Measuring the Subsidy Component of Biofuel Tax Credits and Exemptions

The subsidy component of biofuel policies is complicated because of the forward linkage to oil markets. The subsidy associated with tax exemptions is overestimated because consumers purchase fuel for mileage, but fuel taxes are based on volume. Furthermore, the policies of one country establish the link between biofuel and oil prices, so tax exemptions in other countries subsidize gasoline consumption and do not directly increase biofuel prices. The gap between the intercept of the ethanol supply curve and the oil price means part of the subsidy is benefitting no one. As a result, countries like Brazil do not subsidize ethanol production as much as it would appear.