Abstract
This chapter evaluates the welfare and greenhouse-gas effects of the Renewable Fuel Standard (RFS) in the presence of biofuel subsidies. In our numerical model, demand for gasoline and ethanol stems from consumer demand for driving miles, but all fuels have congestion and environmental external costs. Our estimates of the effects of ethanol mandates on greenhouse gases and social welfare (relative to the status quo) are sensitive to assumptions about the gasoline supply elasticity. The impact of the mandate, by itself, on greenhouse gas emissions ranges from −0.5 to −5% relative to the status quo and is reduced when the mandate is accompanied by a tax credit. The welfare costs of the mandate relative to the socially optimal policy range from $60 B to $115 B depending on the elasticity of gasoline supply. The provision of a tax credit in addition to the mandate leads to additional deadweight losses that range from $1.1 to $12 billion. An ethanol mandate policy provides assured demand for ethanol and therefore supports the domestic ethanol industry, particularly the cellulosic biofuel industry. However, such policy may harm the well-being of the country as a whole, even relative to the ethanol support policy that was in place before the current mandate was passed.
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Notes
- 1.
Rajagopal et al. (2007) estimate that the provision of ethanol in the United States lowered the domestic price of gasoline by 3%.
- 2.
The administering agency, EPA, has the authority to alter the quantity mandates if there is inadequate domestic ethanol supply or if the mandates would yield serious environmental damage; however, even under heavy political pressure from the livestock industry in 2008, the EPA declined to alter the mandate.
- 3.
This discussion is based on background information from http://www.epa.gov/otaq/renewablefuels/index.htm, U.S. EPA (2007), and Beveridge and Diamond, New RFS Program Requirements, accessed at http://www.bdlaw.com/news-202.html [5/2008].
- 4.
The level of miles at which the RFS is not binding may be extremely high or may not exist at all because the mandate fixes not only the overall quantity of ethanol but also the individual quantities of corn and cellulosic ethanol. However, there is likely to be some level of miles above which the policy is not binding, and \({\bar{M}}\) should be interpreted as such.
- 5.
However, we are careful in our numerical simulations to check that our scenarios have not strayed from a range where the mandate is binding; if that were to happen, we would permit the market to choose optimal quantities of ethanol that exceed the quantities in the mandate.
- 6.
- 7.
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Ando, A.W., Khanna, M., Taheripour, F. (2010). Market and Social Welfare Effects of the Renewable Fuels Standard. In: Khanna, M., Scheffran, J., Zilberman, D. (eds) Handbook of Bioenergy Economics and Policy. Natural Resource Management and Policy, vol 33. Springer, New York, NY. https://doi.org/10.1007/978-1-4419-0369-3_14
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