Revenue-Neutral Pollution Taxes in the Presence of a Renewable Fuel Standard

We assess the welfare implications of a revenue-neutral tax in the presence of two Renewable Fuel Standard (RFS) policies for cellulosic biofuels: the waiver credit and the input-ratio requirement. We extend the model of revenue-neutral taxation to allow for the taxation of a dirty input in an imperfectly competitive market while integrating RFS-specific policies. Simulations from Washington and Oregon indicate that a revenue-neutral tax raises welfare by 19%’21% but growth in cellulosic ethanol production is minimal, ranging from 0.6% to 1.5%. Pollution taxes, cellulosic ethanol production, and welfare are more responsive to the waiver credit than to the input-ratio requirement.