Are there Carbon Savings from US Biofuel Policies?
The Critical Importance of Accounting for Leakage in Land
and Fuel Markets
By Antonio M. Bento, Richard Klotz, and Joel R. Landry∗
Although the costs of comprehensive U.S. federal climate legislation, such as a
cap-and-trade program, have been shown to be small, a variety of political obstacles
continue to block its passage. Policymakers have instead relied on sectoral and
regional approaches to reduce greenhouse gas (GHG) emissions. A major concern
associated with sectoral and regional approaches to climate policy relates to their
effectiveness in reducing GHG emissions. Such approaches are incomplete, in that
only a subset of polluting sectors or regions are regulated. As a consequence they
are likely to generate carbon leakage. Carbon leakage occurs as sectors or regions not
covered by the regulation respond to the regulation (directly or indirectly). When
it comes to sectoral approaches to climate policy, policies that call for the expansion
of liquid biofuels have been especially scrutinized by environmental groups and the
popular press. Yet, to date the very few studies that have examined carbon leakage
from biofuel policies typically only consider a single source of leakage.
In this paper we provide comprehensive estimates of carbon leakage from the
Renewable Fuel Standard (RFS) for conventional biofuels. The RFS mandates
quantities of conventional and advanced biofuels, with each biofuel class defined
according to its lifecycle emissions savings relative to gasoline. The current RFS
was established in 2007 when the Volumetric Ethanol Excise Tax Credit (VEETC)–
the long-standing federal biofuel subsidy–was in place. However, the VEETC was
allowed to expire at the end of 2011, leaving the RFS as the primary biofuel support
program in the U.S. Our analysis of the RFS explicitly accounts for these changes
in policy regime, and reviews the impact of current proposals to eliminate the RFS
for conventional biofuels altogether.
This paper addresses three related questions. First, what are the effects of the
RFS on land and fuel markets? Second, what is the impact of the RFS on overall
GHG emissions, and how does carbon leakage in land and fuel markets cause overall
emissions to deviate from the intended emissions savings anticipated by legislators
at the time the RFS was passed in 2007? Third, what is the impact of the change in
policy regimes and current proposals to eliminate the RFS on overall GHG emissions
and leakage due to the RFS?
Our central finding is that the expansion of biofuels mandated by the RFS can
increase or decrease GHG emissions depending on the policy regime being evaluated.
Relative to a baseline that includes the VEETC, which was in place when the current
RFS was established, the RFS causes emissions to increase by 4.5 TgCO2 e in 2015.
However, swapping the RFS for the VEETC implies fewer GHG emissions than
those that result from the VEETC itself, causing emissions to fall by 2.0 TgCO2 e
∗ Bento: Cornell University and the National Bureau of Economic Research; email: amb396@cornell.edu.
Klotz: Cornell University; email: rlk99@cornell.edu. Landry: The Pennsylvania State University, University
Park; email: joelrlandry@psu.edu.
1
in 2015. Thus, the decision to allow the VEETC to expire at the end of 2011
will result in cumulative emissions savings of 25.5 TgCO2 e between 2012 and 2015,
while increasing ethanol production considerably. Finally, the RFS causes emissions
to increase by 6.7 TgCO2 e in 2015 when evaluated relative to a baseline without
the VEETC. Given that the VEETC has expired, this is also the amount by which
emissions could be reduced if the RFS for conventional biofuels was eliminated.
While the overall impact on emissions of the policy regimes we consider are
modest, our numerical analysis uncovers two surprising results that could not be
inferred from a theoretical exercise, an analysis of a single market alone, or a multimarket analysis that uses constant emissions factors in one of the markets. First,
both baselines and policy context matter when determining the change in overall
GHG emissions and the contributions of each leakage channel. We find that leakage
channels are co-determined with emissions from other leakage channel through linked
markets. Second, we show that there is an implicit tension between land and fuel
market leakage channels. Policy regimes that result in less land market leakage tend
to result in more domestic fuel market leakage per liter of ethanol added. This
relationship between land and fuel market leakage has important implications for
policy since it suggests that different policy instruments may lead to different leakage
magnitudes.
2