Impact of policies and subsidies in agribusiness: The case of oil palm and biofuels in Colombia

Abstract

We analyze the economic impacts of policies supporting biodiesel production in Colombia, such as subsidies and mandates for compulsory fuel mixtures. In the major biodiesel source being palm oil, we seek to establish the impact of these policies on oil palm producer incomes, prices and production levels of crude palm oil (CPO) and biodiesel, as well as the impacts on demand for land for oil palm plantation expansion.We also calculate the so-called “deadweight costs”, to account for the social costs derived from the inefficiencies of government interventions in the biodiesel markets. The analysis is done using a partial equilibrium models for the two interrelated sectors, the production of palm oil and biodiesel, and the demand for new land needed to cope with the additional palm oil needed. The model was calibrated for 2009 to simulate for the 2010–2020 period.The results of the simulations reveal that the subsidies alone are themselves not effective tools to achieve the government objectives defined in the Biofuels Program in Colombia.Subsidies need to be complemented by increased blending mandates to ensure that palm cultivation and production of biodiesel investments are profitable enough that producers would bet on such business. Additionally, we find that producers of palm oil benefit most from subsidies in the short term; however, in the long-term it is the biodiesel entrepreneurs who will appropriate the larger share of growth revenue of the entire production chain. The social costs of the Biofuels Program are small in the short term, and represent only between 0.2% and 0.7% of the tax expenditure. However, in the long term they would become significant, and would account for around 4.1% to 6.1% of the tax payers' expense.