The Economics of a Blend Mandate for Biofuels

TLDR

A biofuel blend mandate can raise or lower consumer fuel prices depending on the relative supply elasticities of biofuels and oil. Tax credits consistently lower fuel prices compared to mandates, yet they increase oil dependency, CO₂ emissions, traffic congestion, and impose substantial taxpayer costs of about $28.7 billion annually by 2022.

Abstract

Abstract A biofuel blend mandate may increase or decrease consumer fuel prices with endogenous oil prices, depending on relative supply elasticities. Biofuel tax credits always reduce fuel prices. Tax credits result in lower fuel prices than under a mandate for the same level of biofuel production. If tax credits are implemented alongside mandates, then tax credits subsidize fuel consumption instead of biofuels. This contradicts energy policy goals by increasing oil dependency, CO 2 emissions, and traffic congestion, while providing little benefit to either corn or ethanol producers. These social costs will be substantial with tax credits costing taxpayers $28.7 billion annually by 2022.