| Biofuel is a popular substitute or blending component in conventional fuel. For the sake of increasing a sustainable energy supply to slow global climate change, agricultural economy improvement and energy security, the US has strong interest in promoting biofuels through policy interventions. The Renewable Fuel Standard (RFS) specifies a mandated volumetric standard and carbon emission thresholds for the each biofuels category each year from 2010 to 2022. One major category, biomass-based diesel (BBD or biodiesel), is required to have a carbon saving of at least 50% comparing with diesel fuel. Soybean oil is the dominant biomass input to BBD, but recent debates argue that the increased demand for US soybean oil BBD is likely to result in higher palm oil imports, leading to significant carbon emissions from global indirect land use change (ILUC). This paper investigates the substitution effect between US domestic soybean oil and imported palm oil from 2006 to 2013, using a log-log model to reveal the cross-price elasticity. To tackle the endogenous concerns in soybean oil price, we adopt a two stage least squared (2SLS) approach by using soybean price as an instrumental variable (IV). The estimated elasticity indicates the substitution effect, with a 1 percent increase in soybean oil price associated with a 3.22 percent increase in palm oil imports (p< .01), holding other vegetable oil prices constant. This result demonstrates the key link in my hypothesis that the higher demand of soybean oil driven by BBD production is very likely to trigger higher palm oil imports and foreign palm oil production, leading to substantial ILUC emissions that compromise the carbon targets of the RFS. |
