United States 

Department of 

Agriculture

Economic

Research

Service

Economic

Research

Report

Number 102

October 2010

Effects of Increased Biofuels 

on the U.S. Economy in 2022

Mark Gehlhar

Ashley Winston

Agapi Somwaru
www.ers.usda.gov

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A Report from the Economic Research Service

Abstract

Achieving greater energy security by reducing dependence on foreign petroleum is a goal 

of U.S. energy policy. The Energy Independence and Security Act of 2007 (EISA) calls 

for a Renewable