IDEAS home Printed from https://ideas.repec.org/p/ias/cpaper/16-wp565.html
   My bibliography  Save this paper

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

Author

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
    as

    Download full text from publisher

    File URL: https://www.card.iastate.edu/products/publications/pdf/16wp565.pdf
    File Function: Full Text
    Download Restriction: no

    File URL: https://www.card.iastate.edu/products/publications/synopsis/?p=1251
    File Function: Online Synopsis
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Anderson, Soren T., 2012. "The demand for ethanol as a gasoline substitute," Journal of Environmental Economics and Management, Elsevier, vol. 63(2), pages 151-168.
    2. 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.
    3. James B. Bushnell & Howard Chong & Erin T. Mansur, 2009. "Profiting from Regulation: An Event Study of the EU Carbon Market," NBER Working Papers 15572, National Bureau of Economic Research, Inc.
    4. Hintermann, Beat, 2010. "Allowance price drivers in the first phase of the EU ETS," Journal of Environmental Economics and Management, Elsevier, vol. 59(1), pages 43-56, January.
    5. Andrew W. Lo, A. Craig MacKinlay, 1988. "Stock Market Prices do not Follow Random Walks: Evidence from a Simple Specification Test," Review of Financial Studies, Society for Financial Studies, vol. 1(1), pages 41-66.
    6. Martin L. Weitzman, 1974. "Prices vs. Quantities," Review of Economic Studies, Oxford University Press, vol. 41(4), pages 477-491.
    7. Timothy G. Conley & Christopher R. Taber, 2011. "Inference with "Difference in Differences" with a Small Number of Policy Changes," The Review of Economics and Statistics, MIT Press, vol. 93(1), pages 113-125, February.
    8. Montgomery, W. David, 1972. "Markets in licenses and efficient pollution control programs," Journal of Economic Theory, Elsevier, vol. 5(3), pages 395-418, December.
    9. Linn, Joshua, 2010. "The effect of cap-and-trade programs on firms' profits: Evidence from the Nitrogen Oxides Budget Trading Program," Journal of Environmental Economics and Management, Elsevier, vol. 59(1), pages 1-14, January.
    10. Corts, Kenneth S., 2010. "Building out alternative fuel retail infrastructure: Government fleet spillovers in E85," Journal of Environmental Economics and Management, Elsevier, vol. 59(3), pages 219-234, May.
    11. Farzad Taheripour, 2008. "Welfare Effects and Unintended Consequences of Ethanol Subsidies ," Review of Agricultural Economics, Agricultural and Applied Economics Association, vol. 30(3), pages 411-421.
    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. Burtraw, Dallas & Palmer, Karen & Kahn, Danny, 2010. "A symmetric safety valve," Energy Policy, Elsevier, vol. 38(9), pages 4921-4932, September.
    14. Bielen, David A. & Newell, Richard G. & Pizer, William A., 2018. "Who did the ethanol tax credit benefit? An event analysis of subsidy incidence," Journal of Public Economics, Elsevier, vol. 161(C), pages 1-14.
    15. Aaron Smith, 2005. "Partially overlapping time series: a new model for volatility dynamics in commodity futures," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 20(3), pages 405-422.
    16. Jonah B. Gelbach & Eric Helland & Jonathan Klick, 2013. "Valid Inference in Single-Firm, Single-Event Studies," American Law and Economics Review, Oxford University Press, vol. 15(2), pages 495-541.
    17. Erik Snowberg & Justin Wolfers & Eric Zitzewitz, 2011. "How Prediction Markets can Save Event Studies," CAMA Working Papers 2011-07, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    18. Richard Newell & William Pizer & Jiangfeng Zhang, 2005. "Managing Permit Markets to Stabilize Prices," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 31(2), pages 133-157, June.
    19. Ruiqing Miao & David A. Hennessy & Bruce A. Babcock, 2012. "Investment in Cellulosic Biofuel Refineries: Do Waivable Biofuel Mandates Matter?," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 94(3), pages 750-762.
    20. Du, Xiaodong & Carriquiry, Miguel A., 2013. "Flex-fuel vehicle adoption and dynamics of ethanol prices: lessons from Brazil," Energy Policy, Elsevier, vol. 59(C), pages 507-512.
    21. 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.
    22. repec:tpr:restat:v:99:y:2017:i:3:p:499-513 is not listed on IDEAS
    23. 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.
    24. Peter R. Hansen & Asger Lunde & James M. Nason, 2011. "The Model Confidence Set," Econometrica, Econometric Society, vol. 79(2), pages 453-497, March.
    25. Du, Xiaodong & Hayes, Dermot J., 2009. "The impact of ethanol production on US and regional gasoline markets," Energy Policy, Elsevier, vol. 37(8), pages 3227-3234, August.
    26. Kling, Catherine & Rubin, Jonathan, 1997. "Bankable permits for the control of environmental pollution," Journal of Public Economics, Elsevier, vol. 64(1), pages 101-115, April.
    27. Salvo, Alberto & Huse, Cristian, 2013. "Build it, but will they come? Evidence from consumer choice between gasoline and sugarcane ethanol," Journal of Environmental Economics and Management, Elsevier, vol. 66(2), pages 251-279.
    28. Sebastien Pouliot & Bruce A. Babcock, 2014. "Impact of Increased Ethanol Mandates on Prices at the Pump," Center for Agricultural and Rural Development (CARD) Publications 14-pb18, Center for Agricultural and Rural Development (CARD) at Iowa State University.
    29. Perron, Pierre & Rodriguez, Gabriel, 2003. "GLS detrending, efficient unit root tests and structural change," Journal of Econometrics, Elsevier, vol. 115(1), pages 1-27, July.
    30. 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.
    31. 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.
    32. Christopher R. Knittel and Aaron Smith, 2015. "Ethanol Production and Gasoline Prices: A Spurious Correlation," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1).
    33. repec:ags:illufd:282442 is not listed on IDEAS
    34. 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.
