Impact of Gasoline and Diesel Subsidy Reforms on Global Biofuel Mandates
Abstract
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Argueyrolles, Robin; Heimann, Tobias; Delzeit, Ruth Article — Published Version Impact of Gasoline and Diesel Subsidy Reforms on Global Biofuel Mandates Global Change Biology Bioenergy Provided in Cooperation with: Kiel Institute for the World Economy – Leibniz Center for Research on Global Economic Challenges Suggested Citation: Argueyrolles, Robin; Heimann, Tobias; Delzeit, Ruth (2025) : Impact of Gasoline and Diesel Subsidy Reforms on Global Biofuel Mandates, Global Change Biology Bioenergy, ISSN 1757-1707, Wiley, Hoboken, NJ, Vol. 17, Iss. 2, pp. 1-14, https://doi.org/10.1111/gcbb.70019 This Version is available at: https://hdl.handle.net/10419/323486 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may be saved and copied for your personal and scholarly purposes. You are not to copy documents for public or commercial purposes, to exhibit the documents publicly, to make them publicly available on the internet, or to distribute or otherwise use the documents in public. If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. http://creativecommons.org/licenses/by/4.0/
1 of 14 GCB Bioenergy, 2025; 17:e70019 https://doi.org/10.1111/gcbb.70019 GCB Bioenergy RESEARCH ARTICLE OPEN ACCESS Impact of Gasoline and Diesel Subsidy Reforms on Global Biofuel Mandates RobinArgueyrolles1 | TobiasHeimann2 | RuthDelzeit1 1Department of Environmental Sciences, University of Basel, Basel, Switzerland | 2Kiel Institute for the World Economy, Kiel, Germany Correspondence: Robin Argueyrolles ([email protected]) Received: 21 October 2024 | Revised: 10 December 2024 | Accepted: 14 December 2024 Funding: The authors received no specific funding for this work. Keywords: bioeconomy| biofuel| computable general equilibrium (CGE)| energy transition| fossil fuel subsidy reform| leakages ABSTRACT Fossil fuel subsidy reform(s) support the deployment of lowcarbon technologies, yet fossil fuel subsidies remain stubbornly high, while money allocated by governments to renewable energy continues to grow. In the transport sector, this tension is observed between biofuels that still rely on national policies and gasoline/diesel subsidies. Using a global Computable General Equilibrium (CGE) model, we study how phasing out gasoline and diesel subsidies would impact global biofuel mandates. We find that where they are implemented, Fossil Fuel Subsidy Reforms increase biofuel competitiveness and lower the cost of achieving the mandates. The fiscal benefit is therefore twofold with savings on fossil and biobased energy subsidies. In a multilateral reform scenario, we simulate the rise in fiscal revenue from phasing out the fossil fuel subsidies to be 25% higher when the avoided spending on biofuels' support is accounted for. In the rest of the world, however, the biofuel targets become costlier to achieve as the price of fossil fuels drops. Considering that global biofuel 2030 targets are achieved, governments' support for biofuel falls by $6 billion in regions phasing gasoline and diesel subsidies but increases by $600 million in the rest of the world. 1 | Introduction Fossil fuel subsidies broke an alltime high in 2022 (International Energy Agency2023b), while money allocated by governments to renewable energy continued to grow (International Energy Agency 2023a). Yet, Fossil Fuel Subsidy Reforms (FFSR) are known to support the deployment of lowcarbon technologies (Bridle and Kitson 2014; International Energy Agency 2014). This tension between support/subsidy programs is evident in the transport sector. It is the largest singlesector recipient of fossil fuel subsidies (Black etal.2023), while biofuels can be one of the most successful ways of decarbonizing the transport sector (Ebadian etal.2020) still relying on national support policies to penetrate the market (OECD/FAO2021). Several countries refer to a fossil fuel subsidy phaseout in their Nationally Determined Contributions, and 50 undertook various degrees of reforms between 2015 and 2018 (Global Subsidies Initiative 2019). The results of past reforms were mixed (UNDP 2021). In Indonesia, for example, subsidies for fossil fuels used in the transport sector dropped from $15 billion to almost zero following a successful fuelpricing reform in 2015–2017 (OECD2019b). These, however, bounced back with gasoline and diesel subsidies in 2022 estimated there at $6.7 billion and $12.1 billion, respectively (International Monetary Fund 2023). Simultaneously, the Indonesian government continues to promote biodiesel for a clean energy transition (Dermawan etal.2022), while low oil prices impede biofuels' competitiveness (Winchester and Ledvina2017). A large body of literature exists on the impact of FFSRs and biofuel mandates on the environment and welfare. Food security has been a concern for biofuels (Mitchell 2008; Zhang et al. 2013; Zilberman et al. 2013), while their greenhouse This is an open access article under the terms of the Creative Commons Attribution License, which permits use, distribution and reproduction in any medium, provided the original work is properly cited. © 2025 The Author(s). GCB Bioenergy published by John Wiley & Sons Ltd.
