Measurement of ethanol subsidies and associated economic distortions: An analysis of Brazilian and U.S. policies

Abstract

The objectives of this study were to measure the subsidy equivalent value of ethanol policies in the United States and Brazil, and estimate the magnitude of associated economic distortions. For 2002-11, average annual ethanol subsidy levels were US$ 7.2 billion in the United States and US$2.1 billion in Brazil. Brazilian support measures for ethanol increased the world price by 2.7%on average in this period, which expanded output in both countries (1.2% in the United States and 5.3% in Brazil), reduced U.S. consumption by 4.7%and increased Brazilian consumption by 16.1%. On the other hand, U.S. ethanol policies depressed world prices by 2.4% on average in the same period, which boosted consumption in both countries (by 2.5% in the United States and 1.3% in Brazil), expanded U.S. production by 8.3%, but reduced Brazilian output by 4.7%. Although both countries changed their policies in 2012, distortions remain.