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Abstract

This paper examines the biofuel industry in Canada and US from a trade perspective. The development of a large market for biofuel is judged to have two main benefits for North America: a reduction of Greenhouse Gas Emissions (GHG) for Canada, while the U.S. is interested in reducing the dependence on imported oil from economically and politically volatile areas. A theoretical model is developed using option value theory to determine whether the same governmental policy (subsidization) can lead to different levels of optimal subsidies in each country, where the subsidy policy is driven by two distinct motivating factors: energy security and environmental commitments. Note that if the level of subsidies for the development of biofuels industry in the two countries differs considerably, the likelihood of a trade dispute arising increases.

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