2 of 14 GCB Bioenergy, 2025 gas (GHG) emission balance is ambiguous and depends on, among other things, landuse changes (Searchinger etal.2008; Timilsina and Mevel 2013) and feedstock composition (Laborde and Valin2012; Britz and Delzeit2013), where they are produced (Mareike 2011), and byproduct considerations (Taheripour etal.2010). FFSRs on the other hand were found to lower GHG emissions (Burniaux and Chateau2014; Chepeliev and Mensbrugghe2020; Black etal.2023) but to be regressive if not complemented by revenue recycling mechanisms (Siddig etal.2014; Wesseh, Lin, and Atsagli2016). To the best of our knowledge, fossil fuel subsidy reforms' impact on biofuel markets and mandates remains undetermined. This study does not aim to provide an evaluation of either policy but rather investigate the interaction between gasoline and diesel FFSR and existing global biofuel mandates. The focus is not on the combined environmental or distributional impact of the policies. Instead, we provide a detailed evaluation of the impact of gasoline and diesel FFSRs on fossil and biofuel sectors in a world where existing global biofuel mandates are achieved. The goal is to explore how the consumption and competitiveness of transport fuel changes and how this, in turn, impacts the governments' fiscal revenue and the overall economy to provide an evaluation of FFSRs that account for interactions with biofuel mandates. Considering that fossil and biofuel commodities are part of a complex global value chain and our focus on how these interact, we employ the DARTBIO model, a global recursive dynamic Computable General Equilibrium (CGE) model (Calzadilla, Delzeit, and Klepper2017; Delzeit, Winkler, and Söder2018). CGE models that account for the linkage and feedback effects between markets are particularly well suited for the study of biofuel policies (Kretschmer and Peterson 2010). Similarly, they capture the significant general equilibrium effect of FFSR (Saunders and Schneider2000) and linkages between all markets including those that require energy as an input (Ellis2010). We integrate to the DARTBIO model preand posttax estimates from the IMF for gasoline and diesel subsidies. Pretax subsidies measure support mechanisms that directly impact enduser prices. These are relatively less complex than other forms of government support and are generally wellaccepted to fit the definition of a subsidy by different stakeholders (UNEP, OECD, IISD2019). This is helpful in view of the fact that governments like the UK treasury are reported to have denied providing subsidies at all “on the grounds that any support it offers doesn't artificially lower prices paid by consumers” (Mehta2022). Posttax subsidies on the other hand account for the cost of externalities indirectly paid by society and therefore fall outside the definition of subsidies from the Agreement on Subsidies and Countervailing Measures (ASCM). Still, not paying the cost of damages to the environment from production can legitimately be understood as a subsidy (Stiglitz2006). Posttax subsidies also provide an opportunity to investigate efficient pricing policies which is key to informing the discussion on fuel pricing reforms (Coady etal.2019). We find that the subsidy reforms reinforce biofuel mandates. Where they are implemented, FFSRs increase biofuel competitiveness and lower the cost of achieving the mandates. The fiscal benefit of the reforms is therefore twofold with savings on both fossil fuel and biofuel subsidies. Accounting for the decrease in biofuel support from a multilateral pretax gasoline and diesel subsidies reform, we simulate the overall rise in fiscal revenue to be 25% higher. In the rest of the world, however, the biofuel targets become costlier to achieve as the international price of fossil fuels drops. Considering that biofuel 2030 targets are achieved in all regions, we find that biofuel subsidies fall by $6 billion in regions phasing out their subsidies but that this is partially offset by a $600 million increase in the rest of the world. We conclude that aligning policy objectives is a lowhanging fruit given the cumulative benefits it generates at a relatively low economic cost. The rest of the article is structured as follows: Section2 introduces the DARTBIO model, the data used, and the definition of scenarios; Section3 presents the results of the simulations; Section4 discusses the results; Section5 presents some of the limitations of the study. Finally, Section 6 concludes and explores policy implications. 