This paper analyses the effects of biofuel policies on carbon emissions and welfare. The policies considered include the US and EU mandates accompanied by a biofuel subsidy or by a carbon tax. GHG emission reductions are quite modest in size when biofuel mandates are implemented. The price of blending fuel decreases in the regulated countries, which increases energy use and GHG emissions thus do not decline. When the mandate is accompanied by a carbon tax, the price of gasoline and biofuels both increase depending on their respective carbon intensities. By raising the cost of both fuels, the carbon price instruments lead to a rise in the price of the fuel blend and a decrease in carbon emissions. However, the domestic reduction in GHG emissions achieved by the biofuel policies (mandate plus carbon tax) is eroded by larger indirect carbon emissions, in other countries. Indirect carbon emissions are higher when the mandate is implemented along with a carbon tax. The carbon tax increases the competitiveness of imported biofuels from MICs. As a result, more marginal lands are brought into cultivation. In terms of welfare effects, poorest regions are most impacted by the regulation in the USA and in the EU. Consumer welfare is adversely affected by an increase in food prices. In addition, they suffer from a significant increase in indirect carbon emissions.
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