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Comparison of fixed versus variable biofuels incentives

Author

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  • Tyner, Wallace E.
  • Taheripour, Farzad
  • Perkis, David
Abstract
We evaluated several variants of a variable biofuel subsidy and compared them with the fixed subsidy and Renewable Fuel Standard using two different modeling approaches. First we used a partial equilibrium model encompassing crude oil, gasoline, ethanol, corn, and ethanol by-products. Second, we used a stochastic simulation model of a prototypical ethanol plant. From the partial equilibrium analysis, it appears the variable subsidy provides a safety net for ethanol producers when oil prices are low; yet, it does not put undue pressure on corn prices when oil prices are high. At high oil prices, the level of ethanol production is driven by market forces. From the plant level stochastic analysis, essentially the same conclusions are reached. As with the fixed subsidy, the variable subsidy can increase the net present value (NPV) sufficiently to encourage investment, but with lower risk for the producer, lower probability of a loss from the investment, and often lower expected cost to government. Finally, in the US, the ethanol industry is up against a blending limit called the blend wall. If the blending wall remains in place and no way around it is found, it does not matter much what other policy options are used.

Suggested Citation

  • Tyner, Wallace E. & Taheripour, Farzad & Perkis, David, 2010. "Comparison of fixed versus variable biofuels incentives," Energy Policy, Elsevier, vol. 38(10), pages 5530-5540, October.
    • Handle: RePEc:eee:enepol:v:38:y:2010:i:10:p:5530-5540
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    References listed on IDEAS

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    1. Condon, Nicole & Klemick, Heather & Wolverton, Ann, 2015. "Impacts of ethanol policy on corn prices: A review and meta-analysis of recent evidence," Food Policy, Elsevier, vol. 51(C), pages 63-73.
    2. McPhail, Lihong Lu & Babcock, Bruce A., 2012. "Impact of US biofuel policy on US corn and gasoline price variability," Energy, Elsevier, vol. 37(1), pages 505-513.
    3. Philip Abbott, 2014. "Biofuels, Binding Constraints, and Agricultural Commodity Price Volatility," NBER Chapters, in: The Economics of Food Price Volatility, pages 91-131, National Bureau of Economic Research, Inc.
    4. Debnath, Deepayan & Whistance, Jarrett & Thompson, Wyatt & Binfield, Julian, 2017. "Complement or substitute: Ethanol’s uncertain relationship with gasoline under alternative petroleum price and policy scenarios," Applied Energy, Elsevier, vol. 191(C), pages 385-397.
    5. McCarty, Tanner & Sesmero, Juan, 2014. "Uncertainty, Irreversibility, And Investment In Second-Generation Biofuels," 2014 Annual Meeting, July 27-29, 2014, Minneapolis, Minnesota 170604, Agricultural and Applied Economics Association.
    6. Sarica, Kemal & Tyner, Wallace E., 2013. "Analysis of US renewable fuels policies using a modified MARKAL model," Renewable Energy, Elsevier, vol. 50(C), pages 701-709.
    7. Taheripour, Farzad & Fiegel, Julie & Tyner, Wallace E., 2015. "Development of Corn Stover Biofuel: Impacts on Corn and Soybean Markets and Crop Rotation," Sustainable Agriculture Research, Canadian Center of Science and Education, vol. 5(1).
    8. Taheripour, Farzad & Tyner, Wallace E. & Fiegel, Julie, 2013. "Development of Corn Stover Biofuel: Impacts on Corn and Soybean Markets and Land Rotation," 2013 Annual Meeting, August 4-6, 2013, Washington, D.C. 148851, Agricultural and Applied Economics Association.
    9. Boucher, Philip, 2012. "The role of controversy, regulation and engineering in UK biofuel development," Energy Policy, Elsevier, vol. 42(C), pages 148-154.
    10. Newes, Emily & Clark, Christopher M. & Vimmerstedt, Laura & Peterson, Steve & Burkholder, Dallas & Korotney, David & Inman, Daniel, 2022. "Ethanol production in the United States: The roles of policy, price, and demand," Energy Policy, Elsevier, vol. 161(C).

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    Ethanol policy Biofuel incentives;

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