Alternative transportation fuel standards: Welfare effects and climate benefits

This paper develops an integrated model of the fuel and agricultural sectors to analyze the welfare and greenhouse gas emission (GHG) effects of the existing Renewable Fuel Standard (RFS), a Low Carbon Fuel Standard (LCFS) and a carbon price policy. The conceptual framework shows that these policies differ in the incentives they create for the consumption and mix of different types of biofuels and in their effects on food and fuel prices and GHG emissions. We also simulate the welfare and GHG effects of these three policies which are normalized to achieve the same level of US GHG emissions. By promoting greater production of food-crop based biofuels, the RFS is found to lead to a larger reduction in fossil fuel use but also a larger increase in food prices and a smaller reduction in global GHG emissions compared to the LCFS and carbon tax. All three policies increase US social welfare compared to a no-biofuel baseline scenario due to improved terms-of-trade, even when environmental benefits are excluded; global social welfare increases with a carbon tax but decreases with the RFS and LCFS due to the efficiency costs imposed by these policies, even after including the benefits of mitigating GHG emissions.