This is the first of several posts on models of the transition to alternative fuel vehicles. The first looks at a static equilibrium model of the California Low Carbon Fuel Standard (LCFS). Another will look at another model of the LCFS, called VISION-CA, which generates fuel carbon intensity scenarios. Finally, I’ll discuss Jeroen Struben’s thesis, which is a full dynamic model that closes crucial loops among vehicle fleets, consumer behavior, fueling infrastructure, and manufacturers’ learning. At some point I will try to put the pieces together into a general reflection on alt fuel policy.
Those who know me might be surprised to see me heaping praise on a static model, but I’m about to do so. Not every problem is dynamic, and sometimes a comparative statics exercise yields a lot of insight.
In a no-longer-so-new paper, Holland, Hughes, and Knittel work out the implications of the LCFS and some variants. In a nutshell, a low carbon fuel standard is one of a class of standards that requires providers of a fuel (or managers of some kind of portfolio) to meet some criteria on average – X grams of carbon per MJ of fuel energy, or Y% renewable content, for example. If trading is allowed (fun, no?), then the constraint effectively applies to the market portfolio as a whole, rather than to individual providers, which should be more efficient. The constraint in effect requires the providers to set up an internal tax and subsidy system – taxing products that don’t meet the standard, and subsidizing those that do. The LCFS sounds good on paper, but when you do the math, some problems emerge:
We show this decreases high-carbon fuel production but increases low-carbon fuel production, possibly increasing net carbon emissions. The LCFS cannot be efficient, and the best LCFS may be nonbinding. We simulate a national LCFS on gasoline and ethanol. For a broad parameter range, emissions decrease; energy prices increase; abatement costs are large ($80-$760 billion annually); and average abatement costs are large ($307-$2,272 per CO tonne). A cost effective policy has much lower average abatement costs ($60-$868).