Biofuel Subsidies and International Trade

Subhayu Bandyopadhyay, Sumon Bhaumik and Howard Wall

MPRA Paper from University Library of Munich, Germany

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.

Keywords: Optimal Biofuel Subsidy; Pigouvian Tax; Terms-of-Trade; Pollution Externality (search for similar items in EconPapers)
JEL-codes: F1 H2 O1 (search for similar items in EconPapers)
Date: 2010-10
New Economics Papers: this item is included in nep-agr, nep-ene, nep-env and nep-int
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https://mpra.ub.uni-muenchen.de/30760/1/MPRA_paper_30760.pdf original version (application/pdf)
https://mpra.ub.uni-muenchen.de/32125/3/MPRA_paper_32125.pdf revised version (application/pdf)

Related works:
Journal Article: Biofuel Subsidies and International Trade (2013)
Working Paper: Biofuel subsidies and international trade (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:30760

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