Economic Impacts of Thailand’s Biofuel Subsidy Reallocation Using a Dynamic Computable General Equilibrium (CGE) Model

Abstract

For two decades, the Thai government has been promoting ethanol and biodiesel consumption through tax measures and price subsidies. Although this policy has substantially increased the consumption and production of biofuels, there is concern regarding its future fiscal burden. Due to fiscal constraints, the Thai government has planned to completely terminate the biofuel subsidy by 2022. This study aims at examining the economy-wide impacts of removing the biofuel subsidy and also conducting simulations of alternative scenarios, i.e., improving the yield of energy crops and reallocating the burden to expand capital investment in energy crop plantations. A recursive dynamic computable general equilibrium (CGE) model was used as the main quantitative method to conduct four simulation scenarios. This model was validated by comparing the simulation results with the actual 2015–2019 data and showed low values of root mean square error (RMSE). The simulation results indicate that solely terminating the price subsidy would lead to economy-wide contraction. Meanwhile, eliminating the price subsidy along with influencing crop yield improvement and expanding capital investment in energy crop plantations would lead to the lowest negative impacts. Therefore, the termination of the price subsidy should be simultaneously implemented with supply-side expansions.

Effects of Biofuel Crop Expansion on Green Gross Domestic Product

“…These obtained results are in accordance with those reported in previous publications using CGE models for examining the economy-wide impacts of biofuel policies in the case of Thailand [9,10]. Specifically, this study's simulation outcomes similarly showed that the expansion of biofuels could induce substitution effects on sectoral productions, leading to the manufacturing contraction of petroleum and natural gas.…”

“…On the other hand, all participants in the biofuel supply chain (e.g., tapioca, sugarcane, and oil palm plantations) could benefit from this structural shift. Likewise, the macroeconomic indicators obtained from this study's simulations align with those shown in Phomsoda et al [9] and Phomsoda et al [10], indicating the same range of variation in real GDP and the essential role of productivity improvement on inflation (i.e., the percentage change of CPI).…”

“…Despite ignoring the effects of land expansion, Silalertruksa and Gheewala [6] used GDP as an indicator to present the economic impact of bioethanol production in Thailand. Wianwiwat and Asafu-Adjaye [7], Kaenchan et al [8], Phomsoda et al [9], and Phomsoda et al [10] revealed the dynamic effects of biofuel promotion on the economy through the intertemporal change in real GDP. However, although GDP is a standard measure for economic growth, it does not reflect actual human well-being as it does not account for social sustainability and future environmental consequences of present consumption [11,12].…”

Analysis and Comparison of China’s Biofuel Ethanol Subsidy Modes

“…In addition, the existence of externality problems also makes it impossible for the equilibrium price to accurately reflect the social costs and benefits 0 5,000 of biofuel ethanol production enterprises, thus resulting in "market failures." Therefore, in order to make up for the lack of market forces and correct the negative externalities of traditional oil enterprises and positive externalities of biofuel ethanol enterprises, it is necessary for the government to provide appropriate market intervention through policy support [1][2][3]. In practice, countries all over the world have introduced series of incentive policies to promote the development of biofuel ethanol industry.…”