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Comparison of fixed versus variable biofuels incentives

  • Tyner, Wallace E.
  • Taheripour, Farzad
  • Perkis, David
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    We evaluated several variants of a variable biofuel subsidy and compared them with the fixed subsidy and Renewable Fuel Standard using two different modeling approaches. First we used a partial equilibrium model encompassing crude oil, gasoline, ethanol, corn, and ethanol by-products. Second, we used a stochastic simulation model of a prototypical ethanol plant. From the partial equilibrium analysis, it appears the variable subsidy provides a safety net for ethanol producers when oil prices are low; yet, it does not put undue pressure on corn prices when oil prices are high. At high oil prices, the level of ethanol production is driven by market forces. From the plant level stochastic analysis, essentially the same conclusions are reached. As with the fixed subsidy, the variable subsidy can increase the net present value (NPV) sufficiently to encourage investment, but with lower risk for the producer, lower probability of a loss from the investment, and often lower expected cost to government. Finally, in the US, the ethanol industry is up against a blending limit called the blend wall. If the blending wall remains in place and no way around it is found, it does not matter much what other policy options are used.

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    File URL: http://www.sciencedirect.com/science/article/B6V2W-506YX5G-1/2/0f567ff4d43368e3c8275fa8e08f19fe
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    Article provided by Elsevier in its journal Energy Policy.

    Volume (Year): 38 (2010)
    Issue (Month): 10 (October)
    Pages: 5530-5540

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    Handle: RePEc:eee:enepol:v:38:y:2010:i:10:p:5530-5540
    Contact details of provider: Web page: http://www.elsevier.com/locate/enpol

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    1. 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.
    2. Wallace E. Tyner & Farzad Taheripour, 2007. "Renewable Energy Policy Alternatives for the Future," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 89(5), pages 1303-1310.
    3. Tyner, Wallace E. & Taheripour, Farzad, 2008. "Policy analysis for integrated energy and agricultural markets in a partial equilibrium framework," Transition to a Bio Economy Conferences, Integration of Agricultural and Energy Systems Conference, February 12-13, 2008, Atlanta, Georgia 48712, Farm Foundation.
    4. Tyner, Wallace E. & Quear, Justin, 2006. "Comparison of a Fixed and Variable Corn Ethanol Subsidy," Choices, Agricultural and Applied Economics Association, vol. 21(3).
    5. Taheripour, Farzad & Tyner, Wallace E., 2008. "Ethanol Policy Analysis - What Have We Learned So Far?," Choices, Agricultural and Applied Economics Association, vol. 23(3).
    6. Tyner Wallace E., 2007. "Policy Alternatives for the Future Biofuels Industry," Journal of Agricultural & Food Industrial Organization, De Gruyter, vol. 5(2), pages 1-13, December.
    7. Tyner Wallace & Taheripour Farzad, 2008. "Biofuels, Policy Options, and Their Implications: Analyses Using Partial and General Equilibrium Approaches," Journal of Agricultural & Food Industrial Organization, De Gruyter, vol. 6(2), pages 1-19, December.
    8. Thaeripour, Farzad & Tyner, Wallace E., 2007. "Ethanol subsidies, Who gets the benefits?," Biofuels, Food and Feed Tradeoffs, Biofuels, Food and Feed Tradeoffs Conference, April 12-13, 2007, St, Louis, Missouri 48776, Farm Foundation.
    9. Wallace E. Tyner & Farzad Taheripour, 2008. "Policy Options for Integrated Energy and Agricultural Markets ," Review of Agricultural Economics, Agricultural and Applied Economics Association, vol. 30(3), pages 387-396.
    10. Lihong Lu McPhail & Bruce A. Babcock, 2008. "Short-Run Price and Welfare Impacts of Federal Ethanol Policies," Center for Agricultural and Rural Development (CARD) Publications 08-wp468, Center for Agricultural and Rural Development (CARD) at Iowa State University.
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