The role of federal Renewable Fuel Standards and market structure on the growth of the cellulosic biofuel sector

• We study the effect of the Renewable Fuel Standards on cellulosic biofuel growth.
• Higher cellulosic biofuel mandate and cheap waiver credits stunt biofuel output.
• Raising the waiver price increases cellulosic biofuel output.
• Waiver prices have a larger effect on biofuel output in a competitive market.

This article examines the effect of the Renewable Fuel Standards and market power on the growth of the cellulosic biofuel sector. We develop a sectoral model to show how changes in the regulations governing cellulosic fuel production affect the equilibrium quantity of cellulosic ethanol. Based on model calibration for Washington State, we find that existing low-cost waivers purchased by obligated parties in lieu of cellulosic fuel production negate the effectiveness of the Renewable Fuel Standard to induce the production and consumption of cellulosic biofuels. However, raising waiver price slightly relative to the status quo significantly increases the equilibrium quantity of cellulosic ethanol. The high cost of cellulosic ethanol production is often cited as the cause of the lack of cellulosic ethanol production, which is used to justify low waiver prices. Our policy message is the converse: the low current waiver price significantly contributes to the cellulosic ethanol market stagnation in the context of the current biofuel policy.