How policies affect international biofuel price linkages

We estimate the role of biofuel policies in determining which country is the price leader in world biofuel markets using a cointegration analysis and a Vector Error Correction (VEC) model. Weekly prices are analyzed for the EU, US, and Brazilian ethanol and biodiesel markets in the 2002-2010 and 2005-2010 time periods, respectively. The US blender's tax credit and Brazil's consumer tax exemption are found to play a role in determining the ethanol prices in other countries. For biodiesel, our results demonstrate that EU policies - the consumer tax exemption and blending target - tend to determine the world biodiesel price.