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Biofuel Subsidies and International Trade

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  • Bandyopadhyay, Subhayu
  • Bhaumik, Sumon
  • Wall, Howard

Abstract

This paper explores optimal biofuel subsidization in the context of a general equilibrium trade model. The focus is on biofuels such as corn-based ethanol, which diverts corn from use as food to use as an intermediate input in energy production. In the small-country case, when a Pigouvian tax on conventional fuels such as crude is in place, the optimal biofuel subsidy is zero. When the tax on crude is not available as a policy option, however, a second-best biofuel subsidy (or tax) is optimal. In the large-country case, a biofuel subsidy spurs global demand for food and confers a terms-of-trade benefit to the food-exporting nation. In the absence of beggar-thy-neighbor trade policy tools due to WTO rules, the twin objectives of pollution reduction and term-of-trade improvement justify a combination of crude tax and biofuel subsidy for the food exporter. If the food importer also uses a biofuel subsidy (or tax), we have a Johnson (1953) type Nash equilibrium augmented by pollution considerations. If biofuel subsidies reduce global crude use, then in a Nash equilibrium, the food-exporting nation must use a subsidy, while a food-importing nation will impose a subsidy if and only if the pollution-reduction effect dominates the terms-of-trade effect.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 30760.

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Date of creation: Oct 2010
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Handle: RePEc:pra:mprapa:30760

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Keywords: Optimal Biofuel Subsidy; Pigouvian Tax; Terms-of-Trade; Pollution Externality;

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References

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  1. Jeffrey A. Frankel & Andrew K. Rose, 2002. "Is Trade Good or Bad for the Environment? Sorting Out the Causality," NBER Working Papers 9201, National Bureau of Economic Research, Inc.
  2. Werner Antweiler & Brian R. Copeland & M. Scott Taylor, 2001. "Is Free Trade Good for the Environment?," American Economic Review, American Economic Association, American Economic Association, vol. 91(4), pages 877-908, September.
  3. Brian R. Copeland & M. Scott Taylor, 2003. "Trade, Growth and the Environment," NBER Working Papers 9823, National Bureau of Economic Research, Inc.
  4. Harry de Gorter & David R. Just, 2010. "The Social Costs and Benefits of Biofuels: The Intersection of Environmental, Energy and Agricultural Policy," Applied Economic Perspectives and Policy, Agricultural and Applied Economics Association, Agricultural and Applied Economics Association, vol. 32(1), pages 4-32.
  5. Oecd, 2006. "Agricultural Market Impacts of Future Growth in the Production of Biofuels," OECD Papers, OECD Publishing, OECD Publishing, vol. 6(1), pages 1-57.
  6. Jen Baggs, 2009. "International Trade in Hazardous Waste," Review of International Economics, Wiley Blackwell, Wiley Blackwell, vol. 17(1), pages 1-16, 02.
  7. Farzad Taheripour, 2008. "Welfare Effects and Unintended Consequences of Ethanol Subsidies ," Review of Agricultural Economics, Agricultural and Applied Economics Association, Agricultural and Applied Economics Association, vol. 30(3), pages 411-421.
  8. Rauscher, Michael, 1997. "International Trade, Factor Movements, and the Environment," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780198290506, October.
  9. Lopez Ramon, 1994. "The Environment as a Factor of Production: The Effects of Economic Growth and Trade Liberalization," Journal of Environmental Economics and Management, Elsevier, vol. 27(2), pages 163-184, September.
  10. Lapan, Harvey E. & Moschini, GianCarlo, 2009. "Biofuels Policies and Welfare: Is the Stick of Mandates Better Than the Carrot of Subsidies?," Staff General Research Papers, Iowa State University, Department of Economics 13076, Iowa State University, Department of Economics.
  11. Copeland, Brian R & Taylor, M Scott, 1994. "North-South Trade and the Environment," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 109(3), pages 755-87, August.
  12. Fredriksson, Per G., 1997. "The Political Economy of Pollution Taxes in a Small Open Economy," Journal of Environmental Economics and Management, Elsevier, vol. 33(1), pages 44-58, May.
  13. Marjit, Sugata & Kar, Saibal & Beladi, Hamid, 2007. "Protectionary bias in agriculture: A pure economic argument," Ecological Economics, Elsevier, Elsevier, vol. 63(1), pages 160-164, June.
  14. Vedenov, Dmitry & Wetzstein, Michael, 2008. "Toward an optimal U.S. ethanol fuel subsidy," Energy Economics, Elsevier, Elsevier, vol. 30(5), pages 2073-2090, September.
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  1. Does it make sense to subsidize biofuels?
    by Economic Logician in Economic Logic on 2011-06-07 14:52:00
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Cited by:
  1. Wei, Wenjie, 2014. "Welfare and Environmental Effects of Subsidies and Tariffs in North-South Trade in Renewable Energy Equipment," 2014 Conference (58th), February 4-7, 2014, Port Maquarie, Australia, Australian Agricultural and Resource Economics Society 165887, Australian Agricultural and Resource Economics Society.

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