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.
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.
- 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
- 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.
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.
- Liu, B., C. R. Shumway and J.K. Yoder. 2017. “Lifecycle economic analysis of biofuels: Accounting for economic substitution in policy assessment.” Energy Economics. 67:146-158.
- Skolrud, T. and G.I. Galinato. 2017. “Welfare Implications of the Renewable Fuel Standard with an Integrated Tax Subsidy Policy.” Energy Economics. 62: 291-301.
- Skolrud, T., G.I. Galinato, S.P. Galinato, R. Shumway, and J. Yoder. 2016. “The Role of Federal Renewable Fuel Standards and Market Structure on the Growth of the Cellulosic Biofuel Sector.” Energy Economics. 58: 141-151.
- Liu, B. and C.R. Shumway. “Substitution Elasticities between GHG Polluting and Nonpolluting Inputs in Agricultural Production: A Meta-Regression.” Energy Economics 54: 123–132.
- Galinato, G.I., T. Nadreau and T. Skolrud. 2015. “Who Pays and Who Benefits from a Revenue Neutral Carbon Tax? The Main Contributors and Beneficiaries from Washington State Initiative 732.” Western Economics Forum. 14(2): 2-14.
- Galinato, G.I., T. Nadreau and T. Skolrud. 2015. “How Does Washington State Initiative 732 Impact the Agriculture and Forestry Sectors?” Western Economics Forum. 14(2):15-25
- Nadreau. T. 2015. WSU CGE Analysis of Carbon WA: Technical Documentation. Western Economic Forum. 24(2): 26-56.
Extension and Proceedings Publications
- Skolrud, T. and Galinato, G.I. 2017. “Revenue-Neutral Taxation in Washington, Oregon, and Idaho Given the Renewable Fuel Standard.” Washington State University Extension Technical Bulletin TB40E.
- Galinato, G.I. and T. Skolrud. 2016. “Integrated Tax-Subsidy Policy and the Cellulosic Biofuel Industry in the Pacific Northwest.” Washington State University Extension Technical Bulletin TB37E.
- Galinato, S.P., T. Skolrud, G.I. Galinato, C.R. Shumway and J.K. Yoder. 2016. Impacts of Federal Biofuel Policy and Market Structure on the PNW Cellulosic Ethanol Industry. Washington State University Extension Technical Bulletin TB25E.
- Skolrud,T.D., B. Liu, G.I. Galinato, S.P. Galinato, C.R. Shumway, and J.K. Yoder. “The Impact of the Federal Biofuel Policy on Cellulosic Biofuel Production and Greenhouse Gas Emissions.” In Janick, J., A. Whipkey, and V.M. Cruz. (eds.). New Crops: Bioenergy, Biomaterials, and Sustainability. Proceedings of the Joint Annual Meeting of the Association for the Advancement of Industrial Crops and the USDA National Institute of Food and Agriculture Washington, D.C.
- Skolrud, T. and G. I. Galinato. “Welfare Implications of the Renewable Fuel Standard with a Revenue Neutral Tax.” SES Working Paper 2015-18.
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.