Economics Working Papers

Publication Date

11-2018

Number

17039

Abstract

Many policies mandate renewable energy production to combat global climate change. These policies often differ significantly from first-best policy prescriptions. Among the largest renewable energy mandates enacted to date is the Renewable Fuel Standard (RFS), which mandates biofuel consumption far beyond what is feasible with current technology and infrastructure. In this article, we critically review the methods used by the Environmental Protection Agency to project nearand long-term compliance costs under the RFS, and draw lessons from the RFS experience to date that would improve the program’s efficiency. The lessons are meant to inform both future RFS rulemaking and the design of future climate policies. We draw two lessons specific to the RFS. (1) Incorporate uncertainty into rulemaking. Make, implement, and analyze policy with a view towards what might happen, rather than a projection of what will happen. (2) Implement multiyear rules. Multi-year rulemaking allows for longer periods between major regulatory decisions and sends greater certainty to markets. We also make two more general recommendations. (3) Tie waiver authority to compliance costs or include cost containment provisions. Explicit and transparent cost containment mechanisms send a stable policy signal to markets. (4) Fund research and development of new technologies directly rather than mandating them. Future technological advancement is uncertain, and mandating new technologies has proven to be largely ineffective to date, particularly in fuel markets.

JEL Classification

Q18, Q58

Version History

Original Release Date: November 2017

Departments

Department of Economics, Iowa State University

File Format

application/pdf

Length

37 pages

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