Crude – energy crops nexus in light of biofuel policies: An empirical investigation from India

• Published date: 01 June 2022
• Author: Rakesh Shahani,Anishka Taneja,Anusha Goel
• Date: 01 June 2022
• DOI: http://doi.org/10.1111/opec.12224

Crude –energy crops nexus in light of

biofuel policies: An empirical investigation

from India

Rakesh Shahani*, Anishka Taneja* and Anusha Goel**

*Department of Business Economics, Dr. Bhim Rao Ambedkar College, University of Delhi, New Delhi,

India. Email: rakesh.shahani@bramb.du.ac.inrakesh.shahani@gmail.com Email:

anishkataneja.26@gmail.com

**Department of Commerce, Delhi School of Economics, University of Delhi, New Delhi, India. Email:

anusha.goel92@gmail.com

Abstract

The present study makes an attempt to empirically investigate the impact of crude prices on energy

crops for India (wheat, sugarcane and soybean) during the period Jan 2016–Dec 2020 by taking

daily closing spot prices of these energy crops and crude. The models applied to study the relation

are autoregressive distributed lag (ARDL) (for linear) and NARDL (for non-Linear) variables. The

study results proved the existence of long-run co-integration for wheat (ARDL) and crude and

soybean (NARDL). Further, it was also seen that crude was the only variable impacting wheat both

in the short and long run. However, co-integration for sugarcane was not proven by the study.

The adjustment towards equilibrium from short-run dis-equilibrium was rather slow for wheat

(ARDL) and crude (NARDL), both at 0.5 per cent per period while it was at 12per cent per period

for soybean. The short-run causality tests showed causality moving from crude to wheat. The

above results do give an indication that there is a long-term co-integration among crude and two

energy crops, namely, soybean and wheat, however, these results were not proved for the main

crop; sugarcane. Now since the thrust of the government lies on sugarcane to meet its biofuel

targets and co-integration is not being proved under the present study for this crop, it may be

concluded that the initial impact of the National Policy on Biofuels is not clearly visible from the

results of the study.

1. Introduction

The crude –energy crops nexus got worldwide attention after US Energy Policy laid

down its first renewable fuels standard in 2005 (Bevill, 2008) which aimed at providing

support to the cultivation of biofuels or the energy crops. According to a World Bank

study, there was a steep rise in world food prices from 2002 till 2008 due to large-scale

production of biofuels

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especially in the United States and across Europe. The

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139

production of biofuels in these economies was supported by subsidies and lower tariffs.

The study also found that there was a large-scale shift in land use from other agricultural

crops to energy crops (Mitchell, 2008).

There have been worldwide concerns about shifting of grasslands for biofuel crops

like corn and also razing ancient tropical forests to make way for palm plantations. Thus,

the major concerns due to large-scale production of biofuels were twofold, first, the

prices of food grains started rising steeply, and the second rise in biofuel production

posed the risks of diverting farmlands for the cultivation of energy crops thereby

resulting in a shortage of staple food grains across nations. Economists and

environmentalists now consider big land-use changes from food to bio-fuel as one of

the reasons for climate change and also the loss of natural habitat and wildlife

biodiversity.

Besides the above problem, there was the high use of fertilizers for these energy

crops which not only neutralized the benefit of greenhouse gas reduction occurring due

to biofuels but also resulted in increased costs of transportation. Further, converting the

energy crops to biofuels also resulted in additional emissions of greenhouse gases

thereby challenging the entire concept of renewable fuels (www.wikipedia.com).

Researchers too have proved empirically that the prominent reason for the food crisis

in 2006 was a favourable government policy for biofuels promotion (Nazlioglu, 2011).

According to Avalos and Lombardi (2015), the direct price impact on energy crops

started when some of the developed economies started subsidizing the prices of ethanol

and bio-diesel as an environmentally-friendly measure. On the other hand, although the

subsidies given by governments did reduce the production costs of biofuels, this

however could not actually translate into the reduction in the final price of biofuels. The

reason was clear since the price of crude was high, the demand for biofuels (a substitute)

also remained high which resulted in the prices of biofuels remaining quite close to crude

prices.

As far as India’s position on biofuels is concerned, the country’s interest was initially

seen in the year 2008 when the government launched its National Biofuel Policy (NBP)

which laid down the targets of a mix of 20 per cent ethanol in petrol and 20 per cent

biodiesel in diesel by 2017. (Government of India, 2009). However, the country could

achieve only 10 per cent of its targets by2017, and the reasons for this poor achievement

were that the investment requirement was quite substantial which was simply

unsustainable, and also poor availability of biomass for ethanol production. The

government then revised its policy targets in 2018 by forming a NPB and laid down the

same target of 20 per cent to be achieved by 2030. This target was later advanced by

5 years to 2025 by Niti Aayog Committee (Sarwal et al., 2021). It is important to note

that the biofuel policies in India have not resulted in any significant impact in terms of

diverting farmlands for the cultivation of energy crops as seen in some of the developed

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140 Rakesh Shahani, Anishka Taneja and Anusha Goel

countries. Another important point is that although India’s policy has a focus on

advanced biofuels, that is, biofuel generation from Jatropha and other agricultural wastes

and crop residues, however, this has been a non-starter owing to the requirement of

advanced technology requiring huge investments by bio-refineries. The country has

taken some steps like prohibiting the import and export of biofuels, making domestically

produced biodiesel tax-exempt, and so on, however, these steps could not make much of

an impact and experts felt the need to give additional incentives to boost the morale of

the industry.

Coming back to the nexus between crude prices and energy crops, this also became

an interesting empirical research area that attracted a lot of researchers where they tried

to explore this relationship from an economic and analytical angle. Some of the

prominent studies which could find evidence of a relationship between the crude prices

and prices of energy crops include studies by Mitchell (2008), Zafeiriou et al.(2018),

Bakhat and W¨

urzburg (2013), Rafiq and Bloch (2016) and others. On the other hand,

there are also studies that could not find any significant relation between crude and agro-

based energy products and these include studies by Shahani et al.(2020), Fowowe

(2016), Abdul-Rahim and Zariyawati (2011), Nazlioglu and Soytas (2011), Cashin and

McDermott (2001), Cabrera and Schulz (2016) and others. A deeper analysis of some of

these past empirical studies is given in tabular format in the next section, that is, a review

of the literature.

Speaking of the present study, an attempt has been made to empirically investigate

the impact of crude prices on energy crops for India during the period Jan 2016–Dec

2020. Apart from crude (INR per barrel), the biofuels which have been considered in the

present study include soybean (INR per metric ton), wheat (INR per metric ton) and

sugarcane (INR per Kg). The daily closing spot prices of these energy crops and also the

crude prices have been taken from Multi Commodity Exchange (www.mcxindia.com).

The period of the study also includes a single structural break and since the period of

study also includes the Covid-19 period, the study would try to determine whether the

break date falls under the Covid 19 period or not.

The need for the current study stems from the desire to investigate in a

comprehensive manner, the crude-energy crops relation for India which has become

very important due to the recent steps taken by the Government to promote biofuel in the

country. The seriousness of the government can be judged from the fact that all the

targets pertaining to biofuels, that is, mixing 20per cent ethanol in petrol and 20 per cent

biodiesel in diesel have been advanced by 5 years, that is, from originally 2030 to 2025

(Sarwal et al., 2021).

The rest of the paper is structured as follows: Section 2 reviews the existing literature

in the area of linkages between crude and energy crops. Section 3 gives the distribution

characteristics of our variables. Section 4 gives the methodology employed along with

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