EPA/EBAI/EC bioethanol blend mandate policy simulation on disaggregated ACP countries

344 Pages·2017·2.8 MB·English

by  Christine Middleton

The EC Bioethanol Blend Mandate
Policy: Its Effect on ACP Sugar
Trade and Potential Interaction
with EPA Policies

By

Mphumuzi Angelbert Sukati

Thesis submitted to the University of
Nottingham
for the degree of Doctor of Philosophy

January 2013
Abstract
The study aim was to determine effects of the EC bioethanol blend mandate policy
and its potential interaction with the EPA policies on EU/ACP countries. The research
analysis focussed on welfare outcomes, changes in trade balance and output of
bioethanol crops commodities due to these policies. Emphasis of our analysis was
placed on sugar given the economic importance of this commodity to many ACP
member states. Absence of an EU bioethanol partial equilbrium model means we
had to design one from certain assumptions. One of the assumptions was that
subsidies support EU bioethanol production such that just enough is produced to
meet the 5.75% and 10% EC blend mandate requirements. For this reason, EU
bioethanol production did not affect transport fuel demand and prices.
Using the GTAP model, the study has found that the EC bioethanol blend mandate
policy increases bioethanol crops commodities prices resulting in global welfare loss
that is highest in the EU region. However, the EC bioethanol blend mandate policy
also increases bioethanol crops commodities production in ACP countries and
promote ACP export of these commodities to the EU. The EU is able to produce all
bioethanol requirements from local sugar beet production. Increasing the amount of
sugar beet in bioethanol production minimizes the effect on global food prices and
offers greatest benefits to ACP countries through promotion of their sugar
industries. Trade liberalising EPA policies result in welfare gain for regions engaged
in them. However, the EC bioethanol blend mandate policy’s interaction with the
EPA policies result in welfare loss, which is again highest in the EU. Combination of
the EC bioethanol blend mandate/EPA policies also promotes ACP bioethanol crops
production and export.
Overall, the study has contributed to our understanding of biofuel policies and their
potential global effects on food markets especially in ACP countries.
ii
Acknowledgements

I would like to thank my supervisors, Professor Wyn Morgan and Dr Olli Kauppi for
their continued support during this study. Their guidance, advice and suggestions
have been invaluable and have made my work possible. I would also like to pass my
gratitude to the University of Nottingham School of Economics for allowing me to
study with them and for their financial support. I would also like to thank my family
members who have supported me whilst I was away in the UK for three years
without seeing them. They have sacrificed a lot and I would like to thank them
sincerely for their support and understanding. The greatest thanks however go to
God from whom all things are possible.

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List of Chapters
Chapter 1- Introduction and motivation .............................................................1-1

Chapter 2 – Literature Review on biofuel and bioethanol
2.0 Introduction .................................................................................................. 2-1
2.1 What are biofuels? ....................................................................................... 2-2
2.2 Reasons for promotion of biofuels and concerns for their production ...... 2-5
2.3 Global, USA and Brazilian bioethanol status ............................................. 2-17
2.3.1 A closer look at the Brazilian bioethanol industry ................ 2-20
2.4 Bioethanol and international trade ........................................................... 2-23
2.5 The EU Strategy for promotion of biofuels ............................................... 2-26
2.5.1 The European Commission (EC) Directive on biofuels .......... 2-26
2.5.2 The Common Agricultural Policy (CAP) support for biofuels…..
......................................................................................................... 2-29
2.6 The EU27 bioethanol status and trade ...................................................... 2-31
2.6.1 Recent EU27 fuel bioethanol production and consumption
status .............................................................................................. 2-39
2.6.2 A brief overview of EU27 biodiesel production and
consumption .................................................................................. 2-44
2.7 Review of selected studies on EU bioethanol ........................................... 2-48
2.8 Summary and conclusion ........................................................................... 2-56

Chapter 3: Bioethanol models review, design and analysis of EU27 bioethanol
model

