Energy Policy ] (]]]]) ]]]–]]] Contents lists available at SciVerse ScienceDirect Energy Policy journal homepage: www.elsevier.com/locate/enpol Stacking low carbon policies on the renewable fuels standard: Economic and greenhouse gas implications Haixiao Huang a,1, Madhu Khanna b,n,1, Hayri O¨ nal b,1, Xiaoguang Chen c,1 a Energy Biosciences Institute, University of Illinois at Urbana Champaign, 1206 West Gregory Dr, Urbana, IL 61801, United States b Department of Agricultural and Consumer Economics, University of Illinois at Urbana Champaign, 326 Mumford Hall, 1301 West Gregory Dr, Urbana, IL 61801, United States c Research Institute of Economics and Management, Southwestern University of Finance and Economics, China HIGHLIGHTS c The addition of a LCFS to the RFS increases the share of second generation biofuels. c The addition of a carbon price to these policies encourages fuel conservation. c These combined policies significantly increase the reduction in GHG emissions. c They also achieve greater energy security and economic benefits than the RFS alone. article info abstract Article history: This paper examines the economic and GHG implications of stacking a low carbon fuel standard (LCFS) Received 26 December 2011 with and without a carbon price policy on the Renewable Fuel Standard (RFS). We compare the Accepted 1 June 2012 performance of various policy combinations for food and fuel prices, fuel mix and fuel consumption. We also analyze the economic costs and benefits of alternative policy combinations and their distributional Keywords: effects for consumers and producers in the transportation and agricultural sector in the US. Using a Low carbon fuel standard dynamic, multi-market, partial equilibrium model of the transportation and agricultural sectors, we Cellulosic biofuels find that combining the RFS with an LCFS policy leads to a reduction in first generation biofuels and an Food versus fuel increase in second generation biofuels compared to the RFS alone. This policy combination also achieves greater reduction in GHG emissions even after considering offsetting market mediated effects. Imposition of a carbon price with the RFS and LCFS policy primarily induces fuel conservation and achieves larger GHG emissions reduction compared to the other policy scenarios. All these policy combinations lead to higher net economic benefits for the transportation and agricultural sectors relative to the no policy baseline because they improve the terms of trade for US. & 2012 Elsevier Ltd. All rights reserved. 1. Introduction feedstock (corn), advanced biofuels and particularly cellulosic biofuels can potentially be produced using a variety of feedstocks, Biofuel production is being promoted to achieve multiple including crop and forest residues and energy crops. These objectives including enhanced energy security, reduced depen- biofuels typically have lower life-cycle GHG intensity compared dence on oil and mitigation of greenhouse gas (GHG) emissions to corn ethanol and would divert less land from food production from the transportation sector. At the same time, concerns about per unit fuel produced since they could be produced either from the competition for land posed by food crop based biofuels and its crop by-products or from energy crops that can potentially be implications for food prices are leading to emphasis on the next grown productively on low quality land that is marginal for food generation of biofuels from cellulosic biomass. While conven- crop production. tional biofuels have been produced in the US using one dominant A key policy mechanism to induce the production of biofuels is the Renewable Fuels Standard (RFS) which sets volumetric targets for different categories of biofuels, based on the type of feedstock 2 n Corresponding author. Tel.: þ1 217 333 5176. used and their GHG intensity relative to fossil fuels. The targets E-mail addresses: [email protected] (H. Huang), [email protected] (M. Khanna), [email protected] (H. O¨ nal), [email protected] (X. Chen). 2 The RFS establishes three categories of renewable fuels each with a separate 1 Senior authorship not assigned. volumetric mandate and a specific lifecycle GHG emission threshold. The 0301-4215/$ - see front matter & 2012 Elsevier Ltd. All rights reserved. http://dx.doi.org/10.1016/j.enpol.2012.06.002 Please cite this article as: Huang, H., et al., Stacking low carbon policies on the renewable fuels standard: Economic and greenhouse gas implications. Energy Policy (2012), http://dx.doi.org/10.1016/j.enpol.2012.06.002 2 H. Huang et al. / Energy Policy ] (]]]]) ]]]–]]] for different categories are nested within the overall target, such (ILUCs) that would release the carbon stored in natural vegetation that the target for cellulosic biofuels is set as a lower bound while and forests as new land is brought into crop production the target for conventional biofuels (principally corn ethanol) is (Searchinger et al., 2008). Biofuel production will also displace set as an