How Does The Price Transmission Mechanism Affect The Market Equilibriums On The Industry Chain Of Ethanol?

In order to reduce dependence on oil and promote carbon emission reduction,China had implemented a fuel ethanol expansion plan since 2017.But the implementation process was not smooth,so that the government announced a postponement of the plan at the end of 2019,when the target was less than half completed.Although the ethanol industry has been developing for almost 20 years in China,it has never formed a large enough scale to cover the whole country.This paper is written to find out why the promotion of ethanol was hindered and to help the policy be advanced,And it also helps to enrich the research of China ethanol industry since 2017.This paper tells the global development history of ethanol,summarizes its advantages and disadvantages,and discusses what constrained the development and promotion of ethanol in China,and hold the view that the fundamental factor is insufficient supply of raw materials,and the direct factor is that the price transmission mechanism is not smooth.The article sets up three equilibrium models under the assumptions of different price transmission mechanisms,which correspond to the ideal state where price transmission is basically completely unimpeded,the current actual situation,and the past situation in China.The equilibrium results of the three situations are compared to verify and quantify The results of qualitative analysis.When there is an exogenous demand for ethanol caused by policy,it is possible for the price transmission mechanism to get through.Among the three scenarios discussed in this article,the first is the situation where the price transmission is basically completely unimpeded.At this time,the exogenous policy makes the price transmission from corn to ethanol smooth,and it is assumed that China will greatly reduce crude oil import demand due to the substitution of a large amount of gasoline,so the oil prices will decline.The second scenario is that the price transmission of corn to ethanol is still smooth,but domestic gasoline cannot affect the price of international oil.At this time,the price transmission from corn to ethanol is still smooth because of the exogenous policy,but it is assumed that China will not decrease the import demand of oil,which means,the international oil price is determined exogenously.The third scenario is that the transmission path of corn to ethanol price is unsmooth,but the transmission path of domestic gasoline to international crude oil price is unimpeded,that is,there is no exogenous consumption target,and the pricing of ethanol is not in the market.However,the international crude oil price is an endogenous variable.The results show that,first of all,with the existing corn supply capacity,the development of ethanol will inevitably cause corn prices to rise and corn demand for food and feed to decline in all cases;the more ethanol production is,the greater increases occur in corn prices and food demand;when E10 covered the whole country,consumer prices of corn will rise by 37.8%,and demand for food and feed will fall by 2.27%,whether the price of crude oil is exogenous or not;when there is no policy target of E10,the ethanol is not priced by the market,the ethanol is non-market-oriented pricing,which is similar to the situation when the production subsidy policy was implemented in 2002;with the subsidy increasing to 500 yuan/ton,the output of fuel ethanol increases by 84.93%,the consumer price of corn will increase by 9.83%,and the demand for food will drop by 0.59%.Secondly,with the policy target of ethanol,oil price fluctuations will affect only the gasoline and petroleum by-product markets but the ethanol market and corn market.However,if domestic gasoline prices cannot affect imported oil price,that is,oil price is exogenous,refineries’ financial condition will be worsen and it will be very difficult to promote the ethanol,because in this case,to make E10 cover the whole country,the price of blended fuel will drop significantly(11.17%),while the import oil cost remains unchanged,but when crude oil prices are endogenous,the price of blended fuel will drop even less(6.09%),and the oil import cost will decline by 4.6%.Third,if there is no policy target of ethanol,ethanol producers cannot pass on the high raw material costs to the refineries,which will limit their expansion,and the support effect of subsidy policy to them is weak;when production subsidies are increased to 500,1,000 and 1,500 yuan/ton,respectively,ethanol production will increase by 84.93%,169.95%,and 255.06%,respectively,which is much smaller than that when the price transmission is almost totally smooth.Therefore,it is necessary for China to improve corn supply capacity,so that the corn price will rise not so sharply while expanding the scale of the ethanol industry;what’s more,policy is must to help the price transmission mechanism smooth in China.