3.0 Introduction and motivation ....................................................................... 3-1
3.1 Review of the global bioethanol models ..................................................... 3-5
3.2 The bioethanol FAPRI model ..................................................................... 3-10
3.3 Alternative FAPRI bioethanol models ........................................................ 3-14
3.4 The EU27 bioethanol demand model ......................................................... 3-18
iv
3.4.1 Gasoline demand ……….. .................................................................... 3-20
3.4.2 Bioethanol demand ........................................................................... 3-30
3.5 Gasoline and bioethanol equilibrium solution ........................................... 3-35
3.6 EU bioethanol supply model ..................................................................... 3-38
3.6.1 Bioethanol supply model results ..................................................... 3-52
3.7 Subsidy derivation from equilibrium conditions ....................................... 3-53
3.7.1 Discussion of equilibrium results ..................................................... 3-56
3.7 Conclusion and extension .......................................................................... 3-57

Chapter 4 : The EU/global sugar market: production and trade policies
4.0 Introduction ................................................................................................. 4-1
4.1 The global sugar market ............................................................................... 4-3
4.1.1 The EU sugar market and trade status ................................................ 4-8
4.2 The CAP and its reforms ........................................................................... 4-11
4.3 The Common Market Organization .......................................................... 4-16
4.3.1 Production quotas ................................................................ 4-19
4.3.2 Sugar prices and levies ......................................................... 4-22
4.4 General Trade Agreements between the EU and ACP Countries ............. 4-26
4.5 The ACP/EU trade Agreements specific to sugar ...................................... 4-28
4.5.1 The ACP/EU sugar protocol .................................................. 4-28
4.5.2 The Agreement on Special Preferential Sugar (SPS) ............. 4-32
4.6 ACP sugar industries ................................................................................. 4-37
4.6.1 The Caribbean sugar industries ............................................. 4-40
4.6.2 The African/SADC sugar industries ........................................ 4-45
4.7 Recent EU/ACP sugar trade regime reforms ............................................. 4-50
4.7.1 The EU sugar reform of 2006 ................................................. 4-50
4.7.2 The EU biofuel policy ............................................................. 4-55
4.7.3 The EPAs ................................................................................ 4-55
4.8 Conclusion .................................................................................................. 4-59
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Chapter 5: A review of the GTAP model
5.0 Introduction .................................................................................................. 5-1
5.1 CGE and GTAP modeling ............................................................................... 5-2
5.2 Theoretical foundations of the GTAP model ............................................... 5-5
5.2.1 Behavioural equations ......................................................... 5-18
5.2.2 Model closure and linearization ........................................... 5-20
5.3 Study application of the GTAP model ........................................................ 5-22
5.4 Conclusion .................................................................................................. 5-30

Chapter 6: Simulating the EC bioethanol blend mandate policy on aggregated ACP
countries
6.0 Introduction ................................................................................................... 6-1
6.1 Conversion of bioethanol to bioethanol crops commodities equivalent ..... 6-2
6.2 Transferring the bioethanol crops demanded into the GTAP model …… .... 6-13
6.3 Modelling the EC bioethanol blend mandate on petroleum products …… . 6-17
6.4 EC bioethanol blend mandate policy simulation ......................................... 6-21
6.4.1 Country aggregation............................................................. 6-22
6.4.2 Sectoral aggregation............................................................. 6-23
6.4.3 Closure................... .............................................................. 6-25
6.5 Results and discussion.................................................................................6-26
6.6 Conclusion ……………………………. .................................................................... 6-40

Chapter 7: EPA/EC bioethanol blend mandate policy simulation on ACP countries
7.0 Introduction ................................................................................................... 7-1
7.1 Modelling the EPA policies on EU/ACP countries ......................................... 7-3
7.1.1 Policy simulation……................................................................ 7-3
7.1.2 Results and discussion............................................................. 7-4
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7.2 Simulation of the EC bioethanol blend mandate/EPA policy interactions on ACP
countries ................................................................................................................. 7-13
7.2.1 Policy simulation............................................................................... 7-13
7.2.2 Results and discussion……………................. ....................................... 7-13
7.3 Conclusion .................................................................................................... 7-25

