Policy Shocks and Market-Based Regulations: Evidence from the Renewable Fuel Standard

Gabriel Lade (), C.-Y. Cynthia Lin Lawell and Aaron Smith

Center for Agricultural and Rural Development (CARD) Publications from Center for Agricultural and Rural Development (CARD) at Iowa State University

Abstract: The Renewable Fuel Standard (RFS2) mandates large increases in U.S. biofuel consumption and is implemented using a market for tradable compliance credits, known as RINs. In early 2013, RIN prices soared, causing the regulator to propose reducing future mandates. We develop a dynamic model of RFS2 compliance to demonstrate how changes in expectations about future policy affect current compliance costs, and we use a market effciency test to demonstrate that RIN markets have behaved in accordance with our model. We then estimate empirically the effect of three "policy shocks" that reduced the expected mandates in 2013. The largest of these shocks decreased the total cost of compliance by nearly $8 billion. The burden of the mandate reductions fell primarily on advanced biofuel firms and on commodity markets of the marginal compliance biofuel. We argue that the policy shocks reduced the incentive to invest in the technologies required to meet the future objectives of the RFS2. JEL Codes: Q42, Q50, H23

Keywords: tradable credits; policy design; quantity mechanisms; renewable fuel standard (search for similar items in EconPapers)
Date: 2016-05
New Economics Papers: this item is included in nep-ene, nep-env and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14)

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Related works:
Journal Article: Policy Shocks and Market-Based Regulations: Evidence from the Renewable Fuel Standard (2018)
Working Paper: Policy Shocks and Market-Based Regulations: Evidence from the Renewable Fuel Standard (2018)
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