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Economics – Renewable Fuel

write a review, evaluation, and suggestions of the renewable fuel standard. Directions included in file “Economics4”. All the other files are handouts provided to assist.

Review and evaluate the performance of (critique) the renewable fuel standard during the first ‘renewable biofuel’ phase that has relied on expanding corn-based ethanol processing.

The review should introduce readers to the motivation, program characteristics, and experience with the program. The review should emphasize points that allow you to explain the benefits and shortcomings of the policy later (straw man concept). In particular, your review could discuss:

– the contribution of biofuels to greenhouse gas (CO2) reduction

– the determination of ethanol demand and the market for quota-right (RIN) certificates under a tradable permit system with a demand quota on (two) refiners, and the effect of a quota increase on ethanol demand and certificate pricing

– the effect of a decade of steady quota expansions on the corn market (price)

– unforeseen events with a big effect on markets that are related to biofuels markets

The RFS demand quantity required for use by refiners by year is:
Year        RFS quantity (billion gallons)
2004        2.2
2005        2.7
2006        3.9
2007        4.5
2008        9.0
2009        10.5
2010        12.0
2011        12.6
2012        13.2
2013        13.8
2014        14.4
2015        15.0

The evaluation options include keeping the program in more or less its current form, modifying the program to avoid incidental problems that have occurred thus far, replacing the policy with another (possibly more efficient) policy, or eliminating the program for a free market. You can choose any one of these courses of action – your answer on this part will be judged on the strength of your economic and technical arguments. You should mention that course of action you propose in your introduction. Then explain the details and argue for your idea towards the end of the paper.

A graph showing US corn yields is included for your perusal. Include any appropriate supply and demand diagrams.

Carbon Dioxide (CO2 ) removals (+) and emissoins (-) associated with with ethanol and gasolineconsumption, in lbs CO2  / gallon

Alternative I: burn ethanol                    Alternative II:burn gasoline                        net: alternative I – alternative II

corn credit            19.76        soybean credit        10.85    1            8.91

ethanol                    gasoline
consumption        -14.72            consumption        -19.63            4.91
processing        -1.64            refinery        -3.8            2.16
natural gas        -8.55                                -8.55
fertilizer N2O            -1.25                                -1.25

Land Use Change (LUC)            -10.85                            total    6.18
(oppportunity cost calculation)
Total:            -17.25                    -23.43

-26.4    percent reduction in CO2 emissione with ethanol                             -26.4    percent
according to EPA                            (opportunity cost calculation)
1    included in LUC for EPA calculation, but included with alternative II for opportunity cost calculation

Alternative Calculation Procedures and associated Controversies:
1    Instead of my cattle/DG procedure, assume that DG replaces soy meal with little change in net emissions (adopted by EPA)
2    Instead of my domestic corn replace domestic soybeans, assume that Brazil cuts down rain forest and plants soybeans.
3    Instead of my gasoline gallon for ethanol gallon substitution, use heat content substitution rates.
Implicitly, I assume that ethanol is a small share, or a redesigned engine can get the same fuel economy
4    Some think that N2O fertilizer emission is much larger, due to fertilizer runoff int streams and rivers.

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