Interdependencies between Fossil Fuel and Renewable Energy Markets:The German Biodiesel Market

With this paper, we provide the first quantitative investigation of vertical price transmission inthe biodiesel supply chain in Germany with the focus on the developments during the foodcrisis and the impact of subsidized US biodiesel exports. With the strong promotion of theproduction and use of biodiesel during the first half of the past decade, the German biodieselmarket became the largest national biodiesel market worldwide. This analysis utilizes pricesof rapeseed oil, soya oil, biodiesel and crude oil over a sample period covering the rapidgrowth of the German demand in 2002 until its decline in 2009. The effects of both themarket development and different policies on price transmission are analyzed in detail. Due tothe numerous changes in the market, a regime-dependent Markov-switching vector errorcorrection model is applied. The results indicate that regimes with differing error-correctionbehavior govern the transmission process among the various prices. Evidence was found for astrong impact of crude oil price on biodiesel prices, and of biodiesel prices on rapeseed oilprices. However, in both cases, the price adjustment behavior is found to be regimedependent, and the regime occurrence in both market segments shows similar patterns. Inrelation to crude oil a weak adjustment of biodiesel prices is found to be dominating in thephase of market expansion. This changed from 2007 on when stronger error-correction isfound, reflected by a stronger role of the crude oil price developments. In the relationship ofbiodiesel to the vegetable oils, most of the growth period was dominated by a regimecharacterized by weak price adjustments. From 2007 on, past own price changes and pastchanges in soya oil prices had a strong impact particularly on rapeseed oil prices. Thebiodiesel price development was less important. Reasons for this are substantial changes inthe market structure. The biodiesel market developed as an insulated market; biodiesel wasmainly produced from rapeseed oil until 2006. Thereafter, biodiesel was