On blending mandates, border tax adjustment and import standards for biofuels

Abstract

The transport sector is a major contributor to green house gas (GHG) emissions and its share is increasing. Biofuels may pro- vide an option to replace fossil fuels and generate an increasing worldwide interest. Rich countries like the US and the European Union ha idies for domestic producers, while applying tari¤s for some of the foreign producers. Mid income and poor countries do not have binding restrictions on carbon emissions in the Ky- oto treaty, but may have great potential for producing biofuels both for domestic and foreign use. In this paper we study trade policies for biofuels. We nd that only by combining an import standard with border tax adjustment the government can ensure cost e¢ cient production of biofuels from a global point of view. We also consider a blending mandate. This fundamentally al- ters the way the market works. For instance, if domestic biofuels production is subsidized, the optimal BTA may be negative.