| This paper examines the effects of the E10 ethanol-blend policy and the ethanol production subsidy in China on ethanol supply, ethanol plant entry, ethanol prices, corn production, wheat production, cassava production, crop prices, and gasoline prices. We use instrumental variables to address the endogeneity of prices in our econometric models of ethanol supply, ethanol plant investment and feedstock crop production. We use vector autoregression models and Granger causality tests to examine the relationships among ethanol price, corn price, gasoline price, the E10 ethanol-blend policy, and the ethanol production subsidy. Our results indicate that the E10 ethanol-blend policy has a positive effect on ethanol supply, ethanol plant entry, and corn production, but no significant effect on the supply elasticity, wheat production, or cassava production. When the E10 ethanol-blend policy is in place, ethanol price has a net negative effect on ethanol plant entry. The production subsidy has a negative effect on wheat production and cassava production, but no significant effect on ethanol supply or ethanol plant entry. We also find that ethanol policies such as the E10 policy and the ethanol subsidy can Granger-cause feedstock price and gasoline price, but generally does not Granger-cause ethanol price. The ethanol price Granger-causes feedstock prices and gasoline price. Feedstock prices Granger-cause each other. |
