Dusan Drabik and Harry de Gorter
Carbon leakage in the fuel market due to alternative biofuel policies is shown to have two components: a market leakage (or ‘indirect output use change’) effect and an emissions savings effect. We also distinguish between domestic and international leakage and show how omitting the former can bias leakage estimates. International leakage is always positive, but domestic leakage can be negative with a biofuel mandate. We show leakage due to a tax credit is greater than that of a mandate, while the combination of a mandate and subsidy generates greater leakage than a mandate alone. In general, one gasoline-equivalent gallon of corn ethanol is estimated to replace only 0.35 to 0.50 gallons of gasoline—not one (1.00) gallon as assumed by life-cycle accounting. Taking this market leakage effect into account, we conclude that corn ethanol does not meet the US minimum carbon savings threshold, irrespective of whether the effect of indirect land use change is taken into account.
Key words: Biofuels, blend mandate, carbon leakage, domestic leakage, emissions savings, environment, market leakage, tax credit.