International Interlinkages of Biofuel Prices: The Role of Biofuel Policies

Kliauga, de Gorter, and Just (2008) and de Gorter, Drabik, and Just (2010) argue that the United States and the European Union establish the world ethanol and biodiesel prices, respectively. We test these theories using a cointegration analysis and the Vector Error Correction (VEC) model. Weekly price series are analyzed for the major global biofuel producers (European Union, United States, and Brazil) for the period 2002 – 2010. Biofuel policies in both the United States and Brazil appear to play a role in determining the ethanol prices in other countries, thus only partially confirming the previous findings for the U.S. price leadership in the literature. For biodiesel, our results demonstrate that the EU tax exemption and mandate impact the world biodiesel price, thus confirming the European Union’s price leadership.