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Abstract

This paper applies the insights of the carbon leakage literature to study the emissions consequences of biofuel policies. We develop a simple analytic framework to decompose the intended emissions impacts of biofuel policy from four sources of carbon leakage: domestic fuel markets, domestic land markets, world land markets and world crude oil markets. A numerical simulation model illustrates the magnitude of each source of leakage for combinations of two current US biofuel policies: the Volumetric Ethanol Excise Tax Credit (VEETC) and the Renewable Fuel Standard (RFS). In the presence of both land and fuel market leakage, current US biofuel policies are unlikely to reduce greenhouse gases. Four of the five policy scenarios we consider lead to increases in greenhouse gas emissions. That is, total leakage was greater than 100%. The single scenario that generates emissions savings, the removal of the VEETC in conjunction with a binding RFS, only does so because negative leakage in the domestic fuel market offset the remaining positive sources of leakage.

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