Dynamics of biofuel prices on the European market: the impact of EU environmental policy on resources markets

Francis Declerck, Jean-Pierre Indjehagopian and Frédéric Lantz

Abstract

This paper explains the major drivers of biodiesel market prices by examining agricultural resource prices and gasoil prices for automotive fuels in the context of European Union (EU) environmental policy. EU policy has stimulated biofuel production since the early 2000s. Biodiesel prices are impacted by EU policy as well as by rapeseed and oil prices, which have fluctuated a lot over the last decade. An econometric analysis is performed using monthly data from November 2006 to January 2016, and tests for structural breaks show several changes in price behavior. This leads us to estimate a regime-switching model, which reveals two main regimes for the biodiesel price pattern. When oil prices are high, biodiesel, rapeseed and diesel oil prices are related and are mainly driven by oil prices. When oil prices are low, biodiesel prices are mostly related to rapeseed prices, a consequence of EU regulations requiring the blending of biodiesel and gasoil.