Linking soy oil demand from the US Renewable Fuel Standard to palm oil expansion through an analysis on vegetable oil price elasticities

Highlights: • We examine how soy and palm oils markets react to changes in prices. • We estimate own and cross price elasticities using a Two-Stage Least Square approach. • Increases in the price of soy oil have a considerable impact on imports of palm oil but a limited effect on soy oil supply. -- Abstract: The United States (US) Renewable Fuel Standard and California's Low Carbon Fuel Standard support the use of soy biodiesel and renewable diesel in the transport fuel supply for climate mitigation. However, linkages between the markets for soy oil and palm oil, which is associated with very high land use change emissions, could negatively affect the climate performance of soy-based biofuels. This study estimates the own and cross-price elasticities for the supply of soy and palm oils in the US using country-level data from 1992 to 2016 under rational expectations, through a seemingly unrelated regressions system of equations. We find a positive cross-price elasticity of palm oil import with respect to soy oil price and a positive reaction of supply of soy oil to increase in prices of palm oil. These results suggest that US biofuel policies may underestimate substitution between soy and palm oils and thus overestimate the climate benefits from soy-based biofuel.