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Policy Shocks and Market-Based Regulations: Evidence from the Renewable Fuel Standard

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  • Gabriel E. Lade
  • C.Y. Cynthia Lin Lawell
  • Aaron Smith

Abstract

The Renewable Fuel Standard (RFS2) mandates large increases in U.S. biofuel consumption and is implemented using a market for tradable compliance credits, known as RINs. In early 2013, RIN prices soared, causing the regulator to propose reducing future mandates. We develop a dynamic model of RFS2 compliance to demonstrate how changes in expectations about future policy affect current compliance costs, and we use a market effciency test to demonstrate that RIN markets have behaved in accordance with our model. We then estimate empirically the effect of three "policy shocks" that reduced the expected mandates in 2013. The largest of these shocks decreased the total cost of compliance by nearly $8 billion. The burden of the mandate reductions fell primarily on advanced biofuel firms and on commodity markets of the marginal compliance biofuel. We argue that the policy shocks reduced the incentive to invest in the technologies required to meet the future objectives of the RFS2. JEL Codes: Q42, Q50, H23

Suggested Citation

  • Gabriel E. Lade & C.Y. Cynthia Lin Lawell & Aaron Smith, 2016. "Policy Shocks and Market-Based Regulations: Evidence from the Renewable Fuel Standard," Center for Agricultural and Rural Development (CARD) Publications 16-wp565, Center for Agricultural and Rural Development (CARD) at Iowa State University.
  • Handle: RePEc:ias:cpaper:16-wp565
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    Cited by:

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    3. Zhao, Qiankun & Cai, Ximing & Mischo, William & Ma, Liyuan, 2020. "How do the research and public communities view biofuel development?," Renewable and Sustainable Energy Reviews, Elsevier, vol. 133(C).
    4. Yeh, Sonia & Witcover, Julie & Lade, Gabriel E. & Sperling, Daniel, 2016. "A review of low carbon fuel policies: Principles, program status and future directions," Energy Policy, Elsevier, vol. 97(C), pages 220-234.
    5. An, Henry & Qiu, Feng & Rude, James, 2021. "Volatility spillovers between food and fuel markets: Do administrative regulations affect the transmission?," Economic Modelling, Elsevier, vol. 102(C).
    6. Scott H. Irwin & Kristen McCormack & James H. Stock, 2020. "The Price of Biodiesel RINs and Economic Fundamentals," American Journal of Agricultural Economics, John Wiley & Sons, vol. 102(3), pages 734-752, May.
    7. 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.
    8. Gabriel E. Lade & James Bushnell, 2019. "Fuel Subsidy Pass-Through and Market Structure: Evidence from the Renewable Fuel Standard," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 6(3), pages 563-592.
    9. Colin A. Carter & Gordon C. Rausser & Aaron Smith, 2017. "Commodity Storage and the Market Effects of Biofuel Policies," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 99(4), pages 1027-1055.
    10. Scott H. Irwin & Kristen McCormack & James H. Stock, 2018. "The Price of Biodiesel RINs and Economic Fundamentals," NBER Working Papers 25341, National Bureau of Economic Research, Inc.
    11. 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.
    12. Burkhardt, Jesse, 2019. "The impact of the Renewable Fuel Standard on US oil refineries," Energy Policy, Elsevier, vol. 130(C), pages 429-437.
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    14. Gabriel E. Lade, 2018. "Testimony Before the U.S. House Committee on Energy and Commerce Subcommittee on Environment," Center for Agricultural and Rural Development (CARD) Publications 18-pb24, Center for Agricultural and Rural Development (CARD) at Iowa State University.
    15. Lade, Gabriel E & Lawell, C-Y Cynthia Lin, 2015. "Mandating green: On the Design of Renewable Fuel Policies and Cost Containment Mechanisms," Institute of Transportation Studies, Working Paper Series qt5zj382t4, Institute of Transportation Studies, UC Davis.
    16. Lade, Gabriel E. & Lin, C.-Y. Cynthia & Smith, Aaron, 2015. "Ex Post Costs and Renewable Identification Number (RIN) Prices under the Renewable Fuel Standard," Discussion Papers dp-15-22, Resources For the Future.
    17. Bruce A. Babcock, 2020. "Comment on “The Price of Biodiesel rins and Economic Fundamentals”: US Biofuel Policy Failures Reveal Limitations of Market‐Based Policy Instruments," American Journal of Agricultural Economics, John Wiley & Sons, vol. 102(3), pages 753-756, May.
    18. 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.
    19. Christopher R. Knittel & Ben S. Meiselman & James H. Stock, 2017. "The Pass-Through of RIN Prices to Wholesale and Retail Fuels under the Renewable Fuel Standard," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 4(4), pages 1081-1119.
    20. Pouliot, Sebastien & Smith, Aaron & Stock, James H., 2017. "RIN Pass-Through at Gasoline Terminals," ISU General Staff Papers 201702220800001049, Iowa State University, Department of Economics.
    21. Gabriel E. Lade & James Bushnell, 2016. "Fuel Subsidy Pass-Through and Market Structure: Evidence from the Renewable Fuel Standard," Center for Agricultural and Rural Development (CARD) Publications 16-wp570, Center for Agricultural and Rural Development (CARD) at Iowa State University.
    22. Stacy Sneeringer & Gianna Short & Matthew MacLachlan & Maria Bowman, 2020. "Impacts on Livestock Producers and Veterinarians of FDA Policies on Use of Medically Important Antibiotics in Food Animal Production," Applied Economic Perspectives and Policy, John Wiley & Sons, vol. 42(4), pages 674-694, December.
    23. 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.
    24. 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.
    25. Qiang Wang & Zhongfu Tan & Gejirifu De & Qingkun Tan & Lei Pu, 2019. "An Evolutionary Game Study of Clean Heating Promotion Mechanisms under the Policy Regulation in China," Sustainability, MDPI, Open Access Journal, vol. 11(14), pages 1-22, July.

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    More about this item

    Keywords

    tradable credits; policy design; quantity mechanisms; renewable fuel standard;
    All these keywords.

    JEL classification:

    • Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources
    • Q50 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - General
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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