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Toward an optimal U.S. ethanol fuel subsidy

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  • Vedenov, Dmitry
  • Wetzstein, Michael
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    Abstract

    Enhanced environmental quality, fuel security, and economic development along with reduced prices of ethanol-gasoline blends are often used as justifications for the U.S. federal excise tax exemption on ethanol fuels. However, the possible effect of increased overall consumption of fuel in response to lower total price, mitigating the environmental and fuel security benefits, are generally not considered. Taking this price response into account, the optimal U.S. ethanol subsidy is derived. Estimated values of the optimal subsidy reveal that the subsidy's environmental and security benefits are questionable. However, positive environmental and security benefits from the ethanol tax-exemption subsidy may be obtained if the subsidy is combined with an increase in the excise tax on gasoline.

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    Bibliographic Info

    Article provided by Elsevier in its journal Energy Economics.

    Volume (Year): 30 (2008)
    Issue (Month): 5 (September)
    Pages: 2073-2090

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    Handle: RePEc:eee:eneeco:v:30:y:2008:i:5:p:2073-2090

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    Web page: http://www.elsevier.com/locate/eneco

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    References

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    1. Rask, Kevin N., 1998. "Clean air and renewable fuels: the market for fuel ethanol in the US from 1984 to 1993," Energy Economics, Elsevier, vol. 20(3), pages 325-345, June.
    2. Ian W. H. Parry & Kenneth A. Small, 2005. "Does Britain or the United States Have the Right Gasoline Tax?," American Economic Review, American Economic Association, vol. 95(4), pages 1276-1289, September.
    3. Gallagher, Paul W. & Shapouri, Hosein & Price, Jeffrey & Schamel, Guenter & Brubaker, Heather, 2003. "Some Long-Run Effects of Growing Markets and Renewable Fuel Standards on Additives Markets and the U.S. Ethanol Industry," Staff General Research Papers 10648, Iowa State University, Department of Economics.
    4. Gallagher, Paul W. & Shapouri, Hosein & Price, Jeffrey, 2006. "Welfare maximization, pricing, and allocation with a product performance or environmental quality standard: Illustration for the gasoline and additives market," International Journal of Production Economics, Elsevier, vol. 101(2), pages 230-245, June.
    5. J. Daniel Khazzoom, 1997. "Impact of Pay-at-the-Pump on Safety Through Enhanced Vehicle Fuel Efficiency," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 103-133.
    6. Kevin N. Rask, 2004. "Ethanol Subsidies and the Highway Trust Fund," Journal of Transport Economics and Policy, London School of Economics and University of Bath, vol. 38(1), pages 29-43, January.
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    Citations

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    Cited by:
    1. Bandyopadhyay, Subhayu & Bhaumik, Sumon & Wall, Howard, 2010. "Biofuel Subsidies and International Trade," MPRA Paper 30760, University Library of Munich, Germany.
    2. Cha, Kyung Soo & Bae, Jeong Hwan, 2011. "Dynamic impacts of high oil prices on the bioethanol and feedstock markets," Energy Policy, Elsevier, vol. 39(2), pages 753-760, February.
    3. Li, Aijun & Lin, Boqiang, 2013. "Comparing climate policies to reduce carbon emissions in China," Energy Policy, Elsevier, vol. 60(C), pages 667-674.
    4. Wetzstein, M. & Wetzstein, H., 2011. "Four myths surrounding U.S. biofuels," Energy Policy, Elsevier, vol. 39(7), pages 4308-4312, July.
    5. Kalkuhl, Matthias & Edenhofer, Ottmar & Lessmann, Kai, 2013. "Renewable energy subsidies: Second-best policy or fatal aberration for mitigation?," Resource and Energy Economics, Elsevier, vol. 35(3), pages 217-234.
    6. Roberts, Matthew C., 2008. "E85 and fuel efficiency: An empirical analysis of 2007 EPA test data," Energy Policy, Elsevier, vol. 36(3), pages 1233-1235, March.
    7. Chen, Xiaoguang & Khanna, Madhu & Onal, Hayri, 2009. "The Economic Potential of Second-Generation Biofuels: Implications for Social Welfare, Land Use and Greenhouse Gas Emissions in Illinois," 2009 Annual Meeting, July 26-28, 2009, Milwaukee, Wisconsin 49484, Agricultural and Applied Economics Association.
    8. Perdiguero, Jordi & Jiménez, Juan Luis, 2011. "Sell or not sell biodiesel: Local competition and government measures," Renewable and Sustainable Energy Reviews, Elsevier, vol. 15(3), pages 1525-1532, April.
    9. repec:pra:mprapa:41490 is not listed on IDEAS
    10. Blanco, Luisa & Isenhouer, Michelle, 2010. "Powering America: The impact of ethanol production in the Corn Belt states," Energy Economics, Elsevier, vol. 32(6), pages 1228-1234, November.
    11. Amigues, Jean-Pierre & Chakravorty, Ujjayant & Lafforgue, Gilles & Moreaux, Michel, 2012. "Renewable Portfolio Standards and implicit tax-subsidy schemes: Structural differences induced by quantity and proportional mandates," TSE Working Papers 12-278, Toulouse School of Economics (TSE).
    12. Lin, Boqiang & Jiang, Zhujun, 2011. "Estimates of energy subsidies in China and impact of energy subsidy reform," Energy Economics, Elsevier, vol. 33(2), pages 273-283, March.
    13. Zhang, Zibin & Qiu, Cheng & Wetzstein, Michael, 2010. "Blend-wall economics: Relaxing US ethanol regulations can lead to increased use of fossil fuels," Energy Policy, Elsevier, vol. 38(7), pages 3426-3430, July.

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