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Welfare Impacts of Alternative Biofuel and Energy Policies

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  • Cui, Jingbo
  • Lapan, Harvey E.
  • Moschini, GianCarlo
  • Cooper, Joseph

Abstract

We employ an open economy general equilibrium model to investigate the effects of government energy policy, with an emphasis on corn-based ethanol, on the U.S. economy. The model specification incorporates world and domestic markets, assumes pollution costs from fuel consumption, and allows endogenous determination of equilibrium quantities and prices for oil, corn and ethanol. The model is calibrated to represent a recent benchmark data set for 2009 and is used to simulate the positive and normative effects of alternative policies. We find that a second best policy of a fuel tax and ethanol subsidy approximates fairly closely the welfare gains associated with the first-best policy of an optimal carbon tax and tariffs on traded goods. The largest economic gains to the U.S. economy from these energy policies arise from the impact of the policies on U.S. terms of trade, particularly in the oil market. We also find that, conditional on the current fuel tax, an optimal ethanol mandate is superior to an optimal ethanol subsidy. In the benchmark case, the optimal ethanol mandate is about 18 billion gallons.

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File URL: http://www.econ.iastate.edu/sites/default/files/publications/papers/p11618-2010-06-09.pdf
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Bibliographic Info

Paper provided by Iowa State University, Department of Economics in its series Staff General Research Papers with number 31618.

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Date of creation: 08 Jun 2010
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Publication status: Published in American Journal of Agricultural Economics, October 2011, vol. 93 no. 5, pp. 1235-1256
Handle: RePEc:isu:genres:31618

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Postal: Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070
Phone: +1 515.294.6741
Fax: +1 515.294.0221
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Web page: http://www.econ.iastate.edu
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Related research

Keywords: Biofuel policies; carbon tax; ethanol subsidy; gasoline tax; Greenhouse gas emissions; Mandates; renewable fuel standard; Second best; welfare.;

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References

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  1. Richard S. J. Tol, 2010. "The Economic Impact of Climate Change," Perspektiven der Wirtschaftspolitik, Verein für Socialpolitik, vol. 11(s1), pages 13-37, 05.
  2. Richard S. J. Tol, 2009. "The Economic Effects of Climate Change," Journal of Economic Perspectives, American Economic Association, vol. 23(2), pages 29-51, Spring.
  3. Lapan, Harvey E. & Moschini, GianCarlo, 2009. "Biofuels Policies and Welfare: Is the Stick of Mandates Better Than the Carrot of Subsidies?," Staff General Research Papers 13076, Iowa State University, Department of Economics.
  4. Harry de Gorter & David R. Just, 2007. "The Welfare Economics of a Biofuel Tax Credit and the Interaction Effects with Price Contingent Farm Subsidies," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 91(2), pages 477-488.
  5. Tol, Richard S. J., 2008. "The Social Cost of Carbon: Trends, Outliers and Catastrophes," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 2(25), pages 1-22.
  6. Elobeid, Amani E. & Tokgoz, Simla, 2007. "Removing Distortions in the U.S. Ethanol Market: What Does It Imply for the United States and Brazil?," 2007 Annual Meeting, July 29-August 1, 2007, Portland, Oregon TN 9808, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  7. Hope, C. & Newbery, D., 2006. "Calculating The Social Cost Of Carbon," Cambridge Working Papers in Economics 0749, Faculty of Economics, University of Cambridge.
  8. Hertel, Thomas & Tyner, Wally & Birur, Dileep, 2008. "Biofuels for all? Understanding the Global Impacts of Multinational Mandates," GTAP Working Papers 2809, Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University.
  9. Searchinger, Timothy & Heimlich, Ralph & Houghton, R. A. & Dong, Fengxia & Elobeid, Amani & Fabiosa, Jacinto F. & Tokgoz, Simla & Hayes, Dermot J. & Yu, Hun-Hsiang, 2008. "Use of U.S. Croplands for Biofuels Increases Greenhouse Gases Through Emissions from Land-Use Change," Staff General Research Papers 12881, Iowa State University, Department of Economics.
  10. Harry de Gorter & David R. Just, 2008. "The Economics of a Blend Mandate for Biofuels," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 91(3), pages 738-750.
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Citations

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Cited by:
  1. Janda, Karel & Kristoufek, Ladislav & Zilberman, David, 2011. "Biofuels: Review of Policies and Impacts," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt5v1112qr, Department of Agricultural & Resource Economics, UC Berkeley.
  2. Moschini, GianCarlo & Cui, Jingbo & Lapan, Harvey E., 0. "Economics of Biofuels: An Overview of Policies, Impacts and Prospects," Bio-based and Applied Economics Journal, Italian Association of Agricultural and Applied Economics (AIEAA), issue 3.
  3. Drabik, Dusan, 2011. "The Theory of Biofuel Policy and Food Grain Prices," Working Papers 126615, Cornell University, Department of Applied Economics and Management.
  4. Drabik, Dušan & de Gorter, Harry, 2013. "Emissions from Indirect Land Use Change: Do they Matter with Fuel Market Leakages?," Review of Agricultural and Applied Economics (RAAE), Faculty of Economics and Management, Slovak Agricultural University in Nitra Provider-Homepage: http://www.roaae.org & Association of Agricultural Economists in Slovakia (APES), vol. 16(2).
  5. Trujillo-Barrera, Andres & Mallory, Mindy L. & Garcia, Philip, 2012. "Volatility Spillovers in U.S. Crude Oil, Ethanol, and Corn Futures Markets," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 37(2), August.
  6. Rausser, Gordon C. & de Gorter, Harry, 2013. "US policy contributions to agricultural commodity price fluctuations, 2006.12," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
  7. Karel Janda & Ladislav Kristoufek & David Zilberman, 2011. "Modeling the Environmental and Socio-Economic Impacts of Biofuels," Working Papers IES 2011/33, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Oct 2011.
  8. Condon, Nicole & Klemick, Heather & Wolverton, Ann, 2013. "Impacts of Ethanol Policy on Corn Prices: A Review and Meta-Analysis of Recent Evidence," 2013 Annual Meeting, August 4-6, 2013, Washington, D.C. 149940, Agricultural and Applied Economics Association.
  9. Philip Abbott, 2013. "Biofuels, Binding Constraints and Agricultural Commodity Price Volatility," NBER Chapters, in: The Economics of Food Price Volatility National Bureau of Economic Research, Inc.
  10. Cooper, Kristen & de Gorter, Harry & Drabik, Dusan, 2012. "Welfare Effects of Biofuel Policies in the Presence of Fuel and Labor Taxes," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington 124763, Agricultural and Applied Economics Association.

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