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Does a Renewable Fuel Standard for Biofuels Reduce Climate Costs?

Author

Listed:
  • Mads Greaker
  • Michael Hoel
  • Knut Einar Rosendahl

Abstract

Recent contributions have questioned whether biofuels policies actually lead to emissions reductions, and thus lower climate costs. In this paper we make two contributions to the literature. First, we study the market effects of a renewable fuel standard. Opposed to most previous studies we model the supply of fossil fuels taking into account that fossil fuels is a non-renewable resource. Second, we model emissions from land use change explicitly when we evaluate the climate effects of the renewable fuel standard. We find that extraction of fossil fuels most likely will decline initially as a consequence of the standard. Thus, if emissions from biofuels are sufficiently low, the standard will have beneficial climate effects. Furthermore, we find that the standard tends to reduce total fuel (i.e., oil plus biofuels) consumption initially. Hence, even if emissions from biofuels are substantial, climate costs may be reduced. Finally, if only a subset of countries introduce a renewable fuel standard, there will be carbon leakage to the rest of the world. However, climate costs may decline as global extraction of fossil fuels is postponed.

Suggested Citation

  • Mads Greaker & Michael Hoel & Knut Einar Rosendahl, 2012. "Does a Renewable Fuel Standard for Biofuels Reduce Climate Costs?," CESifo Working Paper Series 4030, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_4030
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    References listed on IDEAS

    as
    1. Michael Hoel, 2011. "The Supply Side of CO 2 with Country Heterogeneity," Scandinavian Journal of Economics, Wiley Blackwell, vol. 113(4), pages 846-865, December.
    2. Lapan, Harvey & Moschini, GianCarlo, 2012. "Second-best biofuel policies and the welfare effects of quantity mandates and subsidies," Journal of Environmental Economics and Management, Elsevier, vol. 63(2), pages 224-241.
    3. Chakravorty, Ujjayant & Magné, Bertrand & Moreaux, Michel, 2008. "A dynamic model of food and clean energy," Journal of Economic Dynamics and Control, Elsevier, vol. 32(4), pages 1181-1203, April.
    4. Khanna, Mahdu, 2011. "Measuring Indirect Land Use Change with Biofuels: Implications for Policy," farmdoc daily, University of Illinois at Urbana-Champaign, Department of Agricultural and Consumer Economics, vol. 1, March.
    5. Stern,Nicholas, 2007. "The Economics of Climate Change," Cambridge Books, Cambridge University Press, number 9780521700801.
    6. Snorre Kverndokk & Knut Einar Rosendahl, 2013. "Effects of Transport Regulation on the Oil Market: Does Market Power Matter?," Scandinavian Journal of Economics, Wiley Blackwell, vol. 115(3), pages 662-694, July.
    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 Archive 12881, Iowa State University, Department of Economics.
    8. Amundsen, Eirik S. & Mortensen, Jorgen Birk, 2001. "The Danish Green Certificate System: some simple analytical results," Energy Economics, Elsevier, vol. 23(5), pages 489-509, September.
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    10. Reyer Gerlagh, 2011. "Too Much Oil," CESifo Economic Studies, CESifo, vol. 57(1), pages 79-102, March.
    11. Michael Hoel, 2011. "The Supply Side of CO2 with Country Heterogeneity," CESifo Working Paper Series 3393, CESifo Group Munich.
    12. Gal Hochman & Deepak Rajagopal & David Zilberman, 2011. "The Effect of Biofuels on the International Oil Market," Applied Economic Perspectives and Policy, Agricultural and Applied Economics Association, vol. 33(3), pages 402-427.
    13. Eggert, Håkan & Greaker, Mads & Potter, Emily, 2011. "Policies for Second Generation Biofuels: Current status and future challenges," Working Papers in Economics 501, University of Gothenburg, Department of Economics.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    biofuel; renewable fuel standard; fossil fuel;

    JEL classification:

    • Q20 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - General
    • Q32 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Exhaustible Resources and Economic Development
    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General
    • Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources

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