IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this paper

Policy Uncertainty under Market-Based Regulations: Evidence from the Renewable Fuel Standard

Listed author(s):
  • Lade, Gabriel
  • Lin, C.-Y. Cynthia
  • Smith, Aaron

Tradeable credits are a central component of many market-based regulations. Whenever the market for compliance credits is efficient and policies are enforced over time, credit prices should reflect both current and expected future discounted marginal compliance costs, which are a function of both expected future market conditions and policy environments. We study credit prices for a relatively recent policy, the market for Renewable Identification Numbers (RINs) under the Renewable Fuel Standard (RFS2). We provide a comprehensive study of RIN markets. Due to the dynamic nature of the program and the feature that credits can be banked and borrowed over time, we specify the first dynamic model of an industry facing a RFS2 to highlight the importance of expectations in driving current RIN prices. We then provide a test of market efficiency, and study historical cost drivers of prices. We find encouraging signs of a maturing over-the-counter market for RINs. Historically, the largest drivers of prices in the program has been policy announcements. We estimate that one particular announcement, the 2013 final rule, was responsible for between a \$10.3 and \$20.7 billion reduction in support the RFS2 provides for the US biofuel industry. The findings call into question the efficacy of using quantity based mechanisms such as the RFS2 to drive innovation and investments in new production technologies, particularly when the regulator faces a classical problem of dynamically inconsistent responses to increases in compliance costs.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://purl.umn.edu/170673
Download Restriction: no

Paper provided by Agricultural and Applied Economics Association in its series 2014 Annual Meeting, July 27-29, 2014, Minneapolis, Minnesota with number 170673.

as
in new window

Length:
Date of creation: 2014
Handle: RePEc:ags:aaea14:170673
Contact details of provider: Postal:
555 East Wells Street, Suite 1100, Milwaukee, Wisconsin 53202

Phone: (414) 918-3190
Fax: (414) 276-3349
Web page: http://www.aaea.org
Email:


More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as
in new window


  1. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 33(1), pages 125-132.
  2. Martin L. Weitzman, 1974. "Prices vs. Quantities," Review of Economic Studies, Oxford University Press, vol. 41(4), pages 477-491.
  3. Jushan Bai & Pierre Perron, 1998. "Estimating and Testing Linear Models with Multiple Structural Changes," Econometrica, Econometric Society, vol. 66(1), pages 47-78, January.
  4. Joseph P. Romano & Michael Wolf, 2005. "Stepwise Multiple Testing as Formalized Data Snooping," Econometrica, Econometric Society, vol. 73(4), pages 1237-1282, 07.
  5. Stephen P. Holland & Jonathan E. Hughes & Christopher R. Knittel & Nathan C. Parker, 2015. "Some Inconvenient Truths about Climate Change Policy: The Distributional Impacts of Transportation Policies," The Review of Economics and Statistics, MIT Press, vol. 97(5), pages 1052-1069, December.
  6. Don Fullerton & Garth Heutel, 2010. "The General Equilibrium Incidence of Environmental Mandates," American Economic Journal: Economic Policy, American Economic Association, vol. 2(3), pages 64-89, August.
  7. Bruce A. Babcock & Sebastien Pouliot, 2013. "Price It and They Will Buy: How E85 Can Break the Blend Wall," Center for Agricultural and Rural Development (CARD) Publications 13-pb11, Center for Agricultural and Rural Development (CARD) at Iowa State University.
  8. de Gorter, Harry & Just, David R. & Tan, Qinwen, 2009. "The Socially Optimal Import Tariff and Tax Credit for Ethanol with Farm Subsidies," Agricultural and Resource Economics Review, Northeastern Agricultural and Resource Economics Association, vol. 38(1), April.
  9. Montgomery, W. David, 1972. "Markets in licenses and efficient pollution control programs," Journal of Economic Theory, Elsevier, vol. 5(3), pages 395-418, December.
  10. Peter R. Hansen & Asger Lunde & James M. Nason, 2011. "The Model Confidence Set," Econometrica, Econometric Society, vol. 79(2), pages 453-497, 03.
  11. Hansen, Peter Reinhard, 2005. "A Test for Superior Predictive Ability," Journal of Business & Economic Statistics, American Statistical Association, vol. 23, pages 365-380, October.
  12. Stephen P. Holland & Jonathan E. Hughes & Christopher R. Knittel, 2009. "Greenhouse Gas Reductions under Low Carbon Fuel Standards?," American Economic Journal: Economic Policy, American Economic Association, vol. 1(1), pages 106-146, February.
  13. Stavins Robert N., 1995. "Transaction Costs and Tradeable Permits," Journal of Environmental Economics and Management, Elsevier, vol. 29(2), pages 133-148, September.
  14. Wyatt Thompson & Seth Meyer & Pat Westhoff, 2010. "The New Markets for Renewable Identification Numbers," Applied Economic Perspectives and Policy, Agricultural and Applied Economics Association, vol. 32(4), pages 588-603.
  15. Schennach, Susanne M., 2000. "The Economics of Pollution Permit Banking in the Context of Title IV of the 1990 Clean Air Act Amendments," Journal of Environmental Economics and Management, Elsevier, vol. 40(3), pages 189-210, November.
  16. Jushan Bai & Pierre Perron, 2003. "Computation and analysis of multiple structural change models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 18(1), pages 1-22.
  17. Diebold, Francis X & Mariano, Roberto S, 2002. "Comparing Predictive Accuracy," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 134-144, January.
  18. Holland, Stephen P. & Moore, Michael R., 2013. "Market design in cap and trade programs: Permit validity and compliance timing," Journal of Environmental Economics and Management, Elsevier, vol. 66(3), pages 671-687.
  19. Wyatt Thompson & Seth Meyer & Pat Westhoff, 2011. "What to Conclude About Biofuel Mandates from Evolving Prices for Renewable Identification Numbers?," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 93(2), pages 481-487.
  20. Pindyck, Robert S, 1993. "The Present Value Model of Rational Commodity Pricing," Economic Journal, Royal Economic Society, vol. 103(418), pages 511-530, May.
  21. 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 Archive 12881, Iowa State University, Department of Economics.
  22. Nicholas Bloom, 2009. "The Impact of Uncertainty Shocks," Econometrica, Econometric Society, vol. 77(3), pages 623-685, 05.
  23. Derek Lemoine, 2017. "Escape from Third-Best: Rating Emissions for Intensity Standards," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 67(4), pages 789-821, August.
  24. Robert W. Hahn, 1984. "Market Power and Transferable Property Rights," The Quarterly Journal of Economics, Oxford University Press, vol. 99(4), pages 753-765.
  25. Mas-Colell, Andreu & Whinston, Michael D. & Green, Jerry R., 1995. "Microeconomic Theory," OUP Catalogue, Oxford University Press, number 9780195102680.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:ags:aaea14:170673. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (AgEcon Search)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.