2 | Materials and Methods Fossil Fuel Subsidy Reforms (FFSRs) and biofuel policies provoke simultaneous adjustment in the fossil fuel and biofuel market. At the same time, biofuels are embedded in a highly integrated agricultural market that relies on energy inputs to sustain production. Capturing these interactions is essential to understanding the impact of each policy on one another. Partial equilibrium models that struggle to represent the link between sectors are not well suited to address questions relating to international competitiveness effects (Ellis 2010). Instead, CGE models have been recognized to be particularly wellequipped to capture these complex interactions because their sectors represent the full economy (Kretschmer and Peterson2010). 2.1 | Model We use the DARTBIO model, which is a version of the Dynamic Applied Regional Trade (DART) model designed to represent in detail the agricultural sector, land use, and conventional biofuels. The DART model is a global multisectoral, multiregional recursivedynamic CGE model that was developed in the 1990s at the Kiel Institute for the World Economy (Springer 1998). It has since then been widely applied to analyze international climate policies (e.g., Klepper and Peterson 2006a), environmental policies (e.g., Weitzel et al. 2012), energy policies (e.g., Klepper and Peterson 2006b), and biofuel policies (e.g., Kretschmer, Narita, and Peterson2009; Calzadilla, Delzeit, and Klepper2017; Delzeit, Winkler, and Söder2018; Schuenemann and Delzeit2022). The DARTBIO is the bioeconomy and landuse version of the DART model. Fundamentally, both share the same structure. The bioeconomy extension however includes land heterogeneity using the agroecological zones classification as well as the complex production process chains of biofuels. The model is largely calibrated on the GTAP9 database (Aguiar, Narayanan, and McDougall 2016). Its current aggregation includes 23 17571707, 2025, 2, Downloaded from https://onlinelibrary.wiley.com/doi/10.1111/gcbb.70019, Wiley Online Library on [07/08/2025]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
3 of 14 regions, 51 sectors, and 21 factors of production. Noticeably, as per Table1, the OPEC countries and Qatar have been aggregated based on their similarities with respect to energy subsidies. For the same reason, countries that have signed the Declaration of Cooperation (DoC) have been aggregated into the PPEC region. Russia and Malaysia are not included in the PPEC region although they have signed the declaration. Instead, Russia is modeled as a single region while Malaysia is aggregated with Indonesia due to its important role in worldwide biofuel production and consumption. As detailed by Delzeit etal.(2021), to enable the modeling of the relationship between biobased and fossil fuelbased fuel for transport, several key sectors were disaggregated from the original GTAP database. Concerning biofuels, biodiesel and bioethanol from different sources (i.e., oilseeds and grains) were included as well as their corresponding processing sectors and byproducts. The adapted database also includes dedicated sectors for motor gasoline and motor diesel. Sectors were split using data from the meó Consulting Team, a company providing consulting services with a special focus on renewables' sustainability and climate change (F.O. Licht2015), and FAOSTAT on production, price, and bilateral trade data. Production volumes were converted in dollars before the trade shares were used to distribute production assuming trade costs, tariffs, and export taxes/subsidies remained unchanged from the original GTAP sector (Schuenemann and Delzeit2019). The DARTBIO model is a classical Walrasian general equilibrium model where the economy in each region is modeled as a competitive economy with flexible price and market clearing conditions. A single agent simultaneously represents utilitymaximizing consumers, profitmaximizing producers, and the regional government. The economies evolve through a sequence of singleperiod static equilibrium connected through capital accumulation and changes in labor supply for periods from 2011 until 2030. Changes in the labor force, the rate of labor productivity growth, and human capital accumulation determine labor supply and productivity changes. Labor productivity and human capital growth are assumed to be constant but regionally differentiated. Production exhibits a constant return to scale and is modeled using multilevel nested constant elasticity of substitution (CES) production functions. Crucially, in the case of motor gasoline and diesel, crude oil enters feed oil in production with no substitution possibilities with labor and capital. Biodiesel on the other hand can be produced using various oil seeds that can be substituted for one another, while bioethanol is a composite of various grainspecific bioethanol products, each of which with its own TABLE 1 | List of regions in DARTBIO. Central and South America Europe BRA Brazil FSU Rest of the former Soviet Union PAC Paraguay, Argentina, Uruguay, Chile CEU Central European Union with Belgium, France, Luxembourg, Netherlands LAM Rest of Latin America DEU Germany Middle East and Northern Africa MED Mediterranean with Cyprus, Greece, Italy, Malta, Portugal, Spain