International Variability in Biofuel Trade: An Assessment of U.S. Policies

Although the United States has typically been in a position to import ethanol, corn-based ethanol exports are surging as the domestic market becomes saturated and world prices rise due to high prices for sugar, the competing global feedstock. The U.S. is now the world’s leading ethanol producer but domestic demand is constrained because of technical limitations in the current vehicle fleet. Higher ethanol blends have been approved for use (15% rather than 10%) but a limited number of vehicles that can use such higher blends. Infrastructure constraints also affect the potential supply of higher ethanol blends. As a result of these factors, U.S. biofuel policies can have significant implications for the world ethanol market. Usage mandates under the Renewable Fuel Standard, blender tax credits, and the blend wall can interact to generate excess supplies of ethanol that are likely to be diverted to the world market. This paper examines how fluctuations in corn yield and gasoline prices affect the excess supply of U.S. corn-based ethanol in the presence of alternative assumptions about the maximum amount of ethanol that can be consumed domestically. Using stochastic simulations we also explore the impact of current policies on the mean and variance of export supply. The results highlight the complex interaction between technological constraints, economic incentives, and government policies in the U.S. biofuels sector, and point to the potentially destabilizing effect of such policies in international markets.