Biofuel Subsidies and International Trade
Subhayu Bandyopadhyay (),
Sumon Bhaumik () and
Howard Wall ()
MPRA Paper from University Library of Munich, Germany
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: O1 H2 F1 (search for similar items in EconPapers)
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)
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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