Mandating Green: On the Design of Renewable Fuel Policies and Cost Containment Mechanisms

Policymakers typically favor renewable fuel mandates over taxes and cap and trade programs to reduce greenhouse gas emissions from the transportation sector. Because of delays in the development of commercially viable renewable fuels and important constraints on their use and distribution, fuel mandates are susceptible to sudden increases in compliance costs as policies become more stringent. The authors study the effects and efficiency of two fuel mandates, a renewable share mandate and a carbon intensity standard, as well as the effects of two cost containment provisions, a credit window price and a renewable fuel multiplier. The authors show using a numerical model of the US fuel market that when the mandates are set optimally, they can lead to modest efficiency gains over business as usual; however, when combined optimally with a credit window price, the efficiency of both mandates increases substantially. In contrast, optimally combining a mandate with a renewable fuel multiplier that indirectly relaxes the standard results in only modest efficiency gains over the optimal mandates alone.