Greenhouse Gas Reductions Under Low Carbon Fuel Standards?
Stephen P. Holland
University of California, Berkeley - Energy Institute; University of North Carolina (UNC) at Greensboro - Bryan School of Business & Economics
Christopher R. Knittel
Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)
Jonathan E. Hughes
University of Colorado at Boulder - Department of Economics
May 18, 2007
A low carbon fuel standard (LCFS) seeks to reduce greenhouse gas emissions by capping an industry's carbon emissions per unit of output. California has launched an LCFS for automotive fuels; others have called for a national LCFS. We show that this policy causes production of high-carbon fuels to decrease but production of low-carbon fuels to increase. The net effect of this may be an increase in carbon emissions. The LCFS may also reduce welfare, and the best LCFS may be no LCFS. We simulate the outcomes of a national LCFS, focusing on gasoline and ethanol as the high- and low-carbon fuels. For a broad range of parameters, we find that the LCFS is unlikely to increase CO2 emissions. However, the surplus losses from the LCFS are quite large ($80 to $760 billion annually for a national LCFS reducing carbon intensities by 10 percent), and the average carbon cost ($307 to $2,272 per ton of CO2 for the same LCFS) can be much larger than damage estimates. We propose an efficient policy that achieves the same emissions reduction at a much lower surplus cost ($16 to $290 billion) and much lower average carbon cost ($60 to $868 per ton of CO2).
Number of Pages in PDF File: 57
Keywords: carbon, externalities, pollution, taxes, transportation, gasoline, ethanol
JEL Classification: L1, L5, L9, N5, H2working papers series
Date posted: May 23, 2007
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