Biofuel Subsidies and International Trade
Federal Reserve Bank of St. Louis Working Paper 2009-053A
34 Pages Posted: 20 Oct 2009 Last revised: 25 May 2013
Date Written: September 21, 2012
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.
Keywords: Biofuel Subsidy, Pigouvian Tax, Pollution Externality
JEL Classification: F1, H2, O1
Suggested Citation: Suggested Citation