Integrated Tax-Subsidy Policy and the Cellulosic Biofuel Industry in the Pacific Northwest

Integrated Tax-Subsidy Policy and the Cellulosic Biofuel Industry in the Pacific Northwest

Gregmar Galinato, Associate Professor, School of Economic Sciences, Washington State University, Pullman, Tristan Skolrud, Assistant Professor, Department of Agricultural and Resource Economics, University of Saskatchewan
For Pacific Northwest policymakers interested in making the federal Renewable Fuel Standard mandates work for their state economies, this publication outlines an optimal policy that integrates taxes and subsidies based on market simulation research. It also describes how implementing this policy might affect the cellulosic biofuel industry in Washington, Idaho, and Oregon.
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Abstract

With emissions standards and renewable fuel mandates set to increase annually, economic policy will need to shift to accommodate these changes. Under current Renewable Fuel Standards (RFS), we derived an optimal policy for Washington, Oregon, and Idaho that integrates both taxes and subsidies. This publication synthesizes the results of market simulations that implement what we call the integrated tax-subsidy policy. It also briefly outlines the policy’s impacts on state economies and social welfare.

For the complete 2016 study, refer to “Welfare Implications of the Renewable Fuel Standard with an Integrated Tax-Subsidy Policy” by Skolrud and Galinato, which provides a detailed description of the model, simulation description, and specific assumptions used to derive the results presented here.

Background on US Energy Mandates

In 2007, the US enacted the Energy Independence and Security Act (EISA) as an attempt to reduce both fossil fuel dependence and greenhouse gas (GHG) emissions. To accomplish this, the EISA mandated the use of renewable energy sources such as feedstocks which pollute less than non-renewable energy sources like crude oil. The law incentivizes biofuel production from conventional feedstocks (sugar or starch) and cellulosic feedstocks (woody biomass or agricultural crop residue). The mandate for cellulosic biofuel, in particular, is set to increase such that by 2022, 16 billion gallons will be required—a billion gallons more than the conventional biofuel mandate (GPO 2011).

Biofuel Production in the PNW

Previous biofuel efforts in the region focused on conventional biofuels such as corn, canola, and sugar beet, but the Pacific Northwest (PNW) did not have a comparative production advantage. However, cellulosic biofuels, such as woody biomass and agricultural crop residue, position the Pacific Northwest states with a comparative advantage (Yoder et al. 2010).

Cellulosic Biofuel Production

Despite growing emphasis on cellulosic biofuels relative to conventional biofuels, the production of cellulosic biofuels has been slow. Only 20,069 gallons of cellulosic biofuel were

produced in 2012 despite an original mandate of 0.5 billion gallons (EPA 2013). By 2014, production increased to 33 million gallons, but the industry is still far behind its original EISA goal (RSFP 2015). There are two relevant Renewable Fuel Standard (RFS) policies relating to the production of cellulosic biofuel: (1) the input ratio requirement which imposes a limit on the amount of cellulosic fuel used and (2) the waiver credits which can be used to circumvent the input requirement (Galinato et al. 2016; GPO 2011).

Policies that Affect Cellulosic Biofuel Production

Input Ratio Requirement

To implement the input ratio requirement, the EPA created the Renewable Identification Number (RIN) as a mechanism for RFS compliance accounting. An RIN is a unique, 38-character number assigned to each gallon of renewable fuel produced in the US or imported. When renewable fuel is blended into motor vehicle fuel, the RIN attached to the renewable fuel can be separated, and then the RIN can be sold or used for current or future compliance. The obligated parties (refiners and importers of gasoline and diesel) must comply with the RFS mandate by accumulating enough RINs to meet their renewable volume obligations (RVOs). Obligated parties can either purchase and blend their required volume of biofuel and report the separated RINs to the EPA, or they can buy RINs in a secondary market without having to use biofuel at all (McPhail et al. 2011; Yacobucci 2013).

The RVOs for cellulosic fuel have been adjusted over the first few years of implementation, but they are scheduled to rise over time as shown in Figure 1, which would translate to an increase in demand for cellulosic biofuel.

Figure 1. Increase of RFS percentage of cellulosic biofuel in blended fuel through 2022.

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