MEA Rest of the Middle East and Africa MEE Eastern EU with Austria, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia, Slovenia, Romania, Bulgaria, Croatia Asia NEW NorthWestern EU with Denmark, Finland, Ireland, Sweden, United Kingdom CHN China, Hong Kong NOR Norway IND India RNE Rest of Northern Europe. Switzerland, Iceland, Liechtenstein EAS Eastern Asia. Japan, South Korea, Taiwan, Singapore North America MAI Malaysia, Indonesia CAN Canada ROA Rest of Asia USA United States of America RUS Russia OPEC and partner Oceania OPEC Algeria, Angola, Congo, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Gabon, Saudi Arabia, United Arab Emirates, Venezuela, Qatar ANZ Australia, New Zealand, Rest of Oceania PPEC Azerbaijan, Bahrain, Brunei Darussalam, Kazakhstan, Mexico, Oman, South Sudan 17571707, 2025, 2, Downloaded from https://onlinelibrary.wiley.com/doi/10.1111/gcbb.70019, Wiley Online Library on [07/08/2025]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
4 of 14 GCB Bioenergy, 2025 nesting and production function. Final consumption in turn is modeled with nonunitary income elasticities using the linear expenditure system (LES) approach and is composed of both a fixed subsistence level and a supernumerary consumption. Only the latter reacts to changes in price/income and therefore allows substitution between biodiesel and diesel or bioethanol and gasoline, as well as, to a lesser extent, between each other. For a full technical description of the model, see Delzeit etal.(2021). 2.2 | Subsidies and Calibration The current study complements the model with the 2022 IMF's publicly available data on fossil fuel subsidies published in 2015 and 2021. The estimates cover 150 and 192 countries in the respective databases and the 2003–2025 period. Specific gasoline and diesel estimates are included, allowing the integration of the subsidies into the model with no additional commodity disaggregation. The IMF derives pretax fossil fuel subsidies using the pricegap approach by comparing average enduser prices with freemarket reference prices reflecting the full cost of supply (Coady etal.2019). Support measures that do not influence enduser prices are not captured, but the method benefits from being relatively low dataintensive and measuring a wellaccepted category of subsidies (UNEP, OECD, IISD2019). The database also contains posttax subsidies, which are defined as the exemption from the corrective Pigouvian tax reflecting the cost of externalities (Coady etal.2019). These include the cost of local air pollution mortality, broader costs associated with the use of fuels in road vehicles, and global warming (Parry, Black, and Vernon2021). Posttax subsidies stray away from the WTO 1994 definition of a subsidy ratified in the Agreement on Subsidies and Countervailing Measures (ASCM). Considering the duality of the topic and the link to climate mitigation, posttax subsidies, however, offer an opportunity to investigate efficient pricing policies. To match the model specification, the fossil fuels subsidy and consumption values provided by the IMF are summed between countries to match the regions in Table1. Diving the resulting subsidies and consumption values by each other allows us to derive the advalorem subsidy rate corresponding to the model regional aggregation. To integrate these advalorem rates into the model, a new (negative) sales tax variable is applied to the model's Armington aggregate of imports and domestic consumption. This means that all agents face the same rates, as well as industries consuming the same intermediates. The model's base year values are recalculated following the integration of the subsidies to minimize the deviation from the benchmark values which implicitly reflects the distortions of the market. The model is then calibrated using labor productivity to match the regional GDP growth projections of the OECD (2019a). To simulate a robust baseline, we simultaneously calibrated the production of motor gasoline, diesel, and crude oil. Between 2011 and 2020, the global cumulative growth of gasoline and diesel production as well as the share of each region in global production is calibrated to replicate figures reported by the United Nations Statistics Division. After 2020, we calibrated the regional production share of crude oil based on the Joint Research Center (JRC) data (Wojtowicz etal.2021). 2.2.1 | Baseline Simulation (“Ref”) In the baseline, fossil fuel subsidies are kept constant after 2021. Biofuel mandates' targets for biodiesel and bioethanol are gradually and linearly reached in all regions by 2030. Biofuel targets are expressed as percent of consumption and based on the projections used in the FAO/OECD 2022 agricultural outlook (OECD/ FAO2021). The EU mandate sets maximum consumption shares instead of a minimum blending rate or consumption target. Considering that the EU 2030 target of 14% share of renewables in total transport fuel consumption cannot be met without a sufficiently large amount of biofuels, we assume that member states meet the renewable energy in transport target with the Directive(2018) maximum allowable share of biofuels. As per the EU Renewable Energy Directive RED, palm oilbased biodiesel is phased out in the EU due to its “highiluc risk” classification. 