Assessing the efficiency implications of renewable fuel policy design in the United States

Obligated parties have chosen to comply with the Renewable Fuel Standard (RFS) by increasing the blending of biomass-based biodiesel beyond originally targeted levels rather than increasing blending/consumption of ethanol to targeted levels that would have required pricing higher blends of ethanol (E85) at or below an energy-equivalent level to E10. This paper develops a welfare-economic framework to analyze the extent to which the nested design and the accompanying cellulosic waiver credit and biodiesel tax credit contributed to a compliance strategy by blenders that favored blending of biodiesel instead of inducing consumption of E85, and its implications for social welfare.