Impact of policies and subsidies in agribusiness: The case of oil palm and biofuels in Colombia Carmenza Castiblanco a,b, ⁎, Alvaro Moreno c , Andrés Etter a a Departamento de Ecología y Territorio, Facultad de Estudios Ambientales y Rurales, Pontificia Universidad Javeriana, Bogotá DC, Colombia b Instituto de Estudios Ambientales, Universidad Nacional de Colombia, Bogotá DC, Colombia c Facultad de Ciencias Económicas, Universidad Nacional de Colombia, Bogotá DC, Colombia abstract article info Article history: Received 16 February 2014 Received in revised form 26 December 2014 Accepted 24 February 2015 Available online 14 April 2015 JEL classification: Q11 Q15 Q18 Q20 Q21 Q28 Keywords: Subsidies for biodiesel Blending mandates Oil palm Tax payers Social cost We analyze the economic impacts of policies supporting biodiesel production in Colombia, such as subsidies and mandates for compulsory fuel mixtures. In the major biodiesel source being palm oil, we seek to establish the impact of these policies on oil palm producer incomes, prices and production levels of crude palm oil (CPO) and biodiesel, as well as the impacts on demand for land for oil palm plantation expansion. We also calculate the so-called “deadweight costs”, to account for the social costs derived from the inefficiencies of government interventions in the biodiesel markets. The analysis is done using a partial equilibrium models for the two interrelated sectors, the production of palm oil and biodiesel, and the demand for new land needed to cope with the additional palm oil needed. The model was calibrated for 2009 to simulate for the 2010–2020 period. The results of the simulations reveal that the subsidies alone are themselves not effective tools to achieve the government objectives defined in the Biofuels Program in Colombia. Subsidies need to be complemented by increased blending mandates to ensure that palm cultivation and produc- tion of biodiesel investments are profitable enough that producers would bet on such business. Additionally, we find that producers of palm oil benefit most from subsidies in the short term; however, in the long-term it is the biodiesel entrepreneurs who will appropriate the larger share of growth revenue of the entire production chain. The social costs of the Biofuels Program are small in the short term, and represent only between 0.2% and 0.7% of the tax expenditure. However, in the long term they would become significant, and would account for around 4.1% to 6.1% of the tax payers' expense. © 2015 Elsevier B.V. All rights reserved. 1. Introduction An analysis of the economic impacts of biodiesel promotion policies is a topic that has been addressed in various countries and for different raw materials (Arndt et al., 2009; Gardner, 2007; De Gorter and Just, 2007). Generally these studies seek to make the relationships between business decisions of feedstock cultivation and industrial production of biofuels and fuel consumption explicit, with the aim of determining the effects of the various direct support instruments on the links in the production chain, as well as in other markets for agricultural inputs, food, land or fuels (Latruffe and Mouel, 2009). For example, the way in which the establishment of mandatory blending not only increases the demand for biodiesel, but also reflects in the agricultural markets, food, land and fuel. Similarly, direct subsidies or tax exemption for biodiesel can generate the conditions for biofuel production to be profitable, but may create inefficiencies and welfare costs for society, more commonly known as “deadweight losses” (Tirole, 1988). All these policy decisions have impacts on the use and conversion of land, CO 2 emissions and on the income of the different players in the sector. Such aspects need to be estimated in order to assess the benefits and costs of public policies. In recent years, significant progress has been made in refining the tools to analyze the impacts of policies promoting biofuels. Kretschmer and Peterson (2008) conducted a detailed review of the various options for economic modeling of biofuels. Among these tools, the computable general equilibrium models have been used intensively, because these models can examine the impacts of policies and exoge- nous shocks globally, taking into consideration all the interactions between the various markets and agents (Hosoe et al., 2010). In the general equilibrium model of the GTAP-E version, Woltjer et al. (2007) explicitly represents the use of cereals, vegetable oils and sugar cane as raw materials for the production of biofuels in a multi- level structure of the oil industry. This allows analyzing the policies of tax exemption and obligatory blending mandates as exogenous in- creases of the share of biofuels (Woltjer et al., 2007). Reilly and Paltsev (2008) used a computable general equilibrium model to esti- mate the global land area needed to produce the biofuels required to Energy Economics 49 (2015) 676–686 ⁎ Corresponding author at: Instituto de Estudios Ambientales (IDEA), Universidad Nacional de Colombia, Bogotá DC, Colombia. Tel.: +57 1 3165000x10572. E-mail address: ccastiblancor@unal.edu.co (C. Castiblanco). http://dx.doi.org/10.1016/j.eneco.2015.02.025 0140-9883/© 2015 Elsevier B.V. All rights reserved. Contents lists available at ScienceDirect Energy Economics journal homepage: www.elsevier.com/locate/eneco