Policy intervention in the biofuel market has led to a significant increase in biofuel production and use in the past several years. However, the welfare effect of biofuelpolicies, specifically the ethanol tax credit for corn ethanol, ethanol import tariff andrenewable fuel standard (RFS) mandate has not been adequately examined. Moreover,the environmental impact of these policies, and their impact on fuel taxationhas not been sufficiently addressed in the literature. This dissertation examines themarket and welfare effects of biofuel policies in the US, specifically those relating tocorn and sugarcane ethanol, with the aim of determining the welfare implications ofexisting policies, and designing second-best optimal policies. In measuring welfareeffects, changes in social surplus, as well as environmental externalities are taken intoaccount. In addition, the interaction of fuel and biofuel policies with the broaderfiscal system is also considered.This dissertation consists of three papers. In the first paper, a stylized modelof the US miles and fuel market, including ethanol trade is developed to quantifythe market and welfare effects of biofuel policies in the US. In order to examinethe effect of the ethanol tax credit and import tariff, several market scenarios aresimulated. The market outcome with the two policies in place are compared to anon-intervention scenario, and an optimal baseline where Pigouvian taxes are leviedon fuel and miles. Results show that the effect of the tax credit on social surplus isclearly negative, while the impact of the tariff depends on the ability of the US toinfluence ethanol prices in the world market. Numerical simulations show that theexisting ethanol tax credit and import tariff increase miles externalities and GHGemissions and decrease social welfare by $5.9 B relative to non-intervention and by$235 B relative to the optimal scenario.In the second paper, detailed production data on ethanol production costs inthe US and Brazil are used together with a numerical model of US biofuel tradewith Brazil to quantify the welfare effect of the US RFS mandate for traditional andadvanced biofuel (excluding cellulosic and biomass biodiesel) under various scenarioson the currency exchange rate between the US dollar and Brazilian reais. Numericalresults show that in 2015, the cost of the mandate is lower when the US currency isappreciated relative to the Brazilian currency, and when the excess supply elasticityof ethanol from Brazil is more elastic. Relative to a baseline without a mandate butwith an ethanol subsidy and import tariff in place, GHG emissions decrease and thewelfare effect of the mandate ranges from -$23 to +$5 Billion dollars as the exchangerate varies from US$1 = R$1.81 to US$1 = R$3.11.The third paper analyzes the impact of biofuel policies and biofuel use on thesecond-best optimal carbon tax for fuels in the presence of a labor tax and a biofuelsubsidy. Findings show that when biofuel is part of the fuel mix, the carbon taxhas a commodity price effect which arises from tax-induced changes in land rent.The commodity price effect could exacerbate or attenuate the tax interaction effectcaused by higher fuel prices, depending on the elasticity of substitution betweengasoline and biofuel, the price elasticity of miles demand, and the relative emissionsintensity of gasoline and biofuel. Numerical results show that the commodity priceeffect affects the value of the second-best optimal carbon tax, and that the effectis greater if the elasticity of substitution between gasoline and ethanol is higher,iiimiles demand is more price inelastic, and the emissions intensity of biofuel is lowerrelative to gasoline. In addition, the existence of a fixed biofuel subsidy lead to agreater divergence between the value of the second-best optimal carbon tax withor without biofuels. A carbon tax policy decreases GHG emissions and increaseswelfare, in contrast to a biofuel subsidy, which also decreases GHG emissions but ata net welfare loss.
