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Toward an optimal U.S. ethanol fuel subsidy

  • Vedenov, Dmitry
  • Wetzstein, Michael
Registered author(s):

    Enhanced environmental quality, fuel security, and economic development along with reduced prices of ethanol-gasoline blends are often used as justifications for the U.S. federal excise tax exemption on ethanol fuels. However, the possible effect of increased overall consumption of fuel in response to lower total price, mitigating the environmental and fuel security benefits, are generally not considered. Taking this price response into account, the optimal U.S. ethanol subsidy is derived. Estimated values of the optimal subsidy reveal that the subsidy's environmental and security benefits are questionable. However, positive environmental and security benefits from the ethanol tax-exemption subsidy may be obtained if the subsidy is combined with an increase in the excise tax on gasoline.

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    File URL: http://www.sciencedirect.com/science/article/B6V7G-4NBXVJF-1/2/61686520b0498e620d43aee50ac8441f
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    Article provided by Elsevier in its journal Energy Economics.

    Volume (Year): 30 (2008)
    Issue (Month): 5 (September)
    Pages: 2073-2090

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    Handle: RePEc:eee:eneeco:v:30:y:2008:i:5:p:2073-2090
    Contact details of provider: Web page: http://www.elsevier.com/locate/eneco

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    1. Gallagher, Paul W. & Shapouri, Hosein & Price, Jeffrey, 2006. "Welfare maximization, pricing, and allocation with a product performance or environmental quality standard: Illustration for the gasoline and additives market," International Journal of Production Economics, Elsevier, vol. 101(2), pages 230-245, June.
    2. Parry, Ian & Small, Kenneth, 2002. "Does Britain or the United States Have the Right Gasoline Tax?," Discussion Papers dp-02-12-, Resources For the Future.
    3. J. Daniel Khazzoom, 1997. "Impact of Pay-at-the-Pump on Safety Through Enhanced Vehicle Fuel Efficiency," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 103-133.
    4. Kevin N. Rask, 2004. "Ethanol Subsidies and the Highway Trust Fund," Journal of Transport Economics and Policy, London School of Economics and University of Bath, vol. 38(1), pages 29-43, January.
    5. Gallagher, Paul W. & Shapouri, Hosein & Price, Jeffrey & Schamel, Guenter & Brubaker, Heather, 2003. "Some Long-Run Effects of Growing Markets and Renewable Fuel Standards on Additives Markets and the U.S. Ethanol Industry," Staff General Research Papers 10648, Iowa State University, Department of Economics.
    6. Rask, Kevin N., 1998. "Clean air and renewable fuels: the market for fuel ethanol in the US from 1984 to 1993," Energy Economics, Elsevier, vol. 20(3), pages 325-345, June.
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