Implementing the Renewable Fuel Standard with the Renewable Portfolio Standard in the US: Implications for Policy Costs and Greenhouse Gas Emissions

Abstract

The Renewable Fuel Standard (RFS) and state-level Renewable Portfolio Standards (RPS) have the potential to interact in complex ways because they will both rely on biomass for cellulosic biofuels and bio-electricity. This interaction could be synergistic or competitive; while the implementation of the RFS could divert biomass from electricity generation for biofuels it would also generate electricity as a co-product of the cellulosic biofuel production process. This paper examines the welfare costs and greenhouse gas (GHG) emissions effects of the RFS and RPS implemented jointly and compares them with those of implementing each of these policies by itself over the 2007-2030 period using an integrated, dynamic, price endogenous model of the electricity, transportation and agricultural sectors for the US. We also compare the cost effectiveness of these policies implemented jointly with those of a carbon tax that achieves the same level of cumulative reduction in domestic GHG emissions over 2007-2030 period. We find that the implementation of the RFS will raise the welfare costs of implementing the RPS for the electricity sector by 10% and lower its GHG benefits by 7% relative to those with the RPS implemented by itself. We also find that the global welfare costs of the jointly implemented RFS and RPS policies are significantly higher than those of a carbon tax. However, the former induces a larger shift to renewable energy than the carbon tax alone and thus would achieve larger reductions in domestic GHG emissions in the long run than a constant carbon tax policy.