An Economic Evaluation of the Renewable Fuel Standard (RFS) Biofuel Program: An Industrial Policy Approach

Abstract

The American public realizes the growing scarcity of petroleum and the desirability of the development of alternative fuels. In 2005 and 2007, the U.S. Congress passed laws that aim to promote the consumption of renewable biofuels. The Environmental Protection Agency then designed the Renewable Fuel Standard Program (RFS) that mandates a certain volume of renewable biofuel consumption over the period of 2006-2022. The current policy discussions and analyses regarding the RFS have focused heavily on environmental issues, but we know very little about the U.S. ethanol industry itself. In this study, we examine the potential impact of the RFS on the development process of the U.S. ethanol industry from the viewpoint of industrial policy using ethanol plant-level data. Our analysis suggests that the RFS program contributes to increasing economies of scale and improving competition level among existing firms. The successful development of the U.S. ethanol industry hinges on this factor. The ethanol market is expanding through new plant construction, and the increased competition will let ethanol emerge as a viable fuel alternative to conventional fossil fuel.