Alternative Transportation Fuel Standards: Welfare Effects and Climate Benefits

Abstract

This paper develops a conceptual framework and a numerical simulation model of the fuel and agricultural sectors in the US to analyze the effects of the existing Renewable Fuels Standard (RFS) that mandates the blending of specific volumes of low carbon biofuels with liquid fossil fuels and a proposed national Low Carbon Fuel Standard (LCFS) that imposes a limit on the GHG intensity of the blended fuel on fuel mix, GHG emissions and social welfare in an open economy and to compare them to those with a carbon price policy. The conceptual framework illustrates that, unlike a carbon price policy, the RFS and LCFS have an ambiguous effect on GHG emissions. The numerical analysis shows that all three policies reduce US GHG emissions and increase domestic social welfare relative to a no-policy, business-as usual scenario, with the RFS leading to a lower reduction in GHG emissions than the LCFS. However, the RFS leads to higher social welfare among the policies examined here than the LCFS and the carbon tax.

Keywords: biofuel mandate, low carbon fuel standard, greenhouse gas emissions, social welfare, cellulosic biofuels, dynamic optimization, sectoral model