Political economy of biofuel.

Abstract

Production of ethanol and biodiesels has dramatically expanded since the beginning of the new millennium. The use of biofuels is central to many of the proposed policies to address climate change impacts. Most of the studies on the economics of climate change policies employ a social welfare economic perspective. The common conclusion of these studies is that the best policy to mitigate environmental externalities while maximizing social welfare is to introduce incentives that nudge producers of energy to pay the price of externalities associated with greenhouse gas (GHG) emissions, which will favor clean biofuel products. Furthermore, economists have found that current policies are inefficient and costly. Policies, however, are not created by economists, but by politicians. The analysis of policy choices by politicians is done using models of political economy. This article takes a political economic approach to identifying some of the key factors in the formulation of biofuel policies in the United States, the European Union (EU), and Brazil. Our analysis is conceptual, but illustrates recent evidence of this approach. We consider both macro-level indicators—economic growth, unemployment, and balance of trade—that are emphasized by the executive branch as well as the considerations of interest groups in determining policies. Macro-Level Considerations