Market and Social Welfare Effects of the Renewable Fuels Standard

HANDBOOK OF BIOENERGY ECONOMICS AND POLICY, Forthcoming

28 Pages Posted: 10 Mar 2009

See all articles by Amy W. Ando

Amy W. Ando

University of Illinois at Urbana-Champaign - Department of Agricultural and Consumer Economics

Madhu Khanna

University of Illinois at Urbana-Champaign - Department of Agricultural and Consumer Economics

Farzad Taheripour

Purdue University, Department of Agricultural Economics

Date Written: March 3, 2009

Abstract

This paper 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 ranges 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.

Suggested Citation

Ando, Amy W. and Khanna, Madhu and Taheripour, Farzad, Market and Social Welfare Effects of the Renewable Fuels Standard (March 3, 2009). HANDBOOK OF BIOENERGY ECONOMICS AND POLICY, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1352662

Amy W. Ando (Contact Author)

University of Illinois at Urbana-Champaign - Department of Agricultural and Consumer Economics ( email )

326 Mumford Hall, MC-710
Urbana, IL 61801
United States
217-333-5130 (Phone)
217-333-5538 (Fax)

Madhu Khanna

University of Illinois at Urbana-Champaign - Department of Agricultural and Consumer Economics ( email )

1301 W. Gregory Drive
Urbana, IL 61801
United States
217-333-5176 (Phone)
217-333-5502 (Fax)

Farzad Taheripour

Purdue University, Department of Agricultural Economics ( email )

403 West State St.
West Lafayette, IN 47906
United States
765-494-4612 (Phone)
765-494-4210 (Fax)

HOME PAGE: http://www.agecon.purdue.edu/directory/details_new.asp?username=tfarzad

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