2.2.2 | PreTax Fossil Fuel Subsidy Reform (“PreT_ FFSR”) In the first policy scenario (“PreT_FFSR”), a reform starting in 2023 is introduced under which gasoline and diesel pretax subsidies are linearly phased out in the regions with biofuel mandates (regions in italic in Table2). This reflects a situation where countries motivate a reform with the ambition to support their renewable transport fuel mandates/targets or more broadly a renewable energy transition. We disregard Ukraine, part of the FSU region, and RUS who despite having a biofuel mandate cannot be expected to implement a fossil fuel subsidy reform given the current geopolitical context of the war in Ukraine. As in the baseline, global biofuel mandates are included in the simulation to understand the interaction between the two policies. Regions not listed in the table did not have pretax subsidies in 2021 based on the IMF database. TABLE 2 | Motor diesel and gasoline pretax subsidies in 2021. Regions Motor gasoline Motor diesel OPEC 35.2% 85.7% Former Soviet Union 0.3% Russia 1.5% PPEC (Partners of OPEC) 2.4% 9.3% Oceania 0.03% Rest of the Middle East and Africa 1.9% 8.4% Rest of Asia 0.02% 0.2% Malaysia and Indonesia 3.8% 23.9% Latin America 0.6% 2.1% 17571707, 2025, 2, Downloaded from https://onlinelibrary.wiley.com/doi/10.1111/gcbb.70019, Wiley Online Library on [07/08/2025]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
5 of 14 2.2.3 | PostTax Subsidy PhaseOut in the EU (“PosT_FFSR”) Biofuels are not free from the externalities included in the IMF posttax subsidies estimates. Only applying a policy internalizing the costs of these externalities to fossil fuels could therefore be considered inconsistent. The difference in local air pollution and global warming (largest sources of subsidies in the database) between fossiland biobased transport fuels is however subject to uncertainty. GHG emissions not being explicitly depicted in the model, instead of only applying the posttax subsidies to fossil fuels we rely on the EU RED's sustainability criteria to explore a “single region” phaseout scenario. The EU RED's sustainability criteria state that food and feed crop biofuels' GHG intensity should be at least 50% lower than their fossil fuel alternative to count toward the mandate's target (Directive2018). We accordingly assume that half of the posttax subsidy rates on gasoline and diesel apply to bioethanol and biodiesel produced using these feedstocks in the region and in the second policy scenario (“PosT_FFSR”), a phase out of posttax subsidies on all four fuels is implemented in the EU starting in 2023. This complements the first multilateral phaseout scenario with one where the countries implementing the reform face a common biofuel mandate target (EU level) but differentiated fossil fuel subsidies (country level). Double counting is avoided as motor gasoline and diesel do not enter the production of biofuels as intermediate. 3 | Results 3.1 | Governmental Spending on FFS Pretax fossil fuel subsidies tend to be concentrated in net crude oil exporting countries, and in 2020 were made up of about 31% of gasoline and diesel subsidies. We simulate, in 2020, that global pretax gasoline and diesel subsidies amount to 120 billion dollars and reach $135 billion in 2030. Solely considering regions with biofuel mandates, the overall value of gasoline and diesel pretax subsidies in the baseline scenario falls to $24.7 billion in 2030. The relative size of the subsidies in value being consistent with the advalorem rates (see Table2), Malaysia and Indonesia (MAI) turn out to be the regions with the largest pretax subsidies and a biofuel mandate, followed by the Middle East and Northern Africa and PPEC. Diesel with its higher advalorem rate is found to make up around 82% of total pretax gasoline and diesel subsidies between 2023 and 2030. Posttax subsidies on gasoline and diesel are larger and more widespread than pretax subsidies. In the EU where they are phased out in the second policy scenario (“PosT_FFSR”), we simulate that they amount to $92 billion in 2030. The regional and fuel variations, depicted in Table3, are the result of both the relative size of the advalorem subsidies (see Data S1) and the value of consumption. As for pretax subsidies, diesel posttax subsidies are found to be higher than those on gasoline, and the same can be said when comparing biodiesel to bioethanol. In the whole EU region in 2030, diesel makes up about 77% of total posttax subsidies. This share is relatively constant across all EU regions except for Germany where the share reaches 87% and NorthWestern EU where it drops to 56%. 