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On the Trade-Offs of Regulating Multiple Unpriced Externalities with a Single Instrument:Evidence from the Renewable Fuel StandardAntonio M. Bento and Joel R. LandryEnvironmental Economics and Energy Policy ProgramDyson School of Applied Economics and ManagementCornell UniversityGood afternoon. Today I will be discussing my work with Dr. Bento titled On the Trade-Offs of Regulating Multiple Unpriced Externalities with a Single Instrument: Evidence from the Renewable Fuel Standard.1MotivationTinbergen (1952): In order to restore economic efficiency when multiple market failures are present we require a separate policy instrument to address each market failure.Despite this, policymakers frequently use a single policy instrument to address multiple unpriced externalities.The Energy Independence and Security Act of 2007 (EISA) was passed to address two objectives:Reduce energy dependenceReduce GHG emissionsOur knowledge of the potential trade-offs between these two objectives is limited.

2Overview of the Renewable Fuel Standard (Energy Independence and Security Act, 2007)Billions of gallons36 billion gallons of total bio-fuels, 21 billion gallons advanced, by 2022The Energy Independence and Security Act of 2007 established a set of nested biofuels mandates that dictate the consumption of 36 billion gallons of biofuels by 2022. Of this, 15 billion gallons are expected to be met by corn ethanol (CLICK), this level is achieved by 2015 and plateaus thereafter. The remainder is expected to come from advanced biofuels, such as that derived from cellulose (CLICK). In this paper we examine the effects of the mandate for corn-based ethanol through 2015.

3What are the economy-wide costs and benefits of the Renewable Fuel Standard (RFS) for conventional biofuels?

What are the trade-offs between the environmental and oil dependency related external benefits of the RFS?

What would policymakers implied value of oil dependency have to be in order for the RFS to pass a benefit-cost test?

Key QuestionsKey Features of the ModelFeatureCapabilityIntegrated treatment of agricultural and fuel marketsEstablishes a relationship between the prices of corn, ethanol, regular gasoline, crude oil, and blended fuel.Attention to detail to agricultural productionConsider adjustments across intensive and extensive margins (e.g. within cropland and between cropland and land held in the Conservation Reservation Program).Comprehensive treatment of trade in crops and crude oil Allows one to assess crop and crude oil displacement abroad.Consider pre-existing policies (volumetric ethanol excise tax credit, fuel tax, and Conservation Reserve Program)Allows us to measure the interactions between the mandate and pre-existing policies and evaluate their implications for welfare.Ability to capture important dynamical trendsAllow agricultural yields, CRP rental rates, efficiency of ethanol production to adjust. Monte Carlo analysis of external benefit parametersAllows us to understand how sensitive our welfare results are to uncertainty.5Overview of the Model The domestic agents in the model are:HouseholdsProducers of Agricultural CropsProducers of EthanolRefiners of Regular GasolineSuppliers of Blended FuelProducers of FoodGovernment

Trade with the Rest Of the World: Crude Oil ImportsCrop Exports6Welfare FormulaChange in welfare due to RFS is given by:

Consists of six components:Primary Costs, dWPCSubsidy Interaction Effect, dWEBlended Fuel Output Effect, dWFOil Premium Effect, dWPCRP Interaction Effect, dWNChange in Trade Balance, dWB

