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

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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.

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