What are the costs of rigidity? A general equilibrium study of the fuel market in Argentina

Abstract

The policy that is most widely applied to the biofuel market in the world is the mandatory blend. This policy aims to induce the use of biofuels by setting a minimum level of biofuel per unit of blended fuel. This paper studies the costs and benefits of such a policy. To do so, a Recursive Computable General Equilibrium model (CGE), calibrated with a new own-developed energy-oriented Social Accounting Matrix of Argentina for 2018, has been developed. Such a model is extended by explicitly embedding a constrained fuel blending model into the CGE setup. This research addresses the following questions: What are the costs and benefits of a mandatory blend compared to a full flexibility scenario? Is it better to induce the use of biofuels through a tax on fossil fuels or a blending constraint? What is the impact of international price shocks when considering different blending regimes? This paper finds that the mandatory policy has a negative impact on the economic activity, poverty, income distribution, and energy affordability, but a positive one on emissions. When analysing the convenience of a special tax on fossil fuels instead of a mandatory regime, this paper finds that the cost and benefits of each policy are distributed differently over time. The special tax on fossil fuels performs better in the short run while the mandatory blend does so in the long run. Finally, this paper finds that flexibility in the fuel market improves the country's performance when there are shocks on international prices.