3.2 | Fossil Fuels for Transport The simulation results show that, in regions that remove pre or posttax fossil fuel subsidies, prices for gasoline and diesel rise relative to the reference scenario. This leads to a reduction in consumption largely proportional to the value of the subsidies that were phased out. In the first policy scenario (“PreT_ FFSR”), regions phasing out pretax subsidies experience a $24 billion (5%) decline in the overall consumption of fossil fuels for transport by 2030 compared to the baseline (summing up values for gasoline and diesel, see Figure1). In the second policy scenario (“PosT_FFSR”), following the removal of posttax subsidy, the EU consumption of fossil fuel for transport drops by $109 billion (18%). In the rest of the world, however, the total consumption of gasoline and diesel increases by $3.8 billion and $6.6 billion in scenarios 1 and 2, respectively. For diesel, this type of consumption leakage, caused by what is sometimes referred to as the “fossilfuelprice” leakage channel (Böhringer, Rosendahl, and Schneider2014), is best explained by considering bilateral trade. As displayed in Table4, regions phasing out fossil fuel subsidies exports and imports of diesel to/from the rest of the world shrink following the pretax FFSR. This suggests that the growing diesel consumption outside of the reform area is not the result of a diversion of domestic consumption to the export market from the regions phasing out their subsidies. Rather it is triggered by these regions' decreasing import demand. In other words, the rest of the world absorbs on its home market some of the exports it no longer makes to regions implementing the reform. The same trade effects cannot be the only source of the growing gasoline consumption since, as per Table4, the trade of this fuel increases between regions inside and outside the reform area. TABLE 3 | EU baseline posttax subsidies in 2030, in $ billion. Central EU Germany Eastern EU Mediterranean NorthWestern EU Total Bioethanol 0.2 0.1 0.1 0.2 0.2 0.7 Biodiesel 1.0 1.1 0.2 1.1 0.3 3.7 Gasoline 4.4 1.8 1.7 4.6 4.2 16.7 Diesel 19.1 20.2 4.9 21.2 5.9 71.3 Total 24.6 23.2 6.9 27.1 10.5 92.3 17571707, 2025, 2, Downloaded from https://onlinelibrary.wiley.com/doi/10.1111/gcbb.70019, Wiley Online Library on [07/08/2025]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
6 of 14 GCB Bioenergy, 2025 Rather than trade, we find that an expansion in gasoline production of $2.5 billion in the rest of the world is largely responsible for the growing consumption there. This is especially evident in the US and China, the largest producers and consumers of gasoline who together make up about half of this change. As reflected in decreasing production costs of gasoline, this is the result of the decrease in demand for crude oil to produce diesel. The production of diesel, which is more heavily subsidized than gasoline, declines everywhere following the reform, either directly because of the domestic reform or due to the lower demand caused by reforms abroad. This puts downward pressure on the price of crude oil, the largest input in the production of both diesel and gasoline. In turn, this leads gasoline to become relatively more attractive, as its production costs drop, and consumption grows outside of the reform area. The same mechanics apply to the consumption leakage of gasoline and diesel in scenario 2. Diesel consumption outside the EU increases mostly from trade between regions outside the EU while gasoline consumption grows due to an expansion in production. Again, we find that the US and China together make up half of the change in gasoline consumption outside of the reform area and that the share of gasoline in their overall transport fuel mix expands. Interestingly, gasoline exports from the rest of the world to regions phasing out their subsidies increase in scenario 1 while they decrease in scenario 2. This helps to explain the $0.8 billion rise in gasoline consumption where the pretax subsidies are phased out in scenario 1 (see Figure1). Not only is gasoline benefiting from lower production costs, but gasoline is also becoming relatively cheaper than diesel as its subsidies are not as large. In the MEA, for example, following the pretax FFSR, gasoline's own prices rise by 1.8%, while relative to diesel, it drops by 7%. This together with the lower production costs at home and abroad leads to an increase in production, imports, and consumption where the pretax subsidies are removed. In scenario 2, the same effect is observed in Germany where diesel subsidies are relatively larger than gasoline. Gasoline production, imports, and consumption rise there, but this is offset at the overall EU level by a drop in the rest of the EU regions. 