An economic analysis of how much counties would gain or lose financially under different climate policies helps explain why the renewable fuel standard was ultimately favored in Congress, even though economists say it is a less cost-effective way of reducing carbon emissions.
The RFS, the current federal policy aimed at reducing greenhouse gas emissions within the transportation sector, mandates that a specific minimum volume of ethanol be blended with transportation fuels. Today, most gasoline on the market is a blend with 10 percent ethanol. The policy works to reduce emissions because ethanol production, particularly from cellulosic feedstocks, is less carbon-intensive than fossil fuels.
However, according to MIT economist Christopher Knittel and his colleagues, the RFS is at least 2.5 times more expensive per ton of greenhouse gas reduction than a cap-and-trade policy, which would tax all carbon emissions from transportation regardless of whether they came from biofuels or fossil fuels.
Cap and trade would also be significantly cheaper than two other climate policies: direct subsidies for renewable fuels and California’s Low Carbon Fuel Standard program, they said.
The economists demonstrated the difference between the policies by modeling potential economic gains at a county level, using estimates of U.S. fuel consumption in 2022 — the year the RFS will be fully implemented. The resulting supply curves showed the different economic outcomes of the varying approaches.
They found that under the RFS, the majority of Americans lost a modest amount of money, about $34 per year, while the average county made about $160 per capita. At the high end of the spectrum, 5 percent of counties gained over $1,250 per capita, and one county in Iowa gained as much as $6,000, said Knittel.
Under a cap-and-trade system, the economic benefits were more evenly distributed, with the average loss per person equaling $11 per year and the average county gaining less than $3 per capita. Even in the 95th percentile, gains reached only $70 per capita. The top-earning county didn’t make more than $1,015.
"Even though it’s better on average, no one really gains a lot," said Stephen Holland, an economist at the University of North Carolina, Greensboro, who co-authored the study.
That difference turns out to be an important factor in which policy was favored by the public, and in turn by their representatives in Congress, the economists said.
Putting fighting words into law
"You and I aren’t going to write our congressman over $20, but that county in Iowa is going to fight for it," Knittel said, referring to the county gaining $6,000 per capita under the RFS.
Once the economists saw the skewed distribution of gains, they analyzed whether the differences would be reflected in campaign funding and congressional voting patterns.
"The beauty of the supply curves was they allowed us to look at the cost-benefits. It wasn’t until we calculated these that we could draw a link [with political support]," Knittel said. "We knew going into it that the RFS, the Low Carbon Fuel Standard and ethanol subsidies would be a lot more expensive, so we knew the average costs would be higher. We didn’t have these ideas that these policies would create these huge winners."
In order to tease out how these findings influenced voting on specific climate policy, the economists focused on votes for the "American Clean Energy and Security Act of 2009," also known as the Waxman-Markey bill. The legislation would have established a cap-and-trade system throughout the United States, and also would have developed measures to address climate change and support a clean energy economy. The proposed bill was passed by the House but never made it to the Senate.
The bill was an ideal candidate to study because it was one of a few policies that were not embedded in larger, unrelated legislation. It also included a new method of accounting for ethanol carbon emissions that would have "substantially weakened the RFS," meaning the legislators would have considered it an alternative policy rather than a complementary one, according to the paper.
The economists found that, even when controlling for other variables, representatives from counties that would have substantial gains from the RFS on average received $33,000 more in contributions from organizations opposed to the Waxman-Markey bill. Representatives from counties that benefitted the most from the RFS also were 39 percentage points more likely to be against Waxman-Markey.
A ‘cautionary tale’ for Washington
In order to tease out the economic impacts of the different climate policies, the economists used a complex model developed by one of the study’s co-authors, Nathan Parker, a postdoctoral researcher at the Institute of Transportation Studies at the University of California, Davis. To start, they evaluated what biofuel crops would likely be grown in different counties based on potential land-use change. Once they had estimates for how much biomass would be available, and from what kinds of biofuel feedstocks, they estimated how many production plants would have to be built, based on the location of the biomass, Holland said.
"The model does this for a bunch of different prices of ethanol, where we would build plants and how much would they produce. If you do this for enough prices, you can map out price with supply, then you can look at the supply curve and look at the effects of these policies," he said.
The findings backed up a previously described political economy theory that people who gain strongly from a policy tend to lobby a lot for that policy, even though it is worse on average. Because the gains are skewed, it motivates that group to push for its passage, Holland said.
"Our paper provides a cautionary tale about whether an efficient policy will ever be implemented," said Knittel.
The study, "Some Inconvenient Truths About Climate Change Policy: The Distributional Impacts of Transportation Policies," will be published in the upcoming issue of The Review of Economics and Statistics.
Jonathan Hughes, an economist at the University of Colorado, Boulder, was also a co-author of the paper.