International Variability in Biofuel Trade: An Assessment of U.S. Policies

Although the United States has typically been in a position to import ethanol, cornbasedethanol exports are surging as the domestic market becomes saturated andworld prices rise due to high prices for sugar, the competing global feedstock. TheU.S. is now the world’s leading ethanol producer but domestic demand isconstrained because of technical limitations in the current vehicle fleet. Higherethanol blends have been approved for use (15% rather than 10%) but a limitednumber of vehicles that can use such higher blends. Infrastructure constraints alsoaffect the potential supply of higher ethanol blends. As a result of these factors, U.S.biofuel policies can have significant implications for the world ethanol market.Usage mandates under the Renewable Fuel Standard, blender tax credits, and theblend wall can interact to generate excess supplies of ethanol that are likely to bediverted to the world market. This paper examines how fluctuations in corn yield andgasoline prices affect the excess supply of U.S. corn-based ethanol in the presence ofalternative assumptions about the maximum amount of ethanol that can be consumeddomestically. Using stochastic simulations we also explore the impact of currentpolicies on the mean and variance of export supply. The results highlight thecomplex interaction between technological constraints, economic incentives, andgovernment policies in the U.S. biofuels sector, and point to the potentiallydestabilizing effect of such policies in international markets.