Significant government support for biofuels has led to rapid growth in U.S. ethanol production and research to develop more advanced biofuels. In this paper we construct a general equilibrium, open economy model that captures the rationale typically invoked to justify government intervention in this setting: to alleviate the environmental impact of energy consumption and to decrease U.S. energy dependence on foreign sources. The model is used to study both the positive and normative implications of alternative policy instruments, including the subsidies and mandates specified by the 2007 Energy Independence and Security Act. From a positive perspective, we find that biofuels mandates are equivalent to a combination of fuel taxes and biofuels subsidies that are revenue neutral. From a welfare perspective, we show that biofuels mandates dominate biofuels subsidies, and that combining fuel taxes (rather than subsidies) with mandates would be welfare enhancing.
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Paper provided by Iowa State University, Department of Economics in its series Staff General Research Papers with number
13076.
Length: Date of creation: 09 Jun 2009 Date of revision: Handle: RePEc:isu:genres:13076
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Find related papers by JEL classification: F1 - International Economics - - Trade H2 - Public Economics - - Taxation, Subsidies, and Revenue Q0 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General
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