The Design of Renewable Fuel Mandates and Cost Containment Mechanisms

Policies to reduce greenhouse gas emissions from transportation fuels often take the form of renewable fuel mandates rather than taxes or cap-and-trade programs. Delays in the development and deployment of new technologies when binding mandates exist for their use may lead to situations with high compliance costs. We study the effects and efficiency of two mandates, a renewable share mandate and a carbon intensity standard, with and without a cost containment mechanism. Using both a theoretical model of a regulated fuel industry and a numerical model of the U.S. fuel market, we show that cost containment mechanisms can have the benefit of both constraining compliance costs and limiting deadweight loss. According to our numerical results, an optimally set mandate alone leads to only modest gains over business as usual welfare levels. The efficiency of both policies, especially carbon intensity standards, can increase substantially when combined with a cost containment mechanism.