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How policies affect international biofuel price linkages

We estimate the role of biofuel policies in determining which country is the biofuel price leader in world markets using a cointegration analysis and a Vector Error Correction (VEC) model. Weekly prices are analyzed for the EU, U.S., and Brazilian ethanol and biodiesel markets in the 2002-2010 and 2005-2010 time periods, respectively. The U.S. blender’s tax credit and consumer tax exemption in Brazil appear to play a role in determining the ethanol prices in other countries. For biodiesel, our results demonstrate that the EU policies – consumer tax exemption and blending target – tend to determine the world biodiesel price.