The Theory of Biofuel Policy and Food Grain Prices

Charles H. Dyson School of Applied Economics and Management Working Paper No. 2011-20

55 Pages Posted: 4 Jun 2012

See all articles by Dusan Drabik

Dusan Drabik

Cornell University - Charles H. Dyson School of Applied Economics and Management

Date Written: December 1, 2011

Abstract

We develop an analytical framework to assess the market effects of alternative biofuel policies (including subsidies to feedstocks). U.S. corn-ethanol policies are used as an example to study the effects on corn prices. We determine the ‘no policy’ ethanol price; analyze the implications for the ‘no policy’ corn price and resulting ‘water’ in the ethanol price premium due to policy; and generalize the unique interaction effects between mandates and tax credits to include ethanol and corn production subsidies. The effect of an ethanol price premium depends on the value of the ethanol co-product, the value of production subsidies, and where the world ethanol price is determined. U.S. corn-ethanol policies are a major reason for the increases in corn prices – an estimated increase of 33 – 46.5% in the period 2008-2011.

Keywords: biofuel policies, corn prices, tax credit, mandate, ethanol subsidy, corn subsidy, water, price premium

JEL Classification: Q02, Q18, Q19

Suggested Citation

Drabik, Dusan, The Theory of Biofuel Policy and Food Grain Prices (December 1, 2011). Charles H. Dyson School of Applied Economics and Management Working Paper No. 2011-20. Available at SSRN: https://ssrn.com/abstract=2075734 or http://dx.doi.org/10.2139/ssrn.2075734

Dusan Drabik (Contact Author)

Cornell University - Charles H. Dyson School of Applied Economics and Management ( email )

331 Warren Hall
Ithaca, NY 14853
United States

HOME PAGE: http://https://sites.google.com/site/dusandrabik83/Home

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