Markets
• Exogenous world oil price
• Perfect substitutability between ethanol and
gasoline
• Constant returns to scale in ethanol production
• Competitive markets
• Fixed aggregate non-ethanol demand for corn and
fixed mixed fuel demand in the short-run
• Multiplicative inverse corn supply shifts
U.S. Corn and Energy Markets
U.S. Corn and Energy Markets
A Binding Mandate (No Trade)
Ethanol Use Exceeds the Mandate
The Impact of Policy Changes
• As the likelihood that the mandate becomes
binding increases, variability in ethanol use
declines, the impact of fluctuations in petroleum
price on corn price is reduced, and the impact of
fluctuations in corn supply on prices is
accentuated
• The likelihood of a binding mandate increases as:
a. The level of tax credit is reduced
b. The mandated ethanol use is increased
The Impact of Policy Changes
• Thus, the impact of changes in biofuel policy on corn
price depends on the relative magnitudes of world oil
price and corn supply shocks
• When fluctuations in oil prices are relatively large, an
increase in the level of tax credit or a decrease in the
mandated ethanol use is expected to result in higher
variability in corn prices and vice versa
• When fluctuations in corn supply are relatively high,
increased variability in corn prices will result from
reducing the tax credit or increasing the level of the
minimum requirement and vice versa
Key Assumptions for The Trade Model
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Imported ethanol available from Brazil
A two-country model (U.S. and Brazil)
Exogenous world oil price
Stable supply of sugar cane
Ethanol mandate in Brazil
Consumer price of ethanol is lower than gasoline
price (70% of domestic gasoline price) in Brazil
Brazilian Ethanol Market
Import Supply Curve in the U.S.
Oil Price and Import Supply
U.S. Ethanol Use Exceeds the Mandate
The Binding Mandate with Imports
The Impact of Corn Supply Reduction
The Impact of Oil Price Reduction
The Impact of Policy Changes
• If the import supply curve is not affected by
world oil price
– Again, as the likelihood that the mandate becomes
binding increases, variability in total ethanol use
declines, the impact of variations in petroleum
price on corn price is reduced, and the impact of
variations in corn supply on prices is accentuated
• The likelihood of a binding mandate
increases as:
a. The tax credit is reduced
b. Mandated ethanol use is increased
c. The tariff is increased
The Impact of Policy Changes
• The impact of corn supply fluctuations on corn
prices under a non-prohibitive tariff is less
than under a prohibitive tariff
• Fluctuations in the world oil price could affect
corn prices, even when the U.S. ethanol
mandate is binding, through changes in the
minimum supply-inducing price for imported
ethanol
The Impact of Policy Changes
• If oil price and domestic corn supply affect
corn prices simultaneously under a mandate,
variability in corn prices could be high
• Policies in supplying countries also influence
U.S. market variability - e.g., the level of
mandates in Brazil
Specific VS Ad Valorem Tariff
• When the aggregate quantity of ethanol used in
the United States exceeds the mandate, it is
less susceptible to fluctuations in petroleum
prices under an ad valorem tariff than under a
specific tariff
• With a binding mandate fluctuations in
domestic corn supply have a larger impact on
corn prices under an ad valorem tariff
(compared to a specific tariff)
A Variable Tariff
• The use of a variable tariff for imported
ethanol (one that varies inversely with the
price of ethanol) could stabilize corn prices
with a mandate, but could also lead to
increased variability in world ethanol prices
Conclusions
• The mechanism of price transmission is
complicated, in particular when imports are
allowed
• Factors influencing market variability and their
impacts depend not only on domestic and trade
policies for biofuels but also on policies in
supplying countries
• Further analysis is needed for stabilization
policy