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Mandating Green: On the Design of Renewable Fuel Policies and Cost Containment Mechanisms


Research Report

Sustainable Transportation Energy Pathways (STEPS), National Center for Sustainable Transportation

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Suggested Citation:
Lade, Gabriel E. and C.-Y. Cynthia Lin Lawell (2015) Mandating Green: On the Design of Renewable Fuel Policies and Cost Containment Mechanisms. Institute of Transportation Studies, University of California, Davis, Research Report UCD-ITS-RR-15-33

The transportation sector is responsible for over a quarter of US greenhouse gas emissions, the majority of which are the result of fossil fuel combustion. Politicians and regulatory agencies at both federal and state levels have passed or considered a suite of policies aimed at decreasing emissions in the sector. Proposals include using carbon taxes, fuel economy standards for new vehicles, renewable fuel mandates, and including transportation sector emissions under regional or federal cap and trade programs.

Of these proposed policies, whenever unpriced emissions are the sole market failure, a carbon tax or cap and trade program is more likely to achieve the firstâ€best, while fuel mandates are unable to replicate the firstâ€best solution. However, rather than establish a carbon tax or cap and trade program to reduce emissions in the sector, policyâ€makers have favored renewable fuel mandates, likely due at least in part to political economy reasons. The most prominent fuel mandates in the US currently are the federal Renewable Fuel Standard (RFS), a renewable fuel share mandate; and California's Low Carbon Fuel Standard (LCFS), a carbon intensity standard. In addition, several other states have considered implementing similar policies.

The market effects of carbon intensity standards and renewable fuel share mandates have been studied by a number of authors. In addition, a growing literature compares the relative performance of fuel mandates to more traditional policy instruments such as carbon taxes; studies unintended consequences of the policies and their relative efficiency when markets are imperfectly competitive or open to trade; and examines ways policymakers can increase the efficiency fuel mandates through strategic policy choices.

In this paper, we formalize, expand upon, and synthesize the prior literature by developing a model of fuel mandates under perfect competition that incorporates both a renewable fuel share mandate and a carbon intensity standard. We summarize the effects of the policies on important market outcomes including equilibrium fuel prices and quantities. We also derive analytically and numerically the secondâ€best optimal RFS and LCFS.