Biofuels Policies and Welfare: Is the Stick of Mandates Better than the Carrot of Subsidies?

Harvey E. Lapan and GianCarlo Moschini ()

Staff General Research Papers from Iowa State University, Department of Economics

Abstract: Significant government support for biofuels has led to rapid growth in U.S. ethanol production and research to develop more advanced biofuels. In this paper we construct a general equilibrium, open economy model that captures the rationale typically invoked to justify government intervention in this setting: to alleviate the environmental impact of energy consumption and to decrease U.S. energy dependence on foreign sources. The model is used to study both the positive and normative implications of alternative policy instruments, including the subsidies and mandates specified by the 2007 Energy Independence and Security Act. From a positive perspective, we find that biofuels mandates are equivalent to a combination of fuel taxes and biofuels subsidies that are revenue neutral. From a welfare perspective, we show that biofuels mandates dominate biofuels subsidies, and that combining fuel taxes (rather than subsidies) with mandates would be welfare enhancing.

Keywords: Biofuels policies; Greenhouse gas emissions; Mandates; Second best; Subsidies; Welfare. (search for similar items in EconPapers)
JEL-codes: F1 H2 Q0 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ene and nep-env
Date: 2009-06-09
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Persistent link: http://EconPapers.repec.org/RePEc:isu:genres:13076

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