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School of Economic Sciences | WSU Gregma Galinato

Cellulosic Ethanol in the Pacific Northwest


In an era of increased concern about the influence of carbon on the environment, the U.S. government has intervened, requiring the use of biofuels in an attempt to reduce dependence on fossil fuels. This project focuses on one of those biofuels, cellulosic ethanol, and the countervailing forces influencing its development, especially in the Pacific Northwest.

Personnel and Funding

This project was directed by Gregmar I. Galinato, with co-directors Suzette P. Galinato, C. Richard Shumway, and Jonathan K. Yoder. Research assistance was provided by Tristan D. Skolrud and Boying Liu. Our research was generously supported by Agriculture and Food Research Initiative Competitive Grant no. 2012-67009-19707 from the USDA National Institute of Food and Agriculture.

Purdue researchers believe that hybrid poplars and similar trees planted like row crops could be processed into ethanol as an alternative fuel. (Photo courtesy of Jake Eaton, plant materials manager, Potlatch Corp.)
Purdue researchers believe that hybrid poplars and similar trees planted like row crops could be processed into ethanol as an alternative fuel. (Photo courtesy of Jake Eaton, plant materials manager, Potlatch Corp.)


Problem Description

The Federal Renewable Fuel Standard (RFS) requires the use of an increasing amount of cellulosic biofuel (ethanol in this case), culminating with approximately 16 billion gallons consumed nationwide by 2022. For reasons outlined in our recently published work at Energy Economics, several mechanisms exist to deter growth in cellulosic industry.

Without sufficient incentives for nationwide cellulosic development, what options are available at the state level for states wishing to internalize the negative externality created by the release of carbon? The answer promoted by economists: a revenue-neutral carbon tax.

In our research we discuss two ways to implement such a tax. The two strategies vary primarily through the manner in which the rebate is returned. In the double-dividend approach, revenue generated by the carbon tax is used to offset an existing tax. In the integrated tax-subsidy approach, revenues are used to subsidize the use of a cleaner fuel alternative. We build two related multi-sector general equilibrium models to assess the performance of each taxation strategy, focusing on the potential for welfare gain and increases in cellulosic ethanol production. Both approaches increase societal welfare and biofuel production, albeit with slightly different magnitudes.

Revenue-neutral carbon tax: A tax levied on the use of carbon, wherein the revenues are returned to the taxable party such that the total amount collected equals the total amount rebated.


Wood gasification plant. Source: Wikimedia Commons (Author: Gefriedc)


  • Carbon tax revenue used to offset existing sales tax
  • $0.19/gallon crude oil tax yields 19% increase in social welfare compared to the no-tax case
  • Negligible increase in cellulosic ethanol production

Integrated Tax-Subsidy

  • Carbon tax revenue used to directly subsidize use of cellulosic ethanol in fuel production
  • Even a negligible crude oil tax (less than $0.01/gallon) is sufficient to induce a 29% increase in cellulosic ethanol production
  • Impact on social welfare is minimal

Which is preferred?

A quick look at preliminary results seems to suggest that the preferred taxation approach should depend on the goal of the policy: is the goal to increase cellulosic ethanol, or simply to increase social welfare? The decision rule is perhaps a bit more nuanced, and we’re currently analyzing the decision in a more rigorous fashion. Stay tuned to this section for updates on this line of research.

Carbon Washington

The citizen-led initiative group Carbon Washington has led an effort to establish a carbon tax in Washington State. While not purely focused on the use of cellulosic biofuel, their initiative does involve the imposition of a carbon tax with the goal of revenue neutrality. Due to the similarity of our work, the research team wrote a series of impact studies for the proposed tax. We find evidence that the policy is welfare improving, with a minimal impact on the forestry and agricultural sectors of Washington State.


Resources and Products

Journal Publications

Extension and Proceedings Publications


Models produced from our project. For more information, please don’t hesitate to contact us.

Multi-Sector General Equilibrium Model with Cellulosic Ethanol Production: Mathematica calibration/model file

Simulating the Policy Effects of the RFS standard, Waiver Credits and Carbon Taxes: Mathematica simulation file

Multi-Sector General Equilibrium Incorporating Policies in WA I-732: GAMS files (for CarbonWA impact study)


Webinar that summarizes the main results of our research.