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Implied Objectives of U.S. Biofuel Subsidies

Ofir D. Rubin, Miguel Carriquiry, Dermot J. Hayes
February 2008  [08-WP 459]

Biofuel subsidies in the United States have been justified on the following grounds: energy independence, a reduction in greenhouse gas emissions, improvements in rural development related to biofuel plants, and farm income support. The 2007 energy act emphasizes the first two objectives. In this study, we quantify the costs and benefits that different biofuels provide. We consider the first two objectives separately and show that each can be achieved with a lower social cost than that of the current policy. Then, we show that there is no evidence to disprove that the primary objective of biofuel policy is to support farm income. Current policy favors corn production and the construction of corn-based ethanol plants. We find that favoring corn happens to be the best way to remove land from food and feed production, thus providing higher commodity prices and income to farmers and landowners. Next, we calculate two sets of alternative biofuel subsidies that are targeted to meeting income transfer objectives and either greenhouse gas emission reductions or fuel energy reductions. The first of these assumes that greenhouse gas emissions and high crop prices are joint objectives, and the second assumes that fuel independence and high crop prices are the joint objectives. Finally, we infer the social willingness to pay for biofuel services. This, in turn, allows us to propose a subsidy schedule that maintains (inferred) social preferences and provides a higher incentive for farmers to choose production of cellulosic materials. This is particularly relevant since the 2007 energy act sets a renewable fuels standard that relies heavily on cellulosic biofuel but does not specify a higher "per gallon" incentive to producers.

Keywords: biofuels, biofuel subsidies, energy security, feedstock, greenhouse gas emissions, social preferences, value-added agriculture.

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