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Title:Welfare effects of biofuel policies in the presence of environmental externalities and pre-existing distortions
Author(s):Lasco, Marie Christine D.
Director of Research:Khanna, Madhu
Doctoral Committee Chair(s):Khanna, Madhu
Doctoral Committee Member(s):Fullerton, Don; Ando, Amy W.; Thompson, Robert L.
Department / Program:Agr & Consumer Economics
Discipline:Agr & Consumer Economics
Degree Granting Institution:University of Illinois at Urbana-Champaign
Subject(s):biofuel policy
second-best optimal carbon tax
fuel tax
biofuel trade
Abstract:Policy intervention in the biofuel market has led to a significant increase in biofuel production and use in the past several years. However, the welfare effect of biofuel policies, specifically the ethanol tax credit for corn ethanol, ethanol import tariff and renewable fuel standard (RFS) mandate has not been adequately examined. Moreover, the environmental impact of these policies, and their impact on fuel taxation has not been sufficiently addressed in the literature. This dissertation examines the market and welfare effects of biofuel policies in the US, specifically those relating to corn and sugarcane ethanol, with the aim of determining the welfare implications of existing policies, and designing second-best optimal policies. In measuring welfare effects, changes in social surplus, as well as environmental externalities are taken into account. In addition, the interaction of fuel and biofuel policies with the broader fiscal system is also considered. This dissertation consists of three papers. In the first paper, a stylized model of the US miles and fuel market, including ethanol trade is developed to quantify the market and welfare effects of biofuel policies in the US. In order to examine the effect of the ethanol tax credit and import tariff, several market scenarios are simulated. The market outcome with the two policies in place are compared to a non-intervention scenario, and an optimal baseline where Pigouvian taxes are levied on fuel and miles. Results show that the effect of the tax credit on social surplus is clearly negative, while the impact of the tariff depends on the ability of the US to influence ethanol prices in the world market. Numerical simulations show that the existing ethanol tax credit and import tariff increase miles externalities and GHG emissions and decrease social welfare by $5.9 B relative to non-intervention and by $235 B relative to the optimal scenario. In the second paper, detailed production data on ethanol production costs in the US and Brazil are used together with a numerical model of US biofuel trade with Brazil to quantify the welfare effect of the US RFS mandate for traditional and advanced biofuel (excluding cellulosic and biomass biodiesel) under various scenarios on the currency exchange rate between the US dollar and Brazilian reais. Numerical results show that in 2015, the cost of the mandate is lower when the US currency is appreciated relative to the Brazilian currency, and when the excess supply elasticity of ethanol from Brazil is more elastic. Relative to a baseline without a mandate but with an ethanol subsidy and import tariff in place, GHG emissions decrease and the welfare effect of the mandate ranges from -$23 to +$5 Billion dollars as the exchange rate varies from US$1 = R$1.81 to US$1 = R$3.11. The third paper analyzes the impact of biofuel policies and biofuel use on the second-best optimal carbon tax for fuels in the presence of a labor tax and a biofuel subsidy. Findings show that when biofuel is part of the fuel mix, the carbon tax has a commodity price effect which arises from tax-induced changes in land rent. The commodity price effect could exacerbate or attenuate the tax interaction effect caused by higher fuel prices, depending on the elasticity of substitution between gasoline and biofuel, the price elasticity of miles demand, and the relative emissions intensity of gasoline and biofuel. Numerical results show that the commodity price effect affects the value of the second-best optimal carbon tax, and that the effect is greater if the elasticity of substitution between gasoline and ethanol is higher, iii miles demand is more price inelastic, and the emissions intensity of biofuel is lower relative to gasoline. In addition, the existence of a fixed biofuel subsidy lead to a greater divergence between the value of the second-best optimal carbon tax with or without biofuels. A carbon tax policy decreases GHG emissions and increases welfare, in contrast to a biofuel subsidy, which also decreases GHG emissions but at a net welfare loss.
Issue Date:2010-05-14
Rights Information:Copyright 2010 Marie Christine D. Lasco
Date Available in IDEALS:2010-05-14
Date Deposited:May 2010

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