The role of CAFE standards and alternative-fuel vehicle production credits in U.S. biofuels markets

This paper investigates the impact of CAFE standards and alternative-fuel vehicle production incentives on the biofuel market and mandate, in particular. The study develops a structural model of the domestic light-duty vehicle sector, as well as reduced-form versions of domestic gasoline, diesel, and biofuel markets. The results suggest that holding CAFE standards at the 2010 level could facilitate U.S. ethanol market expansion, making it easier to meet the mandate. Alternative-fuel vehicle production incentives appear to have small effects. However, there is uncertainty about the level of automaker response to those incentives, and analysis indicates the model is fairly sensitive to the assumed level of response.