Scandinavian Working Papers in Economics

Memorandum,
Oslo University, Department of Economics

No 09/2014: Does a Renewable Fuel Standard for Biofuels Reduce Climate Costs?

Mads Greaker (), Michael Hoel () and Knut Einar Rosendahl ()
Additional contact information
Mads Greaker: Statstics Norway, Postal: Postboks 8131 Dep., N-0033 Oslo , Norway
Michael Hoel: Dept. of Economics, University of Oslo, Postal: Department of Economics, University of Oslo, P.O Box 1095 Blindern, N-0317 Oslo, Norway
Knut Einar Rosendahl: Norwegian Univeristy of Life Sciences, Postal: Norwegian Univeristy of Life Sciences, Postboks 5003 NMBU, 1432 Ås, Norway

Abstract: Recent literature on biofuels has questioned whether biofuels policies are likely to reduce the negative effects of climate change. Our analysis explicitly takes into account that oil is a non-renewable natural resource. A blending mandate has no effect on total cumulative oil extraction. However, extraction of oil is postponed as a consequence of the renewable fuel standard. Thus, if emissions from biofuels are negligible, the standard will have beneficial climate effects. The standard also reduces total fuel (i.e., oil plus biofuels) consumption initially. Hence, even if emissions from biofuels are non-negligible, a renewable fuel standard may still reduce climate costs. In fact our simulations show that even for biofuels that are almost as emissions-intensive as oil, a renewable fuel standard has beneficial climate effects.

Keywords: Renewable fuel standard; Blending mandate; Biofuels; Climate costs; Petroleum extraction profi…le

JEL-codes: Q30; Q40; Q50

23 pages, April 23, 2014

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