The Canola Oil Industry and EU Trade Integration: A Gravity Model Approach

Recently biodiesel has become more prominent in countries of the European Union (EU). The rapidly increasing domestic production and consumption of biodiesel is accompanied by increasing trade flows. It is questionable if these trade flows are caused mainly by EU regulations concerning trade or concerning the bioenergy sector. A sector-specific analysis taking industry patterns into consideration is necessary to evaluate the impact of these two policy areas on trade flows. A common way to analyze trade flows is the so-called gravity model, which is employed here. Because of zero-inflated trade data, the model is expanded using the Heckman approach and augmented by spatial weights and Anderson & Van Wincoop's controls for multilateral resistance. The obtained results suggest that while the mandatory biofuel blending quota has a positive impact, investment subsidies cannot be shown to have any effect and trade integration might even have a trade inhibiting effect among EU members. The surprising latter result can be explained by an exhausted domestic European market for raw and intermediate materials for biodiesel and proves stable even when controlling for sector specific variables. * University of Hannover Institute for Environmental Economics and World Trade (IUW) Königsworther Platz 1, 30163 Hannover + Corresponding Authors: [email protected]; [email protected] The Production and Trade Situation in the Biodiesel Sector In recent years, many developed countries emphasized support for the production of biofuels in their political agenda. This new interest in biofuels arose mainly from the quest for increasing national energy sovereignty to become independent from oil, but is also founded in strong fluctuations of crude oil prices and environmental concerns (see e.g. Florin & Bunting, 2008). The strongest and most concrete and concerted political decision of the European Union (EU) was to set a mandatory quota for the use of biofuel. By 2010, fuels used for transportation are required to have a fraction of 5.75 percent biofuel which could be biodiesel or ethanol (see e.g. Schnepf, 2006). Other less widespread or clearly defined national and other supranational measures followed, like raising excise taxes or providing capital subsidies for green investments (Kutas et al., 2007). These public policies have been and will be a driving force in the development of the EU biofuels industry. The EU is responsible for targets and incentive schemes at the European and national level within the framework of the above noted biofuel quota, capital subsidies as well as other measures. Transfers associated to these EU policies in support of biofuels amounted to transfers of around 3.7 billion Euro in 2006 alone (Kutas et al., 2007). These political requirements set by the Commission at the supranational level are passed down to and enforced by the individual states at the national level. In the case of the mandatory biofuel quota this lead to very different pathways of the EU members for the fulfillment of the requirements. For other measures the picture is even more divided: capital subsidies and excise tax raises are, for example, fully implemented in some countries while non-existent in others. However, since most of them are less directly targeted at biofuels, it is more useful to primarily analyze the impact of the mandatory quota on biofuel trade. Many European countries have not succeeded in reaching their targeted quota yet. Nevertheless, Europe has quickly become the world’s most important producer for biodiesel, as can be seen in figure 1, with canola oil being its main raw material for biodiesel production. In some countries, though, biodiesel is substituted with ethanol leading to a thriving biofuel ethanol industry instead of or besides a biodiesel industry elsewhere, e.g. in Brazil and the United States (GMO Safety, 2007). The steady growth of biodiesel production in the EU still continues. Especially some of the new member countries are catching up by increasing their production capacities (European Biodiesel Board, 2008).