Who Will Pay for Increasing Biofuel Mandates? Incidence of Renewable Fuel Standards Given a Binding Blend Wall

We show that the cost of increasing biofuel mandates given a binding ethanol blend wall will fall disproportionately on diesel fuel consumers. The extent of the burden on diesel fuel consumers is explained neither by their relatively more inelastic demand nor by blenders seeking to capitalize on the biodiesel tax credit. Relaxing the blend wall constraint by increasing the potential demand for high-ethanol blends is the only effective lever to insulate diesel fuel drivers from the one-sided welfare impacts of rising mandate levels. The independent effects of the nested mandate structure and the joint compliance base under the Renewable Fuel Standard (RFS) generate the link between motor gasoline and diesel fuel markets. Our results highlight the importance of evaluating the incidence of the RFS in a holistic framework taking both ethanol and biodiesel into account.