Modelling the interaction between policies and international trade flows for liquid biofuels

Abstract

Biofuels are inextricably bound up with policy. Various drivers can be identified for the production and consumption of biofuels, such as environmental considerations, energy security and economic development. Therefore, biofuels may be an appealing option to policy makers. Biofuels are in general more expensive to produce than their fossil counterparts. Therefore, (support) policy is necessary to increase the competitiveness of biofuels. Policy makers can implement various measures to realize the potential benefits of biofuels, such as import- and export tariffs, imposing trade embargoes, offering subsidies, mandating blending targets and creating tax exemptions. However, the biofuel market is an international affair, because demand and supply of feedstock and biofuel are unequally distributed around the globe. In the past it appeared that domestic biofuel policies could have major unforeseen and unintended effects on the international bioenergy markets.

The influence of policy measures on the global bioenergy markets is not extensively investigated. Lamers et al. [2011] found that trade volumes were largely influenced by import duties, whereas trade routes were mainly driven by tariff preferences. In other words, it is found that there is some interaction between policies and patterns of international trade flows (in terms of volumes and routes) of biofuels and feedstock. However, the study performed by Lamers et al. [2011] did not explain the underlying mechanism. The aim of this research is to fill this knowledge gap. With this knowledge, decision making by policy makers may become better informed and aforementioned effects of policies may be reduced or even prevented.

The main research question addressed in this research is: Which mechanism can explain the effect of policies on emerging patterns in the international trade flows of liquid biofuels and feedstock? To answer this question, an agent-based model (ABM) of the international liquid biofuel markets is developed. If literature on international trade flows for bioenergy is reviewed, it appears that the models applied are usually general- or partial equilibrium models. Contrary to equilibrium models, ABM allows for heterogeneous actors with bounded rationality, the ability to learn and intrinsic behavioural traits. Above that, geographical aspects can be incorporated. It is hypothesized that these factors play an important role in international bioenergy trade. Therefore, this approach could be of added value to the current strand of literature in which equilibrium models are applied.

To limit the scope of this research, a case study is performed. In this case study a number of key players in the international biodiesel market are considered: the European Union, Indonesia and Malaysia. Since the take-off of the biodiesel industry (around the year 2000), the European Union has been one of the largest producers and consumers of biodiesel in the world. In addition, the European biodiesel market has been targeted as an export market for biodiesel and feedstock (palm oil) by Indonesia and Malaysia. In view of the case study, the focus of this research is on first-generation liquid biofuels.