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.

Keywords

• computable general equilibrium
• biofuel
• subsidy
• energy crops
• investment