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Welfare impacts of alternative biofuel and energy policies

  • Cui, Jingbo
  • Lapan, Harvey E.
  • Moschini, GianCarlo
  • Cooper, Joseph C.

We employ an open economy general equilibrium model to investigate the effects of government energy policy, with emphasis on corn-based ethanol, on the U.S. economy. The model specification incorporates world and domestic markets, assumes pollution costs from fuel consumption, and allows endogenous determination of equilibrium quantities and prices for oil, corn and ethanol. The model is calibrated to represent a recent benchmark data set for 2009 and is used to simulate the positive and normative effects of alternative policies. We find that a second best policy of a fuel tax and ethanol subsidy approximates fairly closely the welfare gains associated with the first best policy (optimal carbon tax and tariffs on traded goods).The largest economic gains to the U.S. economy from these energy policies arise from the impact of policies on the U.S.’s terms of trade, particularly in the oil market. We also find that, conditional on the current fuel tax, an optimal ethanol mandate is superior to an optimal ethanol subsidy. In the benchmark case the optimal mandate slightly exceeds 15 billion gallons of ethanol.

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File URL: http://purl.umn.edu/61138
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Paper provided by Agricultural and Applied Economics Association in its series 2010 Annual Meeting, July 25-27, 2010, Denver, Colorado with number 61138.

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Date of creation: Apr 2010
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Handle: RePEc:ags:aaea10:61138
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  1. Harry de Gorter & David R. Just, 2008. "The Economics of a Blend Mandate for Biofuels," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 91(3), pages 738-750.
  2. Hertel, Thomas W. & Tyner, Wallace E. & Birur, Dileep K., 2008. "Biofuels for all? Understanding the Global Impacts of Multinational Mandates," 2008 Annual Meeting, July 27-29, 2008, Orlando, Florida 6526, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  3. Elobeid, Amani E. & Tokgoz, Simla, 2007. "Removing Distortions in the U.S. Ethanol Market: What Does It Imply for the United States and Brazil?," 2007 Annual Meeting, July 29-August 1, 2007, Portland, Oregon TN 9808, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  4. Richard S. J. Tol, 2010. "The Economic Impact of Climate Change," Perspektiven der Wirtschaftspolitik, Verein für Socialpolitik, vol. 11(s1), pages 13-37, 05.
  5. Hope, C. & Newbery, D., 2006. "Calculating The Social Cost Of Carbon," Cambridge Working Papers in Economics 0749, Faculty of Economics, University of Cambridge.
  6. Richard S.J. Tol, 2007. "The Social Cost Of Carbon: Trends, Outliers And Catastrophes," Working Papers FNU-144, Research unit Sustainability and Global Change, Hamburg University, revised Aug 2007.
  7. Searchinger, Timothy & Heimlich, Ralph & Houghton, R. A. & Dong, Fengxia & Elobeid, Amani & Fabiosa, Jacinto F. & Tokgoz, Simla & Hayes, Dermot J. & Yu, Hun-Hsiang, 2008. "Use of U.S. Croplands for Biofuels Increases Greenhouse Gases Through Emissions from Land-Use Change," Staff General Research Papers 12881, Iowa State University, Department of Economics.
  8. Harry de Gorter & David R. Just, 2007. "The Welfare Economics of a Biofuel Tax Credit and the Interaction Effects with Price Contingent Farm Subsidies," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 91(2), pages 477-488.
  9. Richard S. J. Tol, 2009. "The Economic Effects of Climate Change," Journal of Economic Perspectives, American Economic Association, vol. 23(2), pages 29-51, Spring.
  10. Lapan, Harvey E. & Moschini, GianCarlo, 2009. "Biofuels Policies and Welfare: Is the Stick of Mandates Better Than the Carrot of Subsidies?," Staff General Research Papers 13076, Iowa State University, Department of Economics.
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