The Role of Market Structure and Federal Renewable Fuel Standards in the Growth of the Cellulosic Biofuel Sector

This article examines the effect of the Renewable Fuel Standards (RFS) and market power on the growth potential of the cellulosic biofuel sector. We develop a general equilibrium model to show how changes in the regulations governing cellulosic fuel production affect the equilibrium quantity of cellulosic ethanol. We find that an increase in the cellulosic biofuel production mandate does not have any significant effect on the equilibrium quantity of cellulosic ethanol given the opportunity to purchase waiver credits at low waiver prices. In contrast, raising waiver price slightly relative to the status quo significantly increases the equilibrium quantity of cellulosic ethanol. Given the relative infancy of the cellulosic ethanol sector, the market structure may change over time. When more firms enter and market power decreases, there is an increase in the equilibrium quantity of cellulosic ethanol. As market power declines, the marginal effect of an increase in the waiver price on equilibrium quantity of cellulosic ethanol rises which accelerates growth of the sector.