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Interdependencies between fossil fuel and renewable energy markets: the German biodiesel market

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  • Busse, Stefan
  • Brümmer, Bernard
  • Ihle, Rico

Abstract

With this paper, we provide the first quantitative investigation of vertical price transmission in the biodiesel supply chain in Germany with the focus on the developments during the food crisis and the impact of subsidized US biodiesel exports. With the strong promotion of the production and use of biodiesel during the first half of the past decade, the German biodiesel market became the largest national biodiesel market worldwide. This analysis utilizes prices of rapeseed oil, soya oil, biodiesel and crude oil over a sample period covering the rapid growth of the German demand in 2002 until its decline in 2009. The effects of both the market development and different policies on price transmission are analyzed in detail. Due to the numerous changes in the market, a regime-dependent Markov-switching vector error correction model is applied. The results indicate that regimes with differing error-correction behavior govern the transmission process among the various prices. Evidence was found for a strong impact of crude oil price on biodiesel prices, and of biodiesel prices on rapeseed oil prices. However, in both cases, the price adjustment behavior is found to be regime dependent, and the regime occurrence in both market segments shows similar patterns. In relation to crude oil a weak adjustment of biodiesel prices is found to be dominating in the phase of market expansion. This changed from 2007 on when stronger error-correction is found, reflected by a stronger role of the crude oil price developments. In the relationship of biodiesel to the vegetable oils, most of the growth period was dominated by a regime characterized by weak price adjustments. From 2007 on, past own price changes and past changes in soya oil prices had a strong impact particularly on rapeseed oil prices. The biodiesel price development was less important. Reasons for this are substantial changes in the market structure. The biodiesel market developed as an insulated market; biodiesel was mainly produced from rapeseed oil until 2006. Thereafter, biodiesel was increasingly used for blends and sales decreased during the food crisis when agricultural commodity prices rose sharply. At the same time, strong import competition arose from subsidized US B99. The superiority of rapeseed oil for biodiesel production diminished. The uncertainty prevailing in the market from 2007 onwards is reflected by frequent regime changes.

Suggested Citation

  • Busse, Stefan & Brümmer, Bernard & Ihle, Rico, 2010. "Interdependencies between fossil fuel and renewable energy markets: the German biodiesel market," DARE Discussion Papers 1010, Georg-August University of Göttingen, Department of Agricultural Economics and Rural Development (DARE).
    • Handle: RePEc:zbw:daredp:1010
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    2. Vacha, Lukas & Janda, Karel & Kristoufek, Ladislav & Zilberman, David, 2013. "Time–frequency dynamics of biofuel–fuel–food system," Energy Economics, Elsevier, vol. 40(C), pages 233-241.
    3. Danne, Michael & Mußhoff, Oliver, 2018. "Producers' valuation of animal welfare practices: Does herd size matter?," DARE Discussion Papers 1801, Georg-August University of Göttingen, Department of Agricultural Economics and Rural Development (DARE).
    4. Nazlioglu, Saban & Erdem, Cumhur & Soytas, Ugur, 2013. "Volatility spillover between oil and agricultural commodity markets," Energy Economics, Elsevier, vol. 36(C), pages 658-665.
    5. Karel Janda & Ladislav Kristoufek & David Zilberman, 2011. "Modeling the Environmental and Socio-Economic Impacts of Biofuels," Working Papers IES 2011/33, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Oct 2011.
    6. repec:dau:papers:123456789/12798 is not listed on IDEAS
    7. Ladislav Krištoufek & Karel Janda & David Zilberman, 2012. "Correlations between biofuels and related commodities: A taxonomy perspective," Working Papers IES 2012/15, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Jun 2012.
    8. Prehn, Soren & Brümmer, Bernhard & Glauben, Thomas, 2012. "Structural Gravity Estimation & Agriculture," 2012: New Rules of Trade? December 2012, San Diego, California 142765, International Agricultural Trade Research Consortium.
    9. Bilal, Muhammad & Barkmann, Jan & Jaghdani, Tinoush Jamali, 2017. "To analyse the suitability of a set of soical and economic indicators that assesses the impact on SI enhancing advanced technological inputs by farming households in Punjab Pakistan," DARE Discussion Papers 1708, Georg-August University of Göttingen, Department of Agricultural Economics and Rural Development (DARE).
    10. Fecke, Wilm & Danne, Michael & Mußhoff, Oliver, 2018. "E-commerce in agriculture: The case of crop protection product purchases in a discrete choice experiment," DARE Discussion Papers 1803, Georg-August University of Göttingen, Department of Agricultural Economics and Rural Development (DARE).
    11. Janda, Karel & Kristoufek, Ladislav & Zilberman, David, "undated". "Biofuels: review of policies and impacts," CUDARE Working Papers 120415, University of California, Berkeley, Department of Agricultural and Resource Economics.
    12. Rajcaniova, Miroslava & Drabik, Dusan & Ciaian, Pavel, 2013. "How policies affect international biofuel price linkages," Energy Policy, Elsevier, vol. 59(C), pages 857-865.
    13. Kuhanathan Ano Sujithan & Sanvi Avouyi-Dovi & Lyes Koliai, 2014. "On the determinants of food price volatility," Post-Print hal-01511900, HAL.
    14. Kristoufek, Ladislav & Janda, Karel & Zilberman, David, 2012. "Relationship Between Prices of Food, Fuel and Biofuel," 131st Seminar, September 18-19, 2012, Prague, Czech Republic 135793, European Association of Agricultural Economists.
    15. Prehn, Sören & Brümmer, Bernhard & Glauben, Thomas, 2012. "An extended Viner Model: Trade creation, diversion & reduction," DARE Discussion Papers 1210, Georg-August University of Göttingen, Department of Agricultural Economics and Rural Development (DARE).
    16. Kristoufek, Ladislav & Janda, Karel & Zilberman, David, 2012. "Correlations between biofuels and related commodities before and during the food crisis: A taxonomy perspective," Energy Economics, Elsevier, vol. 34(5), pages 1380-1391.
    17. Saldias, Rodrigo & von Cramon-Taubadel, Stephan, 2012. "Access to credit and the determinants of technical inefficiency among specialized small farmers in Chile," DARE Discussion Papers 1211, Georg-August University of Göttingen, Department of Agricultural Economics and Rural Development (DARE).

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    More about this item

    Keywords

    biodiesel; cointegration; nonlinear vector error correction model; regimedependent model; Markov-switching;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • Q11 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Aggregate Supply and Demand Analysis; Prices
    • Q18 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Policy; Food Policy; Animal Welfare Policy

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