3.3 | Biofuels Biofuels are directly impacted by the changes in the fossil transport fuel sector. Since biofuel mandates' targets are calibrated as a share of transport fuel consumption, an increase/decrease in the demand for gasoline or diesel implies an increase/decrease in the amount of biofuels needed for governments to reach their targets. In regions implementing the reform, this means that typically while the price of biofuels rises, their consumption drops together with the government support needed to achieve the mandate. Outside of these regions, biofuel prices contract, but increased fossil fuel consumption leads to more biofuel consumption to meet the mandates and government spending on biofuel subsidies to increase. In the first policy scenario (“PreT_FFSR”), we find that by 2030, the support from regions implementing a pretax FFSR to biofuels decrease by about $6.2 billion (27%) compared to the baseline, while a $0.6 billion increase is observed in the rest of the world (Table5). In regions implementing the pretax FFSR, this translates into a 25cent saving on biofuel support for each dollar not spent on gasoline and diesel subsidy. The Malaysia and Indonesia region with the largest subsidies on both fossil and biofuels experiences the most change in consumption and subsidy level. In the Rest of the Middle East and Africa the need for biofuel support following the reform completely disappears. While growing its share of biofuels in total transport fuel by a FIGURE 1 | Gasoline and diesel 2030 consumption changes relative to the baseline, in $ billion. TABLE 4 | Scenario 1 (“Pre_FFSR”) 2030 changes in trade relative to the baseline, in $ billion. Motor gasoline Motor diesel FFSR RoW FFSR RoW FFSR Imports 0.1 0.3 (−2.9) (−10.7) Exports 0.0 (−0.9) Row Imports 0.0 0.1 (−0.9) 3.2 Exports 0.3 (−10.7) 17571707, 2025, 2, Downloaded from https://onlinelibrary.wiley.com/doi/10.1111/gcbb.70019, Wiley Online Library on [07/08/2025]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
7 of 14 modest 0.2%, this represents a 90% expansion in biofuel consumption and is enough for the region to reach its target by 2030 without the need for government interventions. In the second policy scenario (“PosT_FFSR”), by 2030, the support from EU governments to biofuels decrease by about $6.8 billion (35%) compared to the baseline, while a $0.6 billion increase is observed outside the EU. In regions implementing the posttax FFSR, this translates into a 7cent saving on biofuel support for each dollar of gasoline and diesel subsidy phased out. We find that the percentage change in biofuel support depicted in Figure2, is larger than the posttax advalorem subsidy phased out on the corresponding fuel. This is the result of the combined drop in biofuel consumption needed to achieve the target and a competitive effect making biofuels relatively more attractive. In the central EU region, overall biofuel support declined by 45%, which is more than twice the size of the subsidies on diesel and gasoline phased out in the region. This is explained by the fact that while consumption shrinks at a rate comparable to the posttax subsidy removed, the price of biofuels like biodiesel also fell by 1.2% relative to their fossil fuel alternative (i.e., diesel). We find that this is also what explains the decrease in bioethanol subsidy in Germany. In scenario 2 (“PosT_FFSR”), the German consumption of bioethanol increases by 5% because the subsidy on gasoline is many times lower than the one on diesel, and also lower than in any other EU region. Yet, the government's support for bioethanol falls by 4% following the phaseout, suggesting that the competitive effect between fossil and biofuels dominates over the induced consumption one. Indeed, not only does the relative price of bioethanol drops by 0.3%, but the subsidy per unit of bioethanol consumed decreases as well. More broadly the same is true of all regions that phase out the subsidies on fossil fuels. Biofuels become relatively more competitive as their relative price decreases, leading to a lower subsidy per unit of biofuel to reach the mandates. Outside of the reform area, the effect is reversed. While in absolute terms biofuel prices contract, they do so by less than fossil fuel prices. As the price gap between biofuels and fossil fuels increases, the government must expand support per unit of biofuel consumed to reach the mandates' targets. As a result, while the EU biofuel market benefits when the region implements a posttax FFSR, it suffers from fossil fuel subsidy reforms in other regions of the world. Similarly, countries like China, that do not implement a subsidy reform in either scenario, experience an increase in biofuel subsidies and relative price in both simulations. 