A Simple Framework for Regulation of Biofuels

In this chapter, we develop a framework to regulate producers of biofuel-blended fuels using GHG emissions standards, while accounting for heterogeneity and uncertainty. To this end, we categorize the net GHG emissions caused by a regulated site into two parts: direct and indirect emissions. Direct emissions arise both at and away from the final regulated site but are directly attributable to the final output. Indirect emissions, on the other hand, are emissions not attributable to any single regulated entity, but are caused by the interaction of aggregate supply and demand. An example is emissions due to indirect land use change (ILUC). The two parts, i.e., direct and indirect emissions, are computed using the best available data. The sum of the site-specific direct emissions per unit of output and average indirect emissions per unit of output is, then, compared to the emission threshold or standard.