The US Renewable Fuel Standard was expanded to increase US biofuels consumption to 36 billion gallons per year by 2022, displacing about 25 percent of current fuel demand. This paper examines the US Environmental Protection Agency’s assessment of the benefits and costs of the program and recommends a simplified analytical approach.
We critically review the Environmental Protection Agency’s (EPA) assessment of the costs and benefits of the Renewable Fuel Standard (RFS2) as summarized in its regulatory impact analysis (RIA). We focus particularly on EPA’s methods used to calculate the costs of the policy on the US fuel market. We compare EPA’s ex ante cost and benefit estimates to measures of ex post costs implied by the price of compliance credits under the policy. Overall, we find that the agency’s assessment was inadequate. In spite of, or perhaps because of, the detailed and complex analysis underlying the RIA, EPA overlooked several fundamental factors. We conclude by recommending a simplification of the analysis used in RIAs, as well as the use of “stress tests” in RIAs to ensure that programs like the RFS2 are designed in ways that can manage high compliance cost scenarios.