On the Trade-Offs of Regulating Multiple Unpriced Externalities with a Single Instrument: Evidence from Biofuel Policies

We develop an analytical and numerical model that integrates land, fuel, and food markets to evaluate the welfare implications of the US Renewable Fuel Standard (RFS). The RFS consistently fails a benefit-cost test, with net costs totaling $1.6 billion in 2015. Each dollar reduction in the external costs of oil dependency comes at the expense of additional environmental external costs of $0.90. Further, policymakers would have to value the external costs of oil dependency at $1.11 per gallon of gasoline in order for the RFS to pass a benefit-cost test, which is five times larger than central estimates of the oil premium. JEL: Q16,Q58,D61,D62,D78,C6