3.4 | Rest of the Economy Phasingout subsidies on gasoline and diesel triggers a reduction in the demand and price for crude oil, the main input for their production. Summing over all regions phasing out subsidies, we find that in 2030 crude oil consumption shrinks by $15 billion (3%) in the first scenario and $32 billion (8%) in the second scenario. Some of this is offset by a rise in consumption in the rest of the world of $0.7 billion and $7 billion in the two scenarios, respectively, leading to a global reduction in crude oil consumption of $14 billion (0.4%) and $25 billion (0.7%), respectively. In TABLE 5 | 2030 Change in biofuel subsidies relative to baseline, in $ billion. Policy scenario 1 (PreT_FFSR) Policy scenario 2 (PosT_FFSR) FFSR reg RoW World EU NonEU World Biodiesel (−6.2) 0.2 (−6.1) (−5.4) 0.2 (−5.2) Bioethanol 0.01 0.4 0.4 (−1.3) 0.4 (−1.0) Total (−6.2) 0.6 (−5.6) (−6.8) 0.6 (−6.2) FIGURE 2 | Scenario 2 (“PosT_FFSR”) 2030 changes in EU biofuels subsidies relative to baseline, in $. *Biodiesel from all sources. 17571707, 2025, 2, Downloaded from https://onlinelibrary.wiley.com/doi/10.1111/gcbb.70019, Wiley Online Library on [07/08/2025]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
8 of 14 GCB Bioenergy, 2025 turn, consumption of petroleum and coke products, which are produced using the now cheaper crude oil, increases in and out of the reform area. This forward linkage is simulated in 2030 at $20 billion (0.8%) globally in the first scenario and at $54 billion (2.3%) in the second. In comparison, driven by COVID19 restrictions, the final consumption of oil and petroleum products for energy purposes in the EU fell by 10% in 2020 (Eurostat2022). Backward and forward linkages are also observed in the agricultural sector where the price and demand for biofuel feedstocks tend to decline together with the consumption of the biofuels. In scenario 1, this is especially evident for the palm oil sector whose consumption drops by $1.6 billion in the Malaysia and Indonesia region. In scenario 2, the EU region notably decreases its demand for rapeseed oil and wheat/corn which in the region are the main feedstocks in the production of biodiesel and bioethanol. As consumption of oil seeds and grain for biofuel production shrinks, the supply of byproducts contracts, and their prices increase by up to 8% in 2030 in the EU regions which puts upward pressure on the price of the livestock sectors (Table6). These linkages have a bearing on the reforms' overall impact on fiscal revenue. Not only does the decreasing consumption of gasoline and diesel erode fiscal revenue from the preexisting taxes but changes in the consumption of other energy commodities as well as of commodities in other sectors impact government revenues. Considering all changes in preexisting tax revenues and avoided spending on subsidies, we simulate overall fiscal revenue to increase in both scenarios where the subsidies are phased out as well as in the rest of the world. Where the FFSRs are implemented we find that government revenue increases by 1.9% and 1.2% in scenarios 1 and 2, respectively. Figure3 breaks down the source of the increase in fiscal revenue where the subsidies are phased out. Most of the increase in fiscal revenue in regions implementing the reforms is found to be the result of avoided spending on fossil fuel subsidies. Overall, however, government revenue in these regions also increases by 0.37% and 0.14% from avoided spending on biofuel support in scenarios 1 and 2, respectively. This corresponds to the increase in government revenue being 25% and 17% higher when the impact of fossil fuel subsidy reform on biofuel supports is considered as part of the changing government budget. We note that while revenue from preexisting tax shrinks in scenario 2, it does not do so in a visible manner in scenario 1. This is the result of preexisting taxes on gasoline and diesel in regions with pretax fossil fuel subsidies being relatively small, especially compared to the ones in the EU. Change to 2030 GDP remains below 1% in all scenarios and regions (Table7). That being said, regions phasing out subsidies tend to experience a drop in their GDP. The effect is especially pronounced in scenario 2 for the EU which phases out relatively TABLE 6 | Scenario 2 (“PosT_FFSR”) 2030 rapeseed (oil) and byproducts consumption change in the EU relative to the baseline. Central EU Germany Eastern EU Mediterranean NorthWestern EU Rapeseed Price (−0.1%) (−0.3%) (−0.3%) (−0.1%) (−0.2%) Quantity (−9.8%) (−7.8%) (−5.7%) (−6.0%) (−6.5%) Rapeseed oil Price (−1.7%) (−3.4%) (−1.1%) (−2.2%) (−1.6%) Quantity (−9.0%) (−23.0%) (−1.9%) (−5.1%) (−1.1%) Rapeseed meal Price 8.4% 6.7% 4.8% 4.9% 4.8% Quantity (−13.0%) (−10.9%) (−8.1%) (−7.8%) (−7.3%) FIGURE 3 | Composition of the change in fiscal revenue where the subsidies are phased out, in 2030. 17571707, 2025, 2, Downloaded from https://onlinelibrary.wiley.com/doi/10.1111/gcbb.70019, Wiley Online Library on [07/08/2025]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License