The Effects of Subsidies and Mandates: A Dynamic Model of the Ethanol Industry

This paper analyzes the effects of government subsidies and the Renewable Fuel Standard (RFS) on the U.S. ethanol industry. The researchers first developed a stylized theory model of subsidies in which they examined which subsidies are more cost-effective for inducing investment in firm capacity and how the presence of a mandate affects the relative cost-effectiveness. Researchers then empirically analyzed how government subsidies and the RFS affect ethanol production, investment, entry, and exit through estimating an econometric model that including the distributions of investment costs, entry costs, and exit scrap values. The estimated parameters were used to evaluate three different types of subsidy: a production subsidy, an investment subsidy, and an entry subsidy, each with and without the RFS. While conventional wisdom and some of the previous literature favor production subsidy over investment subsidy, and while historically the federal government has used production subsidies to support ethanol, the results of this study show that, for the ethanol industry, investment subsidies and entry subsidies are more cost-effective than production subsidies for inducing investment that otherwise would not have occurred.

Language

  • English

Project

  • Status: Completed
  • Funding: $103573.65
  • Contract Numbers:

    DTRT13-G-UTC29

  • Sponsor Organizations:

    Office of the Assistant Secretary for Research and Technology

    University Transportation Centers Program
    Department of Transportation
    Washington, DC  United States  20590

    National Center for Sustainable Transportation

    University of California, Davis
    Davis, CA  United States 
  • Managing Organizations:

    National Center for Sustainable Transportation

    University of California, Davis
    Davis, CA  United States 
  • Project Managers:

    Iacobucci, Lauren

  • Performing Organizations:

    National Center for Sustainable Transportation

    University of California, Davis
    Davis, CA  United States 

    University of California, Davis

    Institute of Transportation Studies
    Davis, CA  United States  95616
  • Principal Investigators:

    Lawell, C-Y

  • Start Date: 20151001
  • Expected Completion Date: 20170930
  • Actual Completion Date: 20171128
  • USDOT Program: University Transportation Centers

Subject/Index Terms

Filing Info

  • Accession Number: 01554054
  • Record Type: Research project
  • Source Agency: National Center for Sustainable Transportation
  • Contract Numbers: DTRT13-G-UTC29
  • Files: UTC, RiP
  • Created Date: Feb 25 2015 1:01AM