Economics of a National Low Carbon Fuel Standard

One of the many measures proposed to reduce U.S. greenhouse gas (GHG) emissions is a Low Carbon Fuel Standard (LCFS). An LCFS would apply to sellers of motor fuels, who would be required to meet a per unit GHG emission standard in the fuels they sell, with that standard gradually reduced over time. While proposals for an LCFS differ from one another, the essence is to establish measures of life cycle GHGs per unit of energy in fuel, and set the standard to reduce these GHGs below those of petroleum-based fuels.

We analyze various effects of an LCFS imposed upon sellers within the U.S. motor fuel market. For purposes of this analysis, we follow others in assuming that ethanol would be initially utilized to meet the standard. More is known about its emissions and costs than most other alternatives so that economic analysis can be more readily applied to its adoption. Also, for now it is probably the lowest cost alternative fuel that might meet an LCFS standard. We address whether an LCFS would reduce GHGs, what its costs would be, who would bear those costs, and the effects on U.S. energy security. Our analysis examines these effects in the context of a world petroleum market in which actions taken in the U.S. are not necessarily followed elsewhere. The analysis is applied also to an individual U.S. state imposing an LCFS.

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