Dynamics of the Commodity Prices and Quantities: An Analysis using a Dynamic Multiregional CGE Model

This paper presents a dynamic multiregional CGE model to address commodity quantities and prices in the full fledged general equilibrium framework. This is important for various reasons. One of the reasons is the possible competition between food and biofuels, as biofuel promotion policies have become a hot policy topic over the globe. For example, the European Commission announced the aim of substituting of 10 percent of traditional fossil fuels with biofuels in transport by the year 2020. Generally, there exist several options of biofuel promotion measures and corresponding needs for their economic impact inquiry. The paper presents a computable general equilibrium model, which is characterized by three main features: multiregionality, intertemporality (adaptive expectations), and a quasi-fixed land supply (limited area of agricultural land as one of the production input of agricultural sector). Economic sectors and world regions are properly chosen to address the issue of production, consumption and trade of conventional fuels, agricultural products and biofuels. The competition between food and biofuel production is addressed. Several mixes of potential promotional programs in a E.U. member country are analysed. They are generally expected to result in a gradual penetration of biofuels into the transportation market associated with moderate increases in prices of food and motor fuels, and positive impacts on employment in the agricultural sector. An impact on trade balance is expected to be ambiguous and sensitive to the model parameterization. An increase in imports of biofuels from third countries is followed by reduction in crude oil demand.