upper bound. While this allows for the possibility that demand for fossil fuels and lower the price of fossil fuels in the cellulosic biofuels could displace conventional biofuels it would world market and cause demand to rebound back to some extent. occur only if their costs of production decreased sufficiently to The price induced increase in fossil fuel consumption (and VKT) is allow them to be competitive with conventional biofuels. More- referred to as the ‘‘rebound effect’’ which will offset a part of the over, the thresholds for GHG intensity establish minimum initial reduction in demand (Chen and Khanna, 2012). The requirements for biofuels and do not create incentives to con- magnitude of this rebound effect will influence the extent to sume even lower carbon biofuels if they are more expensive. The which the RFS and the LCFS will contribute to achieving the goal RFS also grandfathers certain corn ethanol production plants from of energy security and GHG emission mitigation. We do not the GHG requirements, thus providing no incentive for reducing estimate the ILUC-effect of biofuel production in the ROW; the carbon intensity from fuel produced by these plants (CARB, instead we use the ILUC effect estimated by other studies to 2009). examine the order of magnitude of the direct and indirect effects This has led to interest in supplementing the RFS with other of the policies considered on global GHG emissions. low carbon policies such as a Low Carbon Fuel Standard (LCFS) We undertake this analysis by using an integrated model of that would shift the mix of biofuels towards those with lower the fuel and agricultural sectors, Biofuel and Environmental Policy carbon intensity. A national LCFS does not currently exist, but a Analysis Model (BEPAM), which incorporates the interconnec- state-wide LCFS has been established in California that calls for a tions between transportation sector policies and land use due to 10% reduction in the carbon intensity (CI) of transport fuels sold their influence on the demand for biofuels. The model endogen- in the state by 2020 (CARB, 2009). British Colombia in Canada has ously determines the effects of alternative policy combinations a similar LCFS policy. Various Northeast, Mid-Atlantic and Mid- for the mix of fuels produced, for the cost of fuel and agricultural west states and the states of Washington and Oregon have been commodities and for VKT in 2035. It considers biofuels that can be investigating the design of an LCFS for their regions. Policies produced from several feedstocks and can be blended with gaso- similar to the LCFS are being implemented under the European line or diesel as well as sugarcane ethanol that can be imported Union’s (EU) Fuel Quality Directive. While the LCFS would lower from Brazil. the GHG intensity of transportation fuel, its effect on fuel The economic and environmental implications of the RFS have consumption and total GHG emissions is ambiguous (Holland been studied extensively (Beach and McCarl, 2010; Chen et al., et al., 2009). In contrast, a carbon price policy would add to the 2012a; Hertel et al., 2010; Searchinger et al., 2008). Beach and cost of consuming both biofuels and fossil fuels based on their McCarl (2010) use the Forest and Agricultural Sector Optimization carbon intensity and could contribute not only to GHG mitigation Model (FASOM) while Chen et al. (2012a) employ an earlier but also to lowering overall fuel consumption. However, previous version of the BEPAM model to analyze the implications of the studies show that a very high carbon price would be needed to RFS for land use, crop price and GHG emissions. Hertel et al. incentivize cellulosic biofuel production (Chen et al., 2012a). A (2010) and Searchinger et al. (2008) apply the Global Trade mix of policies may therefore be needed to achieve the multiple Analysis Project (GTAP) and Food and Agricultural Policy Research goals of reducing GHG emissions and dependence on fossil fuels Institute (FAPRI) models, respectively, to investigate the direct while increasing energy security. and indirect land use changes induced by the mandate for corn The purpose of this paper is to examine the economic and GHG ethanol. There are only a few studies analyzing the performance implications of stacking a low carbon fuel standard (LCFS) with of a LCFS and comparing it to other policies. Holland et al. (2009) and without a carbon price policy on the RFS. We compare the show that in a closed economy the LCFS always imposes an performance of various policy combinations for food and fuel economic cost and that a carbon tax would be the least cost prices, vehicle kilometers traveled (VKT), fuel mix and fuel approach to reducing GHG emissions. However, their analysis consumption. We also analyze the economic costs and benefits does not consider an open economy with trade in food and fuel or of alternative policy combinations and their distributional effects the impacts of the LCFS on agricultural consumers and producers.