    35. Rajagopal, D. & Plevin, Richard J., 2013. "Implications of market-mediated emissions and uncertainty for biofuel policies," Energy Policy, Elsevier, vol. 56(C), pages 75-82.
    36. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501.
    37. Burton G. Malkiel, 2005. "Reflections on the Efficient Market Hypothesis: 30 Years Later," The Financial Review, Eastern Finance Association, vol. 40(1), pages 1-9, February.
    38. Sebastien Pouliot & Bruce A. Babcock, 2014. "Impact of Ethanol Mandates on Fuel Prices when Ethanol and Gasoline are Imperfect Substitutes," Center for Agricultural and Rural Development (CARD) Publications 14-wp551, Center for Agricultural and Rural Development (CARD) at Iowa State University.
    39. repec:kap:enreec:v:67:y:2017:i:4:d:10.1007_s10640-016-0006-6 is not listed on IDEAS
    40. Michael J. Roberts & Wolfram Schlenker, 2013. "Identifying Supply and Demand Elasticities of Agricultural Commodities: Implications for the US Ethanol Mandate," American Economic Review, American Economic Association, vol. 103(6), pages 2265-2295, October.
    41. Hitaj, Claudia & Stocking, Andrew, 2016. "Market efficiency and the U.S. market for sulfur dioxide allowances," Energy Economics, Elsevier, vol. 55(C), pages 135-147.
    42. 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.
    43. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    44. Pouliot, S├ębastien & Babcock, Bruce A., 2014. "The demand for E85: Geographical location and retail capacity constraints," Energy Economics, Elsevier, vol. 45(C), pages 134-143.
    45. Lade, Gabriel E. & Lin Lawell, C.-Y. Cynthia, 2015. "The design and economics of low carbon fuel standards," Research in Transportation Economics, Elsevier, vol. 52(C), pages 91-99.
    46. Pizer, William A., 2002. "Combining price and quantity controls to mitigate global climate change," Journal of Public Economics, Elsevier, vol. 85(3), pages 409-434, September.
    47. Matthew S Clancy & GianCarlo Moschini, 2018. "Mandates and the Incentive for Environmental Innovation," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 100(1), pages 198-219.
    48. Stephen P. Holland & Michael R. Moore, 2012. "When to Pollute, When to Abate? Intertemporal Permit Use in the Los Angeles NOx Market," Land Economics, University of Wisconsin Press, vol. 88(2), pages 275-299.
    49. Perron, Pierre & Rodriguez, Gabriel, 2003. "GLS detrending, efficient unit root tests and structural change," Journal of Econometrics, Elsevier, vol. 115(1), pages 1-27, July.
    50. repec:oup:revage:v:30:y:2008:i:3:p:411-421. is not listed on IDEAS
    51. repec:ucp:jaerec:doi:10.1086/692071 is not listed on IDEAS
    52. 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.
    53. Stephen P. Holland & Jonathan E. Hughes & Christopher R. Knittel & Nathan C. Parker, 2013. "Unintended Consequences of Transportation Carbon Policies: Land-Use, Emissions, and Innovation," NBER Working Papers 19636, National Bureau of Economic Research, Inc.
    54. 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.
    55. Catherine Hausman & Maximilian Auffhammer & Peter Berck, 2012. "Farm Acreage Shocks and Crop Prices: An SVAR Approach to Understanding the Impacts of Biofuels," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 53(1), pages 117-136, September.
    56. A. Craig MacKinlay, 1997. "Event Studies in Economics and Finance," Journal of Economic Literature, American Economic Association, vol. 35(1), pages 13-39, March.
    57. Whistance, Jarrett & Ripplinger, David & Thompson, Wyatt, 2016. "Biofuel-related price transmission using Renewable Identification Number prices to signal mandate regime," Energy Economics, Elsevier, vol. 55(C), pages 19-29.
    58. Claudia Hitaj & Andrew Stocking, 2014. "Market Efficiency and the U.S. Market for Sulfur Dioxide Allowances: Working Paper 2014-01," Working Papers 45044, Congressional Budget Office.
    59. Rubin, Jonathan D., 1996. "A Model of Intertemporal Emission Trading, Banking, and Borrowing," Journal of Environmental Economics and Management, Elsevier, vol. 31(3), pages 269-286, November.
    60. Du, Xiaodong & Hayes, Dermot J., 2009. "The impact of ethanol production on US and regional gasoline markets," Energy Policy, Elsevier, vol. 37(8), pages 3227-3234, August.
    61. Roberts, Marc J. & Spence, Michael, 1976. "Effluent charges and licenses under uncertainty," Journal of Public Economics, Elsevier, vol. 5(3-4), pages 193-208.
    62. 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.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. 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.
    2. Moschini, GianCarlo & Lapan, Harvey & Kim, Hyunseok, 2016. "The Renewable Fuel Standard: Market and Welfare Effects of Alternative Policy Scenarios," 2016 Annual Meeting, July 31-August 2, Boston, Massachusetts 235721, Agricultural and Applied Economics Association.
    3. 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.
    4. 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.
    5. repec:ucp:jaerec:doi:10.1086/692071 is not listed on IDEAS
    6. 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.
    7. 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.
    8. 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.
    9. 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.
    10. 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.

    More about this item

    Keywords

    tradable credits; policy design; quantity mechanisms; renewable fuel standard;

    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

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ias:cpaper:16-wp565. 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: (). General contact details of provider: http://edirc.repec.org/data/caiasus.html .

    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 CitEc recognized a reference but did not link an item in RePEc 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 RePEc Author Service 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.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.