Taking an option on the future: Subsidizing biofuels for energy security or reducing global warming

This paper examines the biofuels industry from a policy and international trade perspective. Across the globe there are two main public policy objectives driving the development of biofuels industries—improving energy security and reducing global warming. The US and Canadian governments have respect...

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Bibliographic Details
Published in:Energy policy 2013-05, Vol.56, p.543-548
Main Authors: Viju, Crina, Kerr, William A.
Format: Article
Language:English
Subjects:
Applied sciences
Biodiesel fuels
bioenergy industry
Biofuels
Biomass energy
Canada
Canadians
Economic data
Economic planning
Economic policy
Energy
Energy economics
Energy policy
Exact sciences and technology
Export-import trade
General, economic and professional studies
Global warming
Government subsidies
Industry
international policy and programs
International trade
Natural energy
Option value theory
Public policy
Studies
Subsidies
Trade disputes
U.S.A
United States
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Summary:This paper examines the biofuels industry from a policy and international trade perspective. Across the globe there are two main public policy objectives driving the development of biofuels industries—improving energy security and reducing global warming. The US and Canadian governments have respectively fostered biofuels industries for these reasons. As biofuels industries will not be financially viable without government support in the foreseeable future, government policies can be interpreted as taking options on the future. A theoretical model is developed using option value theory to determine whether the same governmental policy (subsidization) can lead to different levels of optimal subsidies in each country, where the subsidy policy is driven by two distinct motivating factors. If the reason subsidy levels differ is structural, the likelihood of a trade dispute arising increases. ► Biofuels subsidies represent governments taking an option on the existence of alternative fuels industries in the future. ► The motivations for subsidizing biofuels include energy security and reducing global warming and vary among governments. ► Differing motivations lead to optimal subsidies of different sizes. ► Permanent difference in subsidies can lead to international trade disputes.
ISSN:0301-4215
1873-6777
DOI:10.1016/j.enpol.2013.01.020