Increasing Biofuel Proliferation via the Optimal Use of Government Incentives

Abstract:With the increasing public awareness on global warming, the demand for low greenhouse gas emission (GHG) transportation fuel, such as biofuel, is growing rapidly. In the United States, like many other countries, the government is providing monetary incentives for biofuel displacement of fossil fuel. From the standpoint of biofuel proliferation, it is important that biofuel producers utilize these incentives in the most effective way, because better utilizations of incentives will lead to reduced costs for producers, which in turn will lower biofuel retail prices. Currently, however, biofuel producers are not taking full advantage of these incentives. This industry note introduces a new approach that allows US biofuel producers to improve their practice of using an incentive program called the LCFS (California Low Carbon Fuel Standard). Our method, which is relatively simple, is based on a recent research project conducted with a biofuel manufacturing firm, which aimed to maximize the benefit gained from the LCFS incentive program. We show, by performing numerical experiments with realistic settings, that the method matches or outperforms the current practice in terms of maximizing gains extracted from the incentive program, under all conditions.