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

Abstract

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. We study pass-through of the RFS subsidy for E85, a high-ethanol blend fuel, to retail fuel prices using weekly prices from over 450 fuel stations in the United States. We find that, on average, half to three-quarters of the E85 subsidy is passed through to consumers. However, pass-through takes 6–8 weeks, and station-level pass-through rates exhibit substantial heterogeneity, with the retailers’ market structure influencing both the speed and level of pass-through.