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Greenhouse Gas Reductions under Low Carbon Fuel Standards?

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  • Holland, Stephen P
  • Knittel, Christopher R
  • Hughes, Jonathan E.

Abstract

A low carbon fuel standard (LCFS) seeks to reduce greenhouse gas emissions by capping an industry’s carbon emissions per unit of output. California has launched an LCFS for automotive fuels; others have called for a national LCFS. We show that this policy causes production of high-carbon fuels to decrease but production of low-carbon fuels to increase. The net effect of this may be an increase in carbon emissions. The LCFS may also reduce welfare, and the best LCFS may be no LCFS. We simulate the outcomes of a national LCFS, focusing on gasoline and ethanol as the high- and low-carbon fuels. For a broad range of parameters, we find that the LCFS is unlikely to increase CO2 emissions. However, the surplus losses from the LCFS are quite large ($80 to $760 billion annually for a national LCFS reducing carbon intensities by 10 percent), and the average carbon cost ($307 to $2,272 per ton of CO2 for the same LCFS) can be much larger than damage estimates. We propose an efficient policy that achieves the same emissions reduction at a much lower surplus cost ($16 to $290 billion) and much lower average carbon cost ($60 to $868 per ton of CO2).

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Paper provided by Institute of Transportation Studies, UC Davis in its series Institute of Transportation Studies, Working Paper Series with number qt0177r7xp.

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Date of creation: 01 Jan 2008
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Handle: RePEc:cdl:itsdav:qt0177r7xp

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  1. Dahl, Carol & Duggan, Thomas E., 1996. "U.S. energy product supply elasticities: A survey and application to the U.S. oil market," Resource and Energy Economics, Elsevier, vol. 18(3), pages 243-263, October.
  2. Helfand, Gloria E, 1991. "Standards versus Standards: The Effects of Different Pollution Restrictions," American Economic Review, American Economic Association, vol. 81(3), pages 622-34, June.
  3. Farrell, Alexander E. & Sperling, Dan, 2007. "A Low-Carbon Fuel Standard for California, Part 1: Technical Analysis," Institute of Transportation Studies, Working Paper Series qt6j67z9w6, Institute of Transportation Studies, UC Davis.
  4. Espey, Molly, 1998. "Gasoline demand revisited: an international meta-analysis of elasticities," Energy Economics, Elsevier, vol. 20(3), pages 273-295, June.
  5. Christopher Knittel & Daniel Sperling, 2006. "Evidence of a Shift in the Short-Run Price Elasticity of Gasoline Demand," Working Papers 625, University of California, Davis, Department of Economics.
  6. Buchanan, James M, 1969. "External Diseconomies, Corrective Taxes, and Market Structure," American Economic Review, American Economic Association, vol. 59(1), pages 174-77, March.
  7. J. Daniel Khazzoom, 1980. "Economic Implications of Mandated Efficiency in Standards for Household Appliances," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 21-40.
  8. Aaron S. Edlin & Pinar Karaca-Mandic, 2006. "The Accident Externality from Driving," Journal of Political Economy, University of Chicago Press, vol. 114(5), pages 931-955, October.
  9. Paul R. Portney & Ian W.H. Parry & Howard K. Gruenspecht & Winston Harrington, 2003. "Policy Watch: The Economics of Fuel Economy Standards," Journal of Economic Perspectives, American Economic Association, vol. 17(4), pages 203-217, Fall.
  10. Pizer, William, 2005. "The Case for Intensity Targets," Discussion Papers dp-05-02, Resources For the Future.
  11. Farrell, Alexander & Sperling, Daniel, 2007. "A Low-Carbon Fuel Standard for California, Part 1: Technical Analysis," Institute of Transportation Studies, Working Paper Series qt5245b5kx, Institute of Transportation Studies, UC Davis.
  12. Farrell, Alexander E. & Sperling, Daniel & Arons, S.M. & Brandt, A.R. & Delucchi, M.A. & Eggert, A. & Farrell, A.E. & Haya, B.K. & Hughes, J. & Jenkins, B.M. & Jones, A.D. & Kammen, D.M. & Kaffka, S.R, 2007. "A Low-Carbon Fuel Standard for California Part 1: Technical Analysis," Institute of Transportation Studies, Research Reports, Working Papers, Proceedings qt8zm8d3wj, Institute of Transportation Studies, UC Berkeley.
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