Biofuel subsidies: an open-economy analysis

Arbeitspapier

We present a general equilibrium analysis of biofuel subsidies in an open-economy context. In the small-country case, when a Pigouvian tax on conventional fuels such as crude 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 (or tax) is optimal. In the large-country case, the optimal tax on crude departs from its standard Pigouvian level and a biofuel subsidy is optimal. A biofuel subsidy spurs global demand for food and confers a terms-of-trade benefit to the food-exporting nation. This might encourage the food-exporting nation to use a subsidy even if it raises global crude use. The food importer has no such incentive for subsidization. Terms-of-trade effects wash out between trading nations; hence, any policy intervention by the two trading nations that raises crude use must be jointly suboptimal.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: IZA Discussion Papers ; No. 4584

Classification and Topics

• Classification: Wirtschaft
• Subject: Optimal biofuel subsidy ; Pigouvian tax ; terms-of-trade ; pollution externality ; Biokraftstoff ; Subvention ; Internalisierung externer Effekte ; Optimale Besteuerung ; Allgemeines Gleichgewicht ; Offene Volkswirtschaft ; Terms of Trade ; Theorie

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Bandyopadhyay, Subhayu ; Bhaumik, Sumon Kumar ; Wall, Howard J.
• Event: Veröffentlichung
• (who): Institute for the Study of Labor (IZA)
• (where): Bonn
• (when): 2009

Further information

• Handle: http://hdl.handle.net/10419/35888
• Last update: 10.03.2025, 11:43 AM CET