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Abstract
We show how leakage differs, depending on the biofuel policy and market conditions.
Carbon leakage is shown to have two components: a market leakage effect and an emissions
savings effect. We also distinguish domestic and international leakage. International leakage
is always positive, but domestic leakage can be negative. The magnitude of market leakage
depends on 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. Being a small country in world oil markets does not automatically imply that
leakage is 100 percent or above that of a large country. We show leakage due to a tax credit is
always greater than that of a mandate, while the combination of a mandate and subsidy
generates greater leakage than a mandate alone. In general, one gallon of ethanol is found to
replace only 0.35 gallons of gasoline – not one gallon as assumed by life-cycle accounting.
For the United States, this translates into one (gasoline-equivalent) gallon of ethanol emitting
1.13 times more carbon than a gallon of gasoline if indirect land use change (iLUC) is not
included in the estimated emissions savings effect and 1.43 times more when iLUC is
included.