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Biofuel Subsidies and International Trade

Author

Listed:
  • 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.

Suggested Citation

  • Bandyopadhyay, Subhayu & Bhaumik, Sumon & Wall, Howard, 2010. "Biofuel Subsidies and International Trade," MPRA Paper 30760, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:30760
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    References listed on IDEAS

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    1. Does it make sense to subsidize biofuels?
      by Economic Logician in Economic Logic on 2011-06-07 19:52:00

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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 165887, Australian Agricultural and Resource Economics Society.
    2. Jussila Hammes , Johanna, 2014. "A biofuel mandate and a low carbon fuel standard with ‘double counting’," Working papers in Transport Economics 2014:19, CTS - Centre for Transport Studies Stockholm (KTH and VTI).

    More about this item

    Keywords

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

    JEL classification:

    • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • F1 - International Economics - - Trade

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