Bandyopadhyay, Subhayu and Bhaumik, Sumon and Wall, Howard J. (2010): Biofuel subsidies and international trade.
This is the latest version of this item.
Download (119kB) | Preview
This paper explores optimal biofuel subsidies in a general equilibrium trade model. The focus is on the production of biofuels such as corn-based ethanol, which diverts corn from use as food. In the small-country case, when a Pigouvian tax on conventional fuels 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 may or may not be positive, depending on the input elasticity of substitution in energy production. 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, 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.
|Item Type:||MPRA Paper|
|Original Title:||Biofuel subsidies and international trade|
|Keywords:||Optimal Biofuel Subsidy; Pigouvian Tax; Terms-of-Trade; Pollution Externality|
|Subjects:||O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development
H - Public Economics > H2 - Taxation, Subsidies, and Revenue
F - International Economics > F1 - Trade
|Depositing User:||Howard J. Wall|
|Date Deposited:||12. Jul 2011 22:30|
|Last Modified:||21. Feb 2013 14:38|
Antweiler, W., Copeland, B.R. and Taylor, M.S. (2001). Is free trade good for the environment? American Economic Review 91(4), 877-908.
Barrett, S. (1994). Strategic environmental policy and international trade. Journal of Public Economics 54(3), 325-338.
Copeland, B.R. and Taylor, M.S. (1994). North-South trade and the environment. Quarterly Journal of Economics 109(3), 755-787.
Copeland, B.R. and Taylor, M.S. (2003). Trade and the Environment: Theory and Evidence. Princeton: Princeton University Press.
Copeland, B.R. and Taylor, M.S. (2004). Trade, growth and the environment. Journal of Economic Literature XLII, 7-71.
de Gorter, H. and Just, D.R. (2010). The social costs and benefits of biofuels: The intersection of environmental, energy and agricultural policy. Applied Economic Perspectives and Policy, 32(1), 4–32.
Frankel, J.A. and Rose, A.K. (2005). Is trade good or bad for the environment? Sorting out the causality. Review of Economics and Statistics 87(1), 85-91.
Fredriksson, P. (1997). The political economy of pollution taxes in a small open economy. Journal of Environmental Economics and Management 33(1), 44-58.
Grafton, R.Q., Kompas, T., and Long, N.V. (2010). Biofuel subsidies and the green paradox. CESifo working paper #2960.
Johnson, H.G. (1953). Optimum tariffs and retaliation. Review of Economic Studies 21, 142-53.
Khanna, M., Ando, A.W., and Taheripour, F. (2008). Welfare effects and unintended consequences of ethanol subsidies. Review of Agricultural Economics, 30(3), 411-421.
Lapan, H., and Moschini, GianCarlo. (2009). Biofuels policies and welfare: Is the stick of mandates better than the carrot of subsidies? Working paper #09010, Iowa State University, Ames, Iowa.
Lasco, C., and Khanna, M. (2009). Welfare effects of biofuels trade policy in the presence of environmental externalities. Available at SSRN: http://ssrn.com abstract=136710127
Larson, E.D. (2008). Biofuel production technologies: Status, prospects and implications for trade and development. United Nations Conference on Trade and Development, New York and Geneva.
Lopez, R. (1994). The environment as a factor of production: The effects of economic growth and trade liberalization. Journal of Environmental Economics and Management 27(2), 163-184.
Marjit, S., Kar, S., and Beladi, H. (2007). Protectionary bias in agriculture: A pure economic argument. Ecological Economics 63(1), 160-164.
Neuman, W. (2010). Rising corn prices bring fears of an upswing in food costs. The New York Times, October 12, 2010.
Organisation for Economic Cooperation and Development.(2006). Agricultural market impacts of future growth in the production of biofuels. OECD Papers 6(1), 1-57.
Power, S. (2010). More ethanol to be allowed in cars. The Wall Street Journal, October 13, 2010.
Rauscher, M. (1997). International Trade, Factor Movements, and the Environment. Oxford: Clarendon Press.
Runge, C.F. and Senauer, B. (2007). How biofuels could starve the poor. Foreign Affairs 86(3), May/June 2007, 41-53.
Vedenov, D., and Wetzstein, M. (2008). Toward an optimal U.S. ethanol fuel subsidy. Energy Economics 30, 2073-2090.
Wald, M.L. (2010). A bit more ethanol in the gas tank. The New York Times, October 13, 2010.
Available Versions of this Item
Biofuel Subsidies and International Trade. (deposited 06. May 2011 20:34)
- Biofuel subsidies and international trade. (deposited 12. Jul 2011 22:30) [Currently Displayed]