The Green Paradox of U.S. Biofuel Subsidies: Impact on Greenhouse Gas Emissions

Abstract

This paper presents the first comprehensive estimates of the impact of U.S. biofuel subsidies on greenhouse gas emissions. Although U.S. support for biofuels is large and growing, the associated impact on greenhouse gas emissions remains unclear. The effect of biofuel subsidies on emissions is determined by the relative magnitudes of countervailing substitution and price effects. Regulators typically ignore the price effect of biofuel policies, and therefore do not fully account for market and climate impacts. We develop an economic simulation model of U.S. energy markets to estimate the impact of biofuel subsidies on greenhouse gas emissions from 2005 through 2009. The model represents end-use consumption of oil, natural gas, coal and electricity in four sectors. We find that the subsidies for ethanol increased greenhouse gas emissions, while those for biodiesel have an ambiguous effect. Thus, ethanol subsidies create a green paradox. Although ethanol has lower lifecycle greenhouse gas emissions than gasoline, the subsidies lower the market price of blended fuel, which increases overall fuel consumption and increase total greenhouse gas emissions. These findings question the suitability of using ethanol subsidies to achieve climate goals and highlight the importance of accounting for the price effect of biofuel policies.