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The Renewable Fuel Standard in Competitive Equilibrium: Market and Welfare Effects

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  • GianCarlo Moschini
  • Harvey Lapan
  • Hyunseok Kim

Abstract

We construct a tractable multi-market equilibrium model designed to evaluate alternative biofuel policies. The model integrates the U.S. agricultural sector with the energy sector and it explicitly considers both U.S. ethanol and biodiesel production. The model provides a structural representation of the renewable fuel standard (RFS) policies, and it uses the arbitrage conditions defining the core value of renewable identification number prices to identify the relevant competitive equilibrium conditions. The model is parameterized, based on elasticities and technical coefficients from the literature, to represent observed 2015 data. The model is simulated to analyze alternative scenarios, including repeal of the RFS, projected 2022 RFS mandates, and optimal (second-best) mandates. The results confirm that the current RFS program considerably benefits the agriculture sector, but also leads to overall welfare gains for the United States (mostly via beneficial terms of trade effects). Implementation of projected 2022 mandates, which would require further expansion of biodiesel production, would lead to a considerable welfare loss (relative to 2015 mandate levels). Constrained (second-best) optimal mandates would entail more corn-based ethanol and less biodiesel than currently mandated.

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  • GianCarlo Moschini & Harvey Lapan & Hyunseok Kim, 2017. "The Renewable Fuel Standard in Competitive Equilibrium: Market and Welfare Effects," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 99(5), pages 1117-1142.
    • Handle: RePEc:oup:ajagec:v:99:y:2017:i:5:p:1117-1142.
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    Cited by:

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    2. Johnson, David R. & Geldner, Nathan B. & Liu, Jing & Baldos, Uris Lantz & Hertel, Thomas, 2023. "Reducing US biofuels requirements mitigates short-term impacts of global population and income growth on agricultural environmental outcomes," Energy Policy, Elsevier, vol. 175(C).
    3. Christina Korting & Harry de Gorter & David R Just, 2019. "Who Will Pay for Increasing Biofuel Mandates? Incidence of the Renewable Fuel Standard Given a Binding Blend Wall," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 101(2), pages 492-506.
    4. Iglesias Pinedo, Wilman J., 2021. "The impact of Renewable Energy Standards on the biomass supply and agricultural land demand in the US Great Plains Region," 2021 Annual Meeting, August 1-3, Austin, Texas 314085, Agricultural and Applied Economics Association.
    5. Hyunseok Kim & GianCarlo Moschini, 2018. "The Dynamics of Supply: U.S. Corn and Soybeans in the Biofuel Era," Land Economics, University of Wisconsin Press, vol. 94(4), pages 593-613.
    6. Clark Lundberg & Tristan Skolrud & Bahram Adrangi & Arjun Chatrath, 2021. "Oil Price Pass through to Agricultural Commodities†," American Journal of Agricultural Economics, John Wiley & Sons, vol. 103(2), pages 721-742, March.
    7. Gerveni, Maria & Serra, Teresa & Irwin, Scott H. & Hubbs, Todd, 2023. "Price connectedness in U.S. ethanol terminal markets," Energy Economics, Elsevier, vol. 124(C).
    8. 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.
    9. Brinkman, Marnix L.J. & Wicke, Birka & Faaij, André P.C. & van der Hilst, Floor, 2019. "Projecting socio-economic impacts of bioenergy: Current status and limitations of ex-ante quantification methods," Renewable and Sustainable Energy Reviews, Elsevier, vol. 115(C).
    10. Beaudoin, Justin & Chen, Yuan & Heres, David R. & Kheiravar, Khaled H. & Lade, Gabriel E. & Yi, Fujin & Zhang, Wei & Lin Lawell, C.-Y. Cynthia, 2018. "Environmental Policies in the Transportation Sector: Taxes, Subsidies, Mandates, Restrictions, and Investment," ISU General Staff Papers 201808150700001050, Iowa State University, Department of Economics.
    11. Nicholas J. Pates & Nathan P. Hendricks, 2021. "Fields from Afar: Evidence of Heterogeneity in United States Corn Rotational Response from Remote Sensing Data," American Journal of Agricultural Economics, John Wiley & Sons, vol. 103(5), pages 1759-1782, October.
    12. Kim, Hyunseok, 2019. "Assessing Alternative Renewable Energy Policies in Korea’s Electricity Market," KDI Journal of Economic Policy, Korea Development Institute (KDI), vol. 41(4), pages 67-99.
    13. Aui, Alvina & Wang, Yu, 2022. "Post-RFS supports for cellulosic ethanol: Evaluation of economic and environmental impacts of alternative policies," Energy Policy, Elsevier, vol. 170(C).

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    More about this item

    Keywords

    Biodiesel; biofuel policies; carbon tax; ethanol; greenhouse gas emissions; mandates; renewable fuel standard; renewable identification numbers; RINs; second-best; welfare;
    All these keywords.

    JEL classification:

    • F1 - International Economics - - Trade
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • Q2 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation

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