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Impact of US Biofuel Policy on US Corn and Gasoline Price Variability

  • McPhail, Lihong Lu
  • Babcock, Bruce A.

Despite a large number of studies that examine the influence of biofuels and biofuel policy on commodity prices, the impact of biofuel policy on commodity price variability is poorly understood. A good understanding of biofuel policy's impact on price variability is important for mitigating food insecurity and assisting policy formation. We examine how U.S. ethanol policies such as the Renewable Fuel Standard (RFS) mandates and the blend wall affect the price variability of corn and gasoline. We first present an analytical and graphical framework to identify the effect and then use stochastic partial equilibrium simulation to measure the magnitude of the impacts. We show that RFS mandates and the blend wall both reduce the price elasticity of demand for corn and gasoline and therefore increase the price variability when supply shocks occur to the markets. This has important implications for policy actions with respect to maintaining or changing the current RFS mandates and/or blend wall in the US.Biofuel policy; Price variability; Commodity; Stochastic simulation

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Paper provided by Iowa State University, Department of Economics in its series Staff General Research Papers with number 34892.

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Date of creation: 08 Feb 2012
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Publication status: Published in Energy, February 2012, vol. 37 no. 1, pp. 505-513
Handle: RePEc:isu:genres:34892
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Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070

Phone: +1 515.294.6741
Fax: +1 515.294.0221
Web page: http://www.econ.iastate.edu
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