7Data SourcesDatabase NameSourceData ProvidedNational Income and Product Accounts (NIPA)DOC Bureau of Economic AnalysisSize of sectors relative to total GDP.Benchmark Input-Output TablesDOC Bureau of Economic Analysis Share of labor, capital, and other inputs used by sector.Highway Statistics Dataset (HSD)DOT Federal Highway AdministrationVMT, fuel economy, fuel taxes.Agricultural Resource Management Survey (ARMS), Commodity Cost and Return (CCR), Regional Environment and Agricultural Programming Model (REAP)USDA Economic Research ServiceInput usage (ag sector), shares of crop acreages by crop, rotation and tillage.Agricultural Statistics Database (ASD)USDA National Agricultural Statistics ServiceCrop yields, total acreages by crop.Production, Supply and Distribution OnlineUSDA Foreign Agricultural ServiceCrop export levels.Conservation Reserve Program ReportsUSDA Farm Service AgencyCRP acreages and average rental rate.GREET 1.8b, EBAMM 1.1, 2002 Ethanol Cost-of-Production SurveyWang (2008), Farrell et al. (2006), and Shapouri and Gallagher (2005) (of USDA), respectively.Input usage (ethanol sector), co-product conversion rates.Gasoline Components History, Refinery and Blender Net Input Datasets, US Crude Oil Supply and Disposition DatasetsDOE Energy Information AdministrationCrude oil expenditure share, ethanol and crude quantities.8Model DynamicsYields, domestic income and ROW demand for crops are allowed to adjust following the USDAs Long-Term Projections for 2009.Crude oil and energy prices follow the central price path of the EIAs Annual Energy Outlook 2010.Corn and energy requirements for ethanol follow RFS2 assumptions.Fuel economy adjusts per National Research Councils 2002 report.CRP rental rates increase by 2% a year.9Monte CarloUse Monte Carlo methods to quantify uncertainty with respect to our welfare analysis.For each category of external benefits (GHG emissions, oil dependency related, CRP benefits, local air pollution, accidents, and congestion), we fit separate independent gamma distributions to match:The a mean of our central parameter estimate, The 10th percentile to equal our lower bound parameter estimate, and The 90th percentile to equal our upper bound parameter estimate.External Cost Parameters

Numerical Results

Baseline and Mandated Ethanol Quantities (Billion Gallons)13Effect of the RFS on Land-Use Change

14Effect of the RFS on Import and Export Markets

15Effect of the RFS on Fuel and VMT Markets

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Net Costs of the RFS17

Does the RFS Pass a Benefit-Cost Test?

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How Do Environmental Benefits Trade-off with Oil Dependency Benefits?Comment:The more I think about this the more I believe we should push this result further. Specifically:Can we in addition to present this result break down the environmental external benefit into its components and do rations to oil dependence; that is ratio of local damage/oil dependence; ratio of global damages/oil dependencePerhaps it may be useful to give the benefit of the doubt of the environmental damage and consider the case where there is no blended fuel price effect;

I am making these suggestions because we are going to elevate this part of the paper, and this is very interesting.19Policymakers Implied Value of Oil Dependency

Comment:I have been thinking a lot about this paper of the paper, and I think there is something else we could do that is related and people will like. Specifically, before getting into this implied value of oil dependency, it would be important to calculate the costs of reduced oil dependency. That is what is the ratio of welfare cost to reduced oil importsWe could present first the calculation I am highlighting in 1 and then go into the implied valuation20

Implications if Policymakers Intended to Replace VEETC with RFS

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Implications if Policymakers Intended to Replace VEETC with RFS

22ConclusionsExcluding the change in the trade balance, the RFS for conventional biofuels fails a benefit-cost test with costs exceeding benefits by 3:1.Result is robust, with passage of benefit-cost test occurring only 0.01% of the time.Net costs per EGG of ethanol added by RFS is $0.64-$0.79.With respect to the change in trade balance, if only a quarter of the welfare gain from the change in terms of trade is realized then the RFS will pass a benefit-cost test.

23ConclusionsPolicymakers trade-off oil dependency benefits from the RFS with additional environmental costs almost dollar for dollar.In order for RFS to pass a benefit-cost test, policymakers would have to have external costs of oil-dependency that are 3 to 5 times greater than our central value of the external costs of oil dependency.

24ConclusionsWhen RFS replaces VEETC, The ratio of benefits to costs improves to 0.9 and net costs per EGG fall to $0.36 to $0.19.Instead of a trade-off, we have instead a simultaneous welfare improvement in environmental benefits and oil dependency, with each dollar benefit in oil dependency complemented with a $1-2 gain in environmental benefits.The implied value of oil dependency needed for RFS to pass a benefit-cost test would still have to be1.5-2 times greater than our central parameter estimate.

25Acknowledgements(

Cornell University Agricultural Experiment StationCornell Center for a Sustainable Future

Cornell Institute for Computational Sustainability26