Mandating green: On the design of renewable fuel policies and cost containment mechanisms

• Environmental and Resource Economics Workshop

Date and Location

Friday, February 14, 2014, 11:30 AM - 12:50 PM
ARE Conference Room, 2102 Social Sciences and Humanities

Abstract

Policymakers at the federal and state level have generally favored renewable fuel mandates over taxes and cap and trade programs to address climate change concerns and reduce emissions from the transportation sector. Given difficulties with deploying and developing commercially viable fuel alternatives to fossil fuels, fuel mandates risk large increases in short-run compliance costs as the policies become more stringent. We study the effects and efficiency of two types of mandates, a renewable share mandate similar to the federal Renewable Fuel Standard and a carbon intensity standard similar to California's Low Carbon Fuel Standard, as well as the effects of two cost containment provisions, a hard cap and a soft cap, on compliance credit prices. We show numerically that both fuel mandates in isolation are only able to achieve around a quarter to a third of the efficiency of the first-best policy; however, when combined strategically with a hard cap on compliance costs, the efficiency of both policies can increase substantially. Policies which act to relax the standard in response to high compliance costs achieve only moderate efficiency gains.