Biofuels Policies and Welfare: Is the Stick ofMandates Better than the Carrot of Subsidies?

Significant government support for biofuels has led to rapid growth in U.S. ethanol production andresearch to develop more advanced biofuels. In this paper we construct a general equilibrium, openeconomy model that captures the rationale typically invoked to justify government intervention in thissetting: to alleviate the environmental impact of energy consumption and to decrease U.S. energydependence on foreign sources. The model is used to study both the positive and normativeimplications of alternative policy instruments, including the subsidies and mandates specified by the2007 Energy Independence and Security Act. From a positive perspective, we find that biofuelsmandates are equivalent to a combination of fuel taxes and biofuels subsidies that are revenue neutral.From a welfare perspective, we show that biofuels mandates dominate biofuels subsidies, and thatcombining fuel taxes (rather than subsidies) with mandates would be welfare enhancing.[...]