International Interlinkages of Biofuel Prices: The Role of Biofuel Policies

Based on their theoretical predictions, Kliauga, de Gorter, and Just (2008) and de Gorter,Drabik, and Just (2010) argue that the United States and the European Union establish the worldethanol and biodiesel prices, respectively. We test these theories using cointegration analysisand the Vector Error Correction (VEC) model. Weekly price series are analyzed for the majorglobal biofuel producers (European Union, United States, and Brazil) for the period 2002 –2010. Polices in the United States and Brazil appear to play an equal role in determining ethanolprices in other countries, thus only partially confirming the theoretical predictions. For biodiesel,our results demonstrate that the EU mandate impacts the world biodiesel price and thus theyconfirm the European Union’s price leadership established in theory.