The Relative Impacts of U.S. Bio-Fuel Policies on Fuel-Energy Markets: A Comparative Static Analysis

Abstract

Rapidly declining gasoline prices from their record high during the summer of 2008, while ethanol prices remained relatively high, made it difficult for many bio-fuel policy modelers to fully explain the impacts of U.S. bio-fuel policies on fuel prices. Using profitmaximization models for blenders, refiners, and distillers, we conduct a comparative static analysis to measure the relative magnitudes of the impacts of tax credits and blending mandates on fuel-energy market equilibrium prices. Our results indicate that first, the prices of all fuels including conventional gasoline, ethanol, and blended gasoline decline as the biofuel tax credit increases, but they increase as the rate of the blending mandate increases. Second, the shadow value of a blending mandate represents the marginal rate of substitution between the marginal price change associated with a blending mandate and the marginal price change associated with a bio-fuel tax credit. Therefore, bio-fuel policies can affect the prices of all fuels including conventional gasoline, ethanol, and blended gasoline. Finally, ethanol imports are affected by domestic blender's market-power effects, more than by the import duty imposed to offset the tax credit associated with the use of imported ethanol in the blending process.

2016 Bioenergy Industry Status Report

“…The tax credit was paid to ethanol blenders (petroleum companies) rather than ethanol plants, though the ethanol price was certainly impacted by the tax credit. The value of the tax credit was $0.51/gallon from 2004 through 2008 and $0.45/gallon between 2009 and 2011 (Kim, Schaible, and Daberkow 2010). The VEETC was discontinued at the end of 2011 because conventional ethanol had reached commercial maturity and the incentive was no longer necessary.…”

2015 Bioenergy Market Report

“…The tax credit was paid to ethanol blenders (petroleum companies) rather than ethanol plants, though the ethanol price was certainly impacted by the tax credit. The value of the tax credit was $0.51/gallon from 2004 through 2008 and $0.45/gallon between 2009 and 2011 (Kim et al 2010). The VEETC was discontinued at the end of 2011 with the support of the ethanol industry because conventional ethanol had reached commercial maturity and the incentive was no longer necessary.…”

2013 Bioenergy Market Report

“…The tax credit was paid to ethanol blenders (petroleum companies) rather than ethanol plants, though the ethanol price was certainly impacted by the tax credit. The value of the tax credit was $0.51/gallon from 2004through 2008and $0.45/gallon between 2009(Kim et al 2010. The VEETC was discontinued at the end of 2011 with the support of the ethanol industry because conventional ethanol had reached commercial maturity and the incentive was no longer necessary.…”