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Unintended Consequences of Transportation Carbon Policies: Land-Use, Emissions, and Innovation

  • Stephen P. Holland
  • Jonathan E. Hughes
  • Christopher R. Knittel
  • Nathan C. Parker

Renewable fuel standards, low carbon fuel standards, and ethanol subsidies are popular policies to incentivize ethanol production and reduce emissions from transportation. Compared to carbon trading, these policies lead to large shifts in agricultural activity and unexpected social costs. We simulate the 2022 Federal Renewable Fuel Standard (RFS) and find that energy crop production increases by 39 million acres. Land- use costs from erosion and habitat loss are between $277 and $693 million. A low carbon fuel standard (LCFS) and ethanol subsidies have similar effects while costs under an equivalent cap and trade (CAT) system are essentially zero. In addition, the alternatives to CAT magnify errors in assigning emissions rates to fuels and can over or under-incentivize innovation. These results highlight the potential negative efficiency effects of the RFS, LCFS and subsidies, effects that would be less severe under a CAT policy.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 19636.

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Date of creation: Nov 2013
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Handle: RePEc:nbr:nberwo:19636
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