The Renewable Fuel Standard in Competitive Equilibrium: Market and Welfare Effects

26 Pages Posted: 21 Apr 2020

See all articles by GianCarlo Moschini

GianCarlo Moschini

Iowa State University - Department of Economics

Harvey Lapan

Iowa State University

Date Written: October 2017

Abstract

We construct a tractable multi‐market equilibrium model designed to evaluate alternative biofuel policies. The model integrates the U.S. agricultural sector with the energy sector and it explicitly considers both U.S. ethanol and biodiesel production. The model provides a structural representation of the renewable fuel standard (RFS) policies, and it uses the arbitrage conditions defining the core value of renewable identification number prices to identify the relevant competitive equilibrium conditions. The model is parameterized, based on elasticities and technical coefficients from the literature, to represent observed 2015 data. The model is simulated to analyze alternative scenarios, including repeal of the RFS, projected 2022 RFS mandates, and optimal (second‐best) mandates. The results confirm that the current RFS program considerably benefits the agriculture sector, but also leads to overall welfare gains for the United States (mostly via beneficial terms of trade effects). Implementation of projected 2022 mandates, which would require further expansion of biodiesel production, would lead to a considerable welfare loss (relative to 2015 mandate levels). Constrained (second‐best) optimal mandates would entail more corn‐based ethanol and less biodiesel than currently mandated.

Keywords: Biodiesel, biofuel policies, carbon tax, ethanol, greenhouse gas emissions, mandates, renewable fuel standard, renewable identification numbers, RINs, second‐best, welfare

Suggested Citation

Moschini, GianCarlo and Lapan, Harvey, The Renewable Fuel Standard in Competitive Equilibrium: Market and Welfare Effects (October 2017). American Journal of Agricultural Economics, Vol. 99, Issue 5, pp. 1117-1142, 2017, Available at SSRN: https://ssrn.com/abstract=3577894 or http://dx.doi.org/10.1093/ajae/aax041

GianCarlo Moschini (Contact Author)

Iowa State University - Department of Economics ( email )

260 Heady Hall
Ames, IA 50011
United States

Harvey Lapan

Iowa State University

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