Biofuel subsidies and international trade

Bandyopadhyay, Subhayu and Bhaumik, Sumon and Wall, Howard J. (2010): Biofuel subsidies and international trade.

Abstract

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 the tax on crude is not available as a policy option, a second-best biofuel subsidy may or may not be positive. In the large-country case, the twin objectives of pollution reduction and terms-of-trade improvement justify a combination of crude tax and biofuel subsidy for the food exporter. Finally, we show that when both nations engage in biofuel policies, the terms-of-trade effects encourage the Nash equilibrium subsidy to be positive (negative) for the food exporting (importing) nation.

• Item Type: MPRA Paper
• Language: English
• Keywords: Biofuel Subsidy, Pigouvian Tax, 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

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