An Analysis of the Effects of Government Subsidies and the Renewable Fuels Standard on the Fuel Ethanol Industry: A Structural Econometric Model
AbstractThis paper analyses the effects of the expiration of the volumetric ethanol subsidy and the implementation of the renewable fuels standard (RFS) on the U.S. fuel ethanol industry. Analyses that ignore the dynamic implications of these policies, including their effects on incumbent ethanol firms’ investment, production, and exit decisions and on potential entrants’ entry behavior, may generate incomplete estimates of the impact of the policies and misleading predictions of the future evolution of the fuel ethanol industry. In this paper, we construct a dynamic model to recover the entire cost structure of the industry including the distributions of fixed entry costs and of exit scrap values. We use the estimated parameters to evaluate 3 different types of subsidy: a volumetric production subsidy, an investment subsidy, and an entry subsidy, each with and without the RFS. Results show that the RFS is a critically important policy to support the sustainability of corn-based fuel ethanol production, and that investment subsidies and entry subsidies are more effective than production subsidies.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Agricultural and Applied Economics Association in its series 2013 Annual Meeting, August 4-6, 2013, Washington, D.C. with number 150224.
Date of creation: 2013
Date of revision:
Contact details of provider:
Postal: 555 East Wells Street, Suite 1100, Milwaukee, Wisconsin 53202
Phone: (414) 918-3190
Fax: (414) 276-3349
Web page: http://www.aaea.org
More information through EDIRC
Fuel ethanol; subsidy; renewable fuels standard; structural model; Political Economy; Research and Development/Tech Change/Emerging Technologies; Research Methods/ Statistical Methods; Resource /Energy Economics and Policy; Q16; Q42; Q48; L21;
Find related papers by JEL classification:
- Q16 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - R&D; Agricultural Technology; Biofuels; Agricultural Extension Services
- Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources
- Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
- L21 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Business Objectives of the Firm
This paper has been announced in the following NEP Reports:
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Schmit, Todd M. & Luo, Jianchuan & Tauer, Loren W., 2008. "Ethanol Plant Investment using Net Present Value and Real Options Analyses," Working Papers 51145, Cornell University, Department of Applied Economics and Management.
- Stephen P. Ryan, 2012.
"The Costs of Environmental Regulation in a Concentrated Industry,"
Econometric Society, vol. 80(3), pages 1019-1061, 05.
- Stephen Ryan, 2005. "The Costs of Environmental Regulation in a Concentrated Industry," Working Papers 0510, Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research.
- Stephen Ryan, 2006. "The Costs of Environmental Regulation in a Concentrated Industry," 2006 Meeting Papers 9, Society for Economic Dynamics.
- Pierre-André Jouvet & Elodie Lecadre & Caroline Orset, 2011.
"Irreversible investment, uncertainty, and ambiguity: the case of bioenergy sector,"
2011/01, INRA, Economie Publique.
- Jouvet, Pierre-André & Le Cadre, Elodie & Orset, Caroline, 2012. "Irreversible investment, uncertainty, and ambiguity: The case of bioenergy sector," Energy Economics, Elsevier, vol. 34(1), pages 45-53.
- Patrick Bajari & C. Lanier Benkard & Jonathan Levin, 2004.
"Estimating Dynamic Models of Imperfect Competition,"
NBER Working Papers
10450, National Bureau of Economic Research, Inc.
- Patrick Bajari & C. Lanier Benkard & Jonathan Levin, 2007. "Estimating Dynamic Models of Imperfect Competition," Econometrica, Econometric Society, vol. 75(5), pages 1331-1370, 09.
- Bajari, Patrick & Benkard, C. Lanier & Levin, Jonathan, 2007. "Estimating Dynamic Models of Imperfect Competition," Research Papers 1852r1, Stanford University, Graduate School of Business.
- Jonathan Levin (Stanford University) & Pat Bajari & Lanier Benkard, 2004. "Estimating Dynamic Models of Imperfect Competition," Econometric Society 2004 North American Winter Meetings 627, Econometric Society.
- J. Levin & P. Bajari, 2004. "Estimating Dynamic Models of Imperfect Competition," 2004 Meeting Papers 579, Society for Economic Dynamics.
- Pierre-André Jouvet & Elodie Le Cadre & Caroline Orset, 2011. "Irreversible investment, uncertainty, and ambiguity: the case of bioenergy sector," Working Papers 1104, Chaire Economie du Climat.
- Chernozhukov, Victor & Hong, Han, 2003. "An MCMC approach to classical estimation," Journal of Econometrics, Elsevier, vol. 115(2), pages 293-346, August.
- Paul Gallagher & Guenter Schamel & Hosein Shapouri & Heather Brubaker, 2006. "The international competitiveness of the U.S. corn-ethanol industry: A comparison with sugar-ethanol processing in Brazil," Agribusiness, John Wiley & Sons, Ltd., vol. 22(1), pages 109-134.
- Schmit, T.M. & J., Luo & Conrad, J.M., 2011. "Estimating the influence of U.S. ethanol policy on plant investment decisions: A real options analysis with two stochastic variables," Energy Economics, Elsevier, vol. 33(6), pages 1194-1205.
- Anderson, Soren T., 2012.
"The demand for ethanol as a gasoline substitute,"
Journal of Environmental Economics and Management,
Elsevier, vol. 63(2), pages 151-168.
- Ericson, Richard & Pakes, Ariel, 1995. "Markov-Perfect Industry Dynamics: A Framework for Empirical Work," Review of Economic Studies, Wiley Blackwell, vol. 62(1), pages 53-82, January.
- Gonzalez, Asa O. & Karali, Berna & Wetzstein, Michael E., 2012. "A public policy aid for bioenergy investment: Case study of failed plants," Energy Policy, Elsevier, vol. 51(C), pages 465-473.
- Richardson, James W. & Lemmer, Wessel J. & Outlaw, Joe L., 2007. "Bio-ethanol Production from Wheat in the Winter Rainfall Region of South Africa: A Quantitative Risk Analysis," International Food and Agribusiness Management Review, International Food and Agribusiness Management Association (IAMA), vol. 10(02).
- Richardson, James W. & Herbst, Brian K. & Outlaw, Joe L. & Gill, Robert Chope, II, 2007. "Including Risk in Economic Feasibility Analyses: The Case of Ethanol Production in Texas," Journal of Agribusiness, Agricultural Economics Association of Georgia, vol. 25(2).
- Zubairy, Sarah, 2010. "Explaining the Effects of Government Spending Shocks," MPRA Paper 26051, University Library of Munich, Germany.
- Gallagher, Paul W. & Brubaker, Heather & Shapouri, Hosein, 2005. "Plant Size: Capital Cost Relationships in the Dry Mill Ethanol Industry," Staff General Research Papers 12306, Iowa State University, Department of Economics.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (AgEcon Search).
If references are entirely missing, you can add them using this form.