Fuel Subsidy Pass-Through and Market Structure: Evidence from the Renewable Fuel Standard

Gabriel E. Lade, James Bushnell
December 2016  [16-WP 570]

The Renewable Fuel Standard (RFS) is among the largest renewable energy mandates in the world. The policy is enforced using tradeable credits that implicitly subsidize biofuels and tax fossil fuels. The RFS relies on these taxes and subsidies to be passed through to consumers to stimulate demand for biofuels and decrease demand for gasoline and diesel. Using station-level prices for E85 (a high-ethanol blend fuel) from over 450 retail fuel stations, we show that pass-through of the ethanol subsidy is, on average, complete. However, we find that full pass-through takes four to six weeks and that local market structure of gasoline stations influences both the speed and overall level of pass-through.

JEL Codes: Q42, Q58, H23

Keywords: retail fuel markets, E85, renewable fuel standard, subsidy pass-through

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