Chapter 8: Summary, conclusion and extension
8.1 Summary and conclusion ............................................................................. 8-1
8.2 Shortfall of the research and possible extensions ...................................... 8-6
Appendix
Figure A3-1: The world bioethanol model ................................................................ A-1
Figure A3-2: Brazilian bioethanol model .................................................................. A-2
Figure A3-3: USA bioethanol model ......................................................................... A-3
Figure A3-4: Proposed EU-27 bioethanol model ..................................................... A-4
Table A6.1: Welfare effects or Equivalent Variation-EV (in US$ million) of a 5.75%
and 10% EC bioethanol blend mandate at sugar beet share of s =31.1 (s =100)….
sb sb
.................................................................................................................................. A-5
Table A6.2: Welfare decomposition (in US$ million) of a 5.75% and 10% EC
bioethanol blend mandate at sugar beet share of ssb=31.1 (s =100) ................... A-5
sb
Table A7.1: The welfare effects (in US$ million) of a 5.75% and 10% EC bioethanol
blend mandate/EPA policies at S =31.1(100) % ..................................................... A-6
sb
Table A7.2: Welfare decomposition (in US$ million) of a 5.75% and 10% EC
bioethanol blend mandate/EPA policies at S =31.1 (100) % ................................. A-6
sb

Bibliography .......................................................................................................................... B-1

