On the trade-offs of regulating multiple unpriced externalities with a single instrument: Evidence from biofuel policies

Abstract

We develop an analytical and numerical model that integrates land, fuel, and food markets to evaluate the welfare implications of the U.S. Renewable Fuel Standard (RFS). Each dollar reduction in the external costs of oil dependency comes at the expense of additional environmental external costs of $0.53. Conditional on the categories of external benefits we consider, the RFS fails a benefit–cost test when excluding the change in the trade balance, with net costs totaling $1.4 billion in 2015. Further, policymakers would have to value the external costs of oil dependency at $1.05 per gallon of gasoline in order for the RFS to pass a benefit–cost test, which is nearly five times larger than central estimates of the oil premium.