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The Relative Impacts of U.S. Bio-Fuel Policies on Fuel-Energy Markets: A Comparative Static Analysis

Published online by Cambridge University Press:  26 January 2015

C.S. Kim ,
Glenn Schaible  and
Stan Daberkow
C.S. Kim
Affiliation:
Economic Research Service, United States Department of Agriculture, Washington, DC
Glenn Schaible
Affiliation:
Economic Research Service, United States Department of Agriculture, Washington, DC
Stan Daberkow
Affiliation:
Economic Research Service, United States Department of Agriculture, Washington, DC
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Abstract

Rapidly declining gasoline prices from their record high during the summer of 2008, while ethanol prices remained relatively high, made it difficult for many bio-fuel policy modelers to fully explain the impacts of U.S. bio-fuel policies on fuel prices. Using profit-maximization models for blenders, refiners, and distillers, we conduct a comparative static analysis to measure the relative magnitudes of the impacts of tax credits and blending mandates on fuel-energy market equilibrium prices. Our results indicate that first, the prices of all fuels including conventional gasoline, ethanol, and blended gasoline decline as the biofuel tax credit increases, but they increase as the rate of the blending mandate increases. Second, the shadow value of a blending mandate represents the marginal rate of substitution between the marginal price change associated with a blending mandate and the marginal price change associated with a bio-fuel tax credit. Therefore, bio-fuel policies can affect the prices of all fuels including conventional gasoline, ethanol, and blended gasoline. Finally, ethanol imports are affected by domestic blender's market-power effects, more than by the import duty imposed to offset the tax credit associated with the use of imported ethanol in the blending process.

Keywords

bio-fuel tax creditsblended gasolineblender's market powermandated blendingtariffQ11Q21Q42Q48
Type
Research Article
Information
Journal of Agricultural and Applied Economics , Volume 42 , Issue 1 , February 2010 , pp. 121 - 132
Copyright
Copyright © Southern Agricultural Economics Association 2010

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