THE IMPACT OF U.S. BIOFUEL MANDATE WAIVER DECISIONS ON WORLD ETHANOL AND BIODIESEL MARKETS

Recently, the Environmental Protection Agency (EPA) proposed biofuel requirements for 2014 that suggest the use of ethanol would probably be lower than the volume previously envisioned in the Energy Independence and Security Act (EISA) of 2007. The impact of waiving down the mandate in the U.S., and shrinking the “advanced gap” will mean that both the U.S. and Brazil will export more to other countries. Given the flexibility the EPA has for setting policy, we analyze the impact of two alternative scenarios for mandate waivers on the U.S. domestic biofuel market and its implications for the world ethanol and biodiesel market: (1) overall mandate is waived down to a level which preserves the “advanced gap” at the levels envisioned in the RFS2; (2) overall mandate is achieved by expanding the biodiesel mandate is expanded from 1.28 billion gallons to 1.8 billion gallons. Increasing the advanced gap leads to both an increase in imports, but also an increase in exports of ethanol for the U.S., driven by the fact that the U.S. discriminates on the basis of feedstock where Brazil does not.