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Greenhouse Gas Reductions under Low Carbon Fuel Standards?

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Author Info
Stephen P. Holland
Christopher R. Knittel
Jonathan E. Hughes

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Abstract

A low carbon fuel standard (LCFS) seeks to reduce greenhouse gas emissions by limiting a fuel producer's carbon emissions per unit of output. California has launched an LCFS for transportation fuels; others have called for a national LCFS. We show that this policy decreases production of high-carbon fuels but increases production of low-carbon fuels. The net effect of this may be an increase in carbon emissions. The LCFS cannot be first best, and the best LCFS may reduce social welfare. 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 likely to be quite large ($80 to $760 billion annually for a national LCFS reducing carbon intensities by 10 percent), energy prices are likely to increase, 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 describe 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 National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13266.

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Date of creation: Jul 2007
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Handle: RePEc:nbr:nberwo:13266

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Find related papers by JEL classification:
H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
L71 - Industrial Organization - - Industry Studies: Primary Products and Construction - - - Mining, Extraction, and Refining: Hydrocarbon Fuels
L91 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Transportation: General
Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources
Q52 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Pollution Control Costs; Distributional Effects; Employment Effects
Q53 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Air Pollution; Water Pollution; Noise; Hazardous Waste; Solid Waste; Recycling
Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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  1. Paul R. Portney et al., 2003. "Policy Watch: The Economics of Fuel Economy Standards," Journal of Economic Perspectives, American Economic Association, vol. 17(4), pages 203-217, Fall. [Downloadable!] (restricted)
  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. [Downloadable!] (restricted)
  3. Jonathan E. Hughes & Christopher R. Knittel & Daniel Sperling, 2006. "Evidence of a Shift in the Short-Run Price Elasticity of Gasoline Demand," NBER Working Papers 12530, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. Pizer, William, 2005. "The Case for Intensity Targets," Discussion Papers dp-05-02, Resources For the Future. [Downloadable!]
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Cited by:
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  1. James Bushnell & Carla Peterman & Catherine Wolfram, 2007. "Local Solutions to Global Problems: Policy Choice and Regulatory Jurisdiction," NBER Working Papers 13472, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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