Fuel Subsidy Pass-Through and Market Structure: Evidence from the Renewable Fuel Standard

Gabriel Lade (Iowa State University), James Bushnell (University of California, Davis)

The Renewable Fuel Standard (RFS) is among the largest renewable energy mandates in the world. The policy is enforced using tradeable credits that implicitly subsidize biofuels and tax fossil fuels. The RFS relies on these taxes and subsidies to be passed through to consumers to stimulate demand for biofuels and decrease demand for gasoline and diesel. Using station-level prices for E85 (a high-ethanol blend fuel) from over 450 retail fuel stations, we show that pass-through of the ethanol subsidy is, on average, near complete. However, we find that full pass-through takes four to six weeks and that station-level pass-through rates exhibit substantial heterogeneity, with local market structure of stations influencing both the speed and overall level of pass-through.

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