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Welfare Impacts of Alternative Biofuel and Energy Policies

Author

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

Abstract

We employ an open economy general equilibrium model to investigate the effects of government energy policy, with an 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 of an 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 the policies on U.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 ethanol mandate is about 18 billion gallons.

Suggested Citation

  • Cui, Jingbo & Lapan, Harvey E. & Moschini, GianCarlo & Cooper, Joseph, 2010. "Welfare Impacts of Alternative Biofuel and Energy Policies," Staff General Research Papers Archive 31618, Iowa State University, Department of Economics.
  • Handle: RePEc:isu:genres:31618
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    File URL: http://www2.econ.iastate.edu/papers/p11618-2010-06-09.pdf
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    References listed on IDEAS

    as
    1. Tol, Richard S. J., 2008. "The Social Cost of Carbon: Trends, Outliers and Catastrophes," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy (IfW), vol. 2, pages 1-22.
    2. repec:oup:renvpo:v:12:y:2018:i:1:p:4-25. is not listed on IDEAS
    3. Hope, C. & Newbery, D., 2006. "Calculating The Social Cost Of Carbon," Cambridge Working Papers in Economics 0749, Faculty of Economics, University of Cambridge.
    4. Amani Elobeid & Simla Tokgoz, 2008. "Removing Distortions in the U.S. Ethanol Market: What Does It Imply for the United States and Brazil?," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 90(4), pages 918-932.
    5. 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.
    6. Hertel, Thomas & Tyner, Wally & Birur, Dileep, 2008. "Biofuels for all? Understanding the Global Impacts of Multinational Mandates," GTAP Working Papers 2809, Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University.
    7. Richard S J Tol, 2018. "The Economic Impacts of Climate Change," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 12(1), pages 4-25.
    8. 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 Archive 13076, Iowa State University, Department of Economics.
    9. 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.
    10. 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.
    11. 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.
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    More about this item

    Keywords

    Biofuel policies; carbon tax; ethanol subsidy; gasoline tax; Greenhouse gas emissions; Mandates; renewable fuel standard; Second best; welfare.;

    JEL classification:

    • F1 - International Economics - - Trade
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • Q2 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation

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