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The Design of Renewable Fuel Mandates and Cost Containment Mechanisms

Author

Listed:
  • Gabriel E. Lade

    (Macalester College)

  • C.-Y. Cynthia Lin Lawell

    (Cornell University)

Abstract

Policies to reduce greenhouse gas emissions from transportation fuels often take the form of renewable fuel mandates rather than taxes or cap-and-trade programs. Delays in the development and deployment of new technologies when binding mandates exist for their use may lead to situations with high compliance costs. We study the effects and efficiency of two mandates, a renewable share mandate and a carbon intensity standard, with and without a cost containment mechanism. Using both a theoretical model of a regulated fuel industry and a numerical model of the U.S. fuel market, we show that cost containment mechanisms can have the benefit of both constraining compliance costs and limiting deadweight loss. According to our numerical results, an optimally set mandate alone leads to only modest gains over business as usual welfare levels. The efficiency of both policies, especially carbon intensity standards, can increase substantially when combined with a cost containment mechanism.

Suggested Citation

  • Gabriel E. Lade & C.-Y. Cynthia Lin Lawell, 2021. "The Design of Renewable Fuel Mandates and Cost Containment Mechanisms," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 79(2), pages 213-247, June.
  • Handle: RePEc:kap:enreec:v:79:y:2021:i:2:d:10.1007_s10640-021-00558-w
    DOI: 10.1007/s10640-021-00558-w
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    Cited by:

    1. Zhong, Jia & Khanna, Madhu & Chen, Xiaoguang, 2017. "Going Beyond the Blend Wall: Policy Incentives for Fuel Consumers to Supplement the Renewable Fuel Standard," 2017 Annual Meeting, July 30-August 1, Chicago, Illinois 258483, Agricultural and Applied Economics Association.
    2. Gabriel E Lade & C-Y Cynthia Lin Lawell & Aaron Smith, 2018. "Designing Climate Policy: Lessons from the Renewable Fuel Standard and the Blend Wall," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 100(2), pages 585-599.

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