An Empirical Study of the Impact of the Renewable Fuel Standard (RFS) on the Production of Fuel Ethanol in the U.S.

The Renewable Fuel Standard (RFS) program, which mandates the commercialization of biofuels through 2022, is the United States’ most significant piece of legislation regarding renewable energy. It was first passed in 2005 and revised and expanded in 2007 in order to create a viable market for biofuels based on the policy goals of enhancing domestic U.S. energy security, reducing transportation-related greenhouse gas (GHG) emissions, and stimulating rural economic development. The RFS requires minimum levels of consumption for different kinds of biofuels and requires increasing blending amounts of biofuels into gasoline and diesel fuels by producers and importers each year. Mandates and targets for biofuels as required by the RFS are not a policy exclusive just to the U.S. Sixty-four other countries mandate fixed quantities of ethanol use in gasoline to generally stimulate renewable energy use and to specifically promote production of biofuels. In the past few years, there have been challenges in complying with the RFS in the U.S. As a result, legislative mandates were modified and reduced to respond to these difficulties. Proponents of the RFS argue that the policy reduces the risk of investing in renewable fuel projects, enhances the country’s energy security as well as the rural sector, and addresses climate change concerns. On the other hand, critics argue that policy makers are “picking a winner” by funding biofuels over other types of alternative energy sources, and mandates for biofuels have presented unintended consequences in other areas, such as the food markets, land use patterns and the current gasoline-market infrastructure. Many studies have observed beneficial impacts of mandates on the agricultural markets and on the environment. However, there are very few empirical studies of the actual impact of the RFS on the development of the biofuel industry and none that use an industrial policy approach to analyze this issue. In this Article, we intend to fill this gap and provide an empirical study addressing whether the RFS is an effective policy instrument that incentivizes an efficient and sustainable development of the biofuels industry. Our analysis uses data from the first-generation ethanol industry between the years 2000 and 2013, and we find that the industry life cycle mediates the effects of the RFS in contributing to production-related economies of scale. More specifically, our empirical findings suggest that the RFS had a significant positive effect on the production capacity of firstgeneration ethanol firms during the early stages of development of the first-generation ethanol industry. But the RFS does not have a statistically significant effect on plant or firm capacity after the first-generation ethanol market entered a mature stage in its product life cycle