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Abstract
We show carbon leakage depends on the type of biofuel policy (tax credit versus mandate),
the domestic and foreign gasoline supply and fuel demand elasticities, and on consumption
and production shares of world oil markets for the country introducing the biofuel policy. The
components of carbon leakage – market leakage and emissions savings – are counteracting:
carbon leakage increases with market leakage but decreases with emissions savings. We also
distinguish domestic and international leakage where the latter is always positive, but
domestic leakage can be negative with a mandate. The IPCC definition of leakage omits
domestic leakage, resulting in biased estimates. Leakage with a tax credit always exceeds that
of a mandate, while the combination of a mandate and tax credit generates lower leakage than
a tax credit alone. In general, a gallon of ethanol (energy equivalent) is found to replace 35
percent of a gallon of gasoline – not 100 percent as assumed by life-cycle accounting. This
means ethanol emits 13 percent more carbon than a gallon of gasoline if indirect land use
change (iLUC) is not included in the estimated emissions savings effect and 43 percent more
when iLUC is included.