US–Brazil Trade in Biofuels: Determinants, Constraints, and Implications for Trade Policy

This chapter compares the cost and greenhouse gas (GHG) mitigation benefits of corn ethanol in the United States relative to sugarcane ethanol produced in Brazil and develops a stylized model to analyze its implications for the impact of US biofuel policies on social welfare and GHG emissions. The policies considered here include the 0.51 per gallon blender's subsidy for ethanol and the import tariff of 0.54 per gallon on sugarcane ethanol. Our analysis shows that the combined subsidy and tariff policy decreases welfare by about 3 B depending on assumptions about the extent of market power the United States has in the world ethanol market. These policies also provide negligible (in some cases negative) benefits in the form of GHG reduction. The results indicate that the United States would gain from removing domestic and trade distortions in the ethanol market. Increasing ethanol demand in the world market will entail expansion of Brazil's ethanol industry. We briefly discuss concerns about the environmental impacts of this expansion.