Cost and carbon-intensity reducing innovation in biofuels for road transportation

The transportation sector is the leading contributor to greenhouse gas emissions in the United States. Incentives for biofuel production in the form of direct subsidies and tradable performance standards have been substantial. Although research suggests such policies are less cost-effective at reducing emissions than an explicit carbon price, a dynamic assessment that accounts for innovation may differ substantially from static cost estimates. This study evaluates cost and carbon-intensity reducing innovation in the U.S. biofuel industry and estimates the value of social benefits for comparison with the observed level of policy support.

Using multi-factor experience curves, this study finds that cost declines have been significant in ethanol production, with an estimated learning rate of 21.8%. However, learning in biodiesel and renewable diesel has been much less pronounced, at 3.23% and 1.33%, respectively. Reductions in carbon intensity are found to be largely related to feedstock choice rather than improvements in production processes. Based on the innovation rates identified in this study, current policy support for biofuels from stacked incentives is found to exceed the social benefits. This misalignment calls for a reassessment of biofuel policies to ensure they are economically and environmentally justified.