Dynamics of Biofuel Prices on the European Market: Impact of the EU Environmental Policy on the Resources Markets

Abstract

This paper aims at explaining the major drivers of bio-diesel market prices by examining agricultural resource prices and gas-oil prices for automotive fuels in the context of the EU environmental policy. The EU policy has enhanced bio-diesel production since 2006. Bio-diesel prices are impacted by the EU policy as well as rapeseed and oil prices which have fluctuated a lot over the last decade. An econometric analysis was performed using monthly data from November 2006 to January 2016. However, tests for structural breaks show several changes in price behavior. This leads us to estimate a regime-switching model which reveals two main regimes for the bio-diesel price pattern. When oil prices are high, bio-diesel, rapeseed and diesel oil prices are related, mainly driven by oil prices. When oil prices are low, bio-diesel prices are mostly related to rapeseed prices according to EU regulations requiring the blending of bio-diesel and gas-oil.