Some Inconvenient Truths about Climate Change Policy: The Distributional Impacts of Transportation Policies

Holland, Stepehen P.; Hughes, Jonathan E.; Knittel, Christopher R.; Parker, Nathan

doi:10.1162/rest_a_00452

Cited by 37 publications

(27 citation statements)

References 30 publications

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“…This construction boom, which anticipated the expansion of the RFS, received considerable attention. This lack of opposition suggests that the RFS has high value to the ethanol industry; with the RFS in place, it has acquired guaranteed demand for its product and a large implicit subsidy (Holland et al 2011).…”

Section: Policy Historymentioning

confidence: 99%

Commodity Storage and the Market Effects of Biofuel Policies

Carter

Rausser

Smith

2016

American J Agri Economics

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US legislation passed in 2007 (RFS2) increased by about 1.3 billion bushels the net amount of corn required to be processed annually into ethanol for motor-fuel use. Using modern time-series methods, we estimate that corn prices were about 30 percent higher between 2006 and 2014 than they would have been but for RFS2 and if pre-2006 trends had continued. We estimate a permanent corn demand increase of 1.3 billion bushels increased the long-run price by 31% (90% confidence interval is [5%,95%]). Our identification strategy is unique in the literature because it enables estimation of the effects of transitory shocks, such as weather, separately from the effects of persistent shocks, such as the ethanol mandate. Keywords:Ethanol; agriculture; energy policy; VAR; partial identification The difference between the RFS2 and RFS mandates is approximately 5.5 billion gallons (bgal) of ethanol annually in the years 2010-2012, which corresponds to about 1.3 billion bushels of corn after accounting for feed by-products. We take these 1.3 billion bushels as the permanent increase in corn demand in the RFS2, and we estimate that it caused a 31 percent long-run increase in corn prices.Interpreting our estimates correctly requires a precise statement about counterfactual ethanol production. In our counterfactual, ethanol production would have increased from its actual 2005 value of 3.9bgal to 8.8bgal in 2014. This path represents a continuation of the trend observed between 2002 and 2005 and is slightly below the path predicted by the USDA in early 2006. We argue it is a reasonable counterfactual path in the absence of the RFS2. We also point that our long-run estimate is scalable. To estimate the effect of increasing corn demand permanently by any multiple of 1.3 billion bushels, a reader could multiply our estimate by that multiple.Previous studies have also found that the increase in corn-ethanol production affected corn We focus our analysis on commodity inventory dynamics, which distinguishes our work from the extant literature. This approach enables us to estimate the price effects of persistent shocks to supply or demand separately from the effects of transitory shocks in a market for a storable commodity. This distinction is important in our context because persistent shocks have larger price effects than transitory shocks. The market can respond to a transitory shock, such as poor growing season weather, by drawing down inventory. This action mitigates the price effect. A persistent shock, such as an increase in current and expected future demand, cannot be mitigated by drawing down inventory.To identify these two types of shocks, we exploit their differential effects on inventory levels and on the term structure of futures prices. For example, all else equal, a sudden increase in this year's consumption demand reduces available inventories and raises spot prices relative to futures prices. This is a transitory shock. In contrast, a predicted increase in next year's consumption demand generates an increase in i...

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Section: Policy Historymentioning

confidence: 99%

Commodity Storage and the Market Effects of Biofuel Policies

Carter

Rausser

Smith

2016

American J Agri Economics

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“…We consider four alternatives, renewable fuel standards (RFS), low carbon fuel standards (LCFS), a carbon cap and trade system (CAT), and ethanol subsidies (SUBS). Our modeling approach is similar to Holland, Hughes, and Knittel (2009) and Holland et al (2013). A single, representative, price taking firm produces quantities q 1 , q 2 .…”

Section: Biofuel Policiesmentioning

confidence: 99%

“…Similarly for the total requirement, the additional cost taking into account advanced fuel is p RIN tot (σ tot − σ adv ). For more details see Holland et al (2013).…”

Section: Renewable Fuel Standardmentioning

confidence: 99%

“…11 Holland et al (2013) investigate the political economy of transportation sector carbon policy as a possible explanation of why H.R. 2454 was unsuccessful.…”

Section: Ethanol Subsidiesmentioning

confidence: 99%

“…A number of studies have shown that renewable fuel standards (RFS) or mandates, low carbon fuel standards (LCFS) and direct subsidies are inefficient instruments for achieving emissions reductions relative to cap and trade (CAT) or carbon pricing (Cui et al, 2011;de Gorter and Just, 2010;Holland, Hughes, and Knittel, 2009;Holland et al, 2013;Lapan and Moschini, 2012;Khanna, Ando, and Taheripour, 2008;Chen et al, 2011). Despite these well-documented inefficiencies, the inefficient policies persist and there is little political support to replace them with more efficient policies.…”

Section: Introductionmentioning

confidence: 99%

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Unintended Consequences of Carbon Policies: Transportation Fuels, Land-Use, Emissions, and Innovation

Holland¹,

Hughes²,

Knittel³

et al. 2015

The Energy Journal

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Renewable fuel standards, low carbon fuel standards, and ethanol subsidies are popular policies to incentivize ethanol production and reduce emissions from transportation. Compared to carbon trading, these policies lead to large shifts in agricultural activity and unexpected social costs. We simulate the 2022 Federal Renewable Fuel Standard (RFS) and find that energy crop production increases by 39 million acres. Land-use costs from erosion and habitat loss are between $277 and $693 million. A low carbon fuel standard (LCFS) and ethanol subsidies have similar effects while costs under an equivalent cap and trade (CAT) system are essentially zero. In addition, the alternatives to CAT magnify errors in assigning emissions rates to fuels and can over or under-incentivize innovation. These results highlight the potential negative efficiency effects of the RFS, LCFS and subsidies, effects that would be less severe under a CAT policy.

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Escape from Third-Best: Rating Emissions for Intensity Standards

Lemoine

2016

Environ Resource Econ

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An increasingly common type of environmental policy instrument limits the carbon intensity of transportation and electricity markets. In order to extend the policy's scope beyond point-of-use emissions, regulators assign each competing fuel an emission intensity rating for use in calculating compliance. I show that welfare-maximizing ratings do not generally coincide with the best estimates of actual emissions. In fact, the regulator can achieve a higher level of welfare by manipulating the emission ratings than by manipulating the level of the standard. Moreover, a fuel's optimal rating can actually decrease when its estimated emission intensity increases. Numerical simulations of the California Low-Carbon Fuel Standard suggest that when recent scientific information suggested greater emissions from conventional ethanol, regulators should have lowered ethanol's rating (making it appear less emission-intensive) so that the fuel market would clear with a lower quantity. JEL: H23, Q42, Q58

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Some Inconvenient Truths about Climate Change Policy: The Distributional Impacts of Transportation Policies

Cited by 37 publications

References 30 publications

Commodity Storage and the Market Effects of Biofuel Policies

Commodity Storage and the Market Effects of Biofuel Policies

Unintended Consequences of Carbon Policies: Transportation Fuels, Land-Use, Emissions, and Innovation

Escape from Third-Best: Rating Emissions for Intensity Standards

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