Impact of agricultural and energy prices on the biofuels market through a VAR-VEC model

This study uses a Vector Autoregression - Error Correction Model to examine the price dynamics of Fatty Acid Methyl Ester (FAME) in the Portuguese market. The importance of this research is that failure to meet the targets of the Renewable Energy Directive jeopardizes Portugal's efforts to improve the sustainability of the transport sector. The results suggest that FAME prices are susceptible to fluctuations in agricultural commodities, ethanol, and fossil fuels, particularly diesel. Specifically for soy, FAME prices did not return to baseline levels by the end of the period, indicating a persistent impact. The volatility of FAME prices in response to ethanol and agricultural commodity prices underscores the need for strategic interventions to optimize these relationships. In the case of ethanol, this correlation could be strengthened, while in the case of agricultural commodities, feedstock diversification is essential to decouple FAME from first-generation biofuel sources and avoid competition with food crops. Moreover, biodiesel FAME, which serves as substitute and a complement to diesel, has a price sensitivity to changes in diesel prices. Policies and incentives to diversify feedstocks and promote advanced biofuels are essential for maintaining FAME's competitiveness and mitigating diesel price impacts.