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List of Tables
Table 1.1: Contribution of sugar to some ACP member states GDP in 2003 ........... 1-7
Table 2.1: Change in Life-Cycle GHG emissions per kilometre travelled by replacing
gasoline with bioethanol in conventional spark-ignition vehicles ......................... 2-10
Table 2.2: Typical biofuel production systems from agricultural crops ................. 2-13
Table 2.3: Land and water demand in large-scale biofuel production compared to
availability (expressed on a per capita basis) ......................................................... 2-14
Table 2.4: Recent statistics of Brazilian sugar and bioethanol production ............ 2-23
Table 2.5: Minimum incorporation % biofuel blend targets for EU member states in
place in 2005 and 2010 .......................................................................................... 2-28
Table 2.6: Estimation of year 2007 and future bioethanol production capacity in
EU27 ........................................................................................................................ 2-32
Table 2.7: EU market price support for bioethanol through border protection….. 2-34
Table 2.8: Cost of biofuels in the EU ..................................................................... 2-35
Table 2.9: Cost comparison of biofuels with petroleum fossil fuels (valued at filling
stations in €2004/1000L) ........................................................................................ 2-35
Table 2.10: Preferential agreements providing duty free and quota free access to
the EU bioethanol market ....................................................................................... 2-38
Table 2.11: EU fuel bioethanol consumption (production) from 2000 to 2009 in
thousands of barrels per day .................................................................................. 2-41
Table 2.12: EU bioethanol production from bioethanol crops from 2006 to 2012.....
................................................................................................................................. 2-44
Table 3.1: Regression results for a static long run EU27 gasoline demand .......... 3-22
Table 3.2: K-S test for normality for gasoline demand in the EU27 ....................... 3-24
Table 3.3: OLS regression summary results for EU27 gasoline demand ............... 3-26
Table 3.4: OLS unit root estimation for price variable............................................ 3-27
viii
Table 3.5: OLS unit root estimation for GDP variable ............................................ 3-28
Table 3.6: OLS estimation for cointegration testing ............................................... 3-30
Table 3.7: 2004 equilibrium gasoline and bioethanol demand ............................. 3-37
Table 3.8: Bioethanol crops supply elasticities ...................................................... 3-52
Table 4.1: World sugar production statistics in year 2004 (2011) ........................... 4-4
Table 4.2: World sugar exports in year 2004 (2011) ................................................ 4-5
Table 4.3: Major global sugar consumers in year 2004 (2011) ................................ 4-6
Table 4.4: The quota distribution of sugar in the EU25 (2004) ........................... …4-21
Table 4.5: The average levy regime for the EU sugar industry from 1990 to 2002…..
................................................................................................................................ 4-24
Table 4.6: Sugar quotas of ACP Protocol countries ............................................... 4-30
Table 4.7: ACP SP and SPS sugar quotas and average production levels (in tonnes
white sugar equivalent) .......................................................................................... 4-34
Table 4.8: Summary classification of ACP countries and trade arrangement with the
EU ............................................................................................................................ 4-35
Table 4.9: Sugar cane production in SADC region in 2010 ..................................... 4-45
Table 4.10: EU support prices from 2005-2010 ...................................................... 4-52
Table 5.1: A typical structure of a Social Accounting Matrix .................................. 5-6
Table 6.1: Bioethanol production from sugar beet at sugar beet share of 31.1% . ..6-6
Table 6.2: Bioethanol productivity efficiency of grain crops .................................... 6-7
Table 6.3: Conversion of EU bioethanol sugar beet share from litres to tonnes
equivalent at 31.1% (100%) sugar beet share .......................................................... 6-8
Table 6.4: Conversion of EU bioethanol sugar beet share from tonnes to sugar
equivalent and as a percentage of 2004 sugar production at 31.1% (100%) sugar
beet share ................................................................................................................. 6-8
ix
Table 6.5: Bioethanol crop shares for bioethanol production in billion litres (and
million tonnes equivalent) ...................................................................................... 6-10
Table 6.6: EU27 uncompensated own price elasticity of demand for bioethanol crop
commodities .......................................................................................................... 6-14
Table 6.7: Calculated % quantity changes {qo (i,r)} at 5.75% (10%) blend mandate
and different bioethanol crops shares.................................................................... 6-16
Table 6.8: Calculated % price changes {pm (i,r)} at 5.75% (10%) blend mandate and
different bioethanol crops shares........................................................................... 6-17
Table 6.9: Elasticity and % change in quantity and price for petroleum products in
the EU27 due to the EC biofuel blend mandate ..................................................... 6-19
Table 6.10: Alterations to the exogenous variable tax variable τ to simulate the
effect of the EC bioethanol blend mandate policy ................................................ 6-20
Table 6.11: Welfare loss as a percentage of GDP of a 5.75% and 10% EC bioethanol
blend mandate at sugar beet share of ssb=31.1 (100%) ... .................................... 6-26
Table 6.12: Selected results of % change in market prices due to the EC 5.75% (10%)
bioethanol blend mandate at sugar beet share of S =31.1 ................................... 6-29
sb
Table 6.13: Selected results of % change in market prices due to the EC 5.75% (10%)
bioethanol blend mandate at sugar beet share of S =100%...............................6-29
sb
Table 6.14: Selected results of % change in industry output due to the EC 5.75%
(10%) bioethanol blend mandate at sugar beet share of S =31.1 ........................ 6-31
sb
Table 6.15: Selected results of % change in industry output due to the EC 5.75%
(10%) bioethanol blend mandate at sugar beet share of S =100 ......................... 6-32
sb
Table 6.16: Selected results of changes in trade balance (in US$ million) as a result
of the EC 5.75% (10%) bioethanol blend mandate at sugar beet share of S =31.1%
sb
................................................................................................................................ .6-34
Table 6.17: Selected results of changes in trade balance (in US$ Million) due to the
EC 5.75% (10%) bioethanol blend mandate at Sugar beet Share of S =100%... ... 6-34
sb
Table 6.18: Selected results of % change in ACP export sales due to the EC 5.75%
(10%) bioethanol blend mandate at sugar beet share of S =31.1% .................. ....6-37
sb
x