The role of flexible biofuel policies in meeting biofuel mandates

Abstract

The paper analyzes the role of biofuel sector in three major regions (USA, European Union and Brazil). It focuses on the links between volatility in the yields of feedstock and how these yields feed through to changes in the prices of biofuel crops under different rules for managing biofuel mandates. Global Trade Analysis Project (GTAP) model has been calibrated for the years 2007-2012 to derive, endogenously, biofuel production in each year for all the three regions. Further, the study examines four different volatility variations of possible shocks to yields as representative of natural variations in the production of the feedstocks. It analyzes the impacts of changes in the mandated biofuel under the four variations to see what impact they would have principally on the prices of the key agricultural inputs linked to the biofuel sector. The model results indicate that current mandates have significant impact on the biofuel crops. The world biofuels production is expected to increase by 54% by year 2020. EU ethanol from grains and biodiesel are expected to grow by 85% and 49% respectively. The analysis observes high elasticity of substitution between fossil fuel and biofuels, which results in a greater demand for biofuels when yields of feedstocks rise and prices of feedstocks fall.