The Impact of Alternative Domestic and Trade Policies for Biofuels on Market Variability in the United States

• The development of first generation biofuels, based on existing agricultural crops such as corn and sugarcane, has strengthened the linkage between agricultural commodity markets and energy markets. This paper analyzes the implications of U.S. domestic and trade policies for ethanol in the face of fluctuations in petroleum prices and the domestic supply of feedstock (corn). The current U.S. policy mix involves a prohibitive tariff on imported ethanol, a fixed subsidy for blending ethanol with gasoline, and a blending or consumption mandate. Under this closed economy case, as the likelihood that the mandate is binding increases the variability of ethanol use declines, the impact of oil price variations on corn prices is reduced, and the impact of corn supply variations on corn prices is increased. The effect on corn prices of changes in domestic biofuel policy, such as a reduction in the level of subsidy or an increase in the mandate, depends on the source of external shocks and their relative magnitudes. If a non-prohibitive tariff is applied corn prices would still be susceptible to fluctuations in oil prices while total ethanol use exceeds the mandated level, but the impact of domestic corn supply variability on corn prices would be reduced. The magnitude of the reduction depends on the flexibility of the use of corn for ethanol. If the mandate is binding, the impact of corn supply fluctuations on corn prices is increased, but is less than under a prohibitive tariff because blenders can adjust the use of domestic and imported ethanol to achieve the mandate. The impact of world oil price variability on corn prices under a binding mandate largely depends on how the import supply curve for imported ethanol is affected. If the minimum supply-inducing price for imported ethanol is sensitive to petroleum prices, corn prices could be affected by petroleum price fluctuations even when the U.S. ethanol mandate is binding. In the open economy case, the impact of domestic and trade policies for ethanol on the variability of domestic corn prices depends on the relative magnitudes of external shocks as well as on ethanol policies in supplying countries. Holding the minimum supply-inducing price of imported ethanol and expected imports constant and assuming that total ethanol use exceeds the mandate, the aggregate quantity of ethanol used in the United States is less susceptible to fluctuations in petroleum prices under an ad valorem tariff than under a specific tariff. But with a binding mandate, fluctuations in domestic corn supply have a larger impact on corn prices with an ad valorem tariff than with a specific tariff. The use of a variable tariff for imported ethanol could stabilize corn prices under a binding mandate, but could lead to increased variability in world ethanol prices

Subject headings

SAMHÄLLSVETENSKAP  -- Ekonomi och näringsliv (hsv//swe)

SOCIAL SCIENCES  -- Economics and Business (hsv//eng)

LANTBRUKSVETENSKAPER  -- Lantbruksvetenskap, skogsbruk och fiske -- Jordbruksvetenskap (hsv//swe)

AGRICULTURAL SCIENCES  -- Agriculture, Forestry and Fisheries -- Agricultural Science (hsv//eng)

LANTBRUKSVETENSKAPER  -- Annan lantbruksvetenskap -- Förnyelsebar bioenergi (hsv//swe)

AGRICULTURAL SCIENCES  -- Other Agricultural Sciences -- Renewable Bioenergy Research (hsv//eng)

Publication and Content Type

vet (subject category)

kon (subject category)