Biofuel Subsidies and International Trade
AbstractThis 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 InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 30760.
Date of creation: Oct 2010
Date of revision:
Optimal Biofuel Subsidy; Pigouvian Tax; Terms-of-Trade; Pollution Externality;
Other versions of this item:
- O1 - Economic Development, Technological Change, and Growth - - Economic Development
- H2 - Public Economics - - Taxation, Subsidies, and Revenue
- F1 - International Economics - - Trade
This paper has been announced in the following NEP Reports:
- NEP-AGR-2011-05-14 (Agricultural Economics)
- NEP-ALL-2011-05-14 (All new papers)
- NEP-ENE-2011-05-14 (Energy Economics)
- NEP-ENV-2011-05-14 (Environmental Economics)
- NEP-INT-2011-05-14 (International Trade)
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Blog mentionsAs found by EconAcademics.org, the blog aggregator for Economics research:
- Does it make sense to subsidize biofuels?
by Economic Logician in Economic Logic on 2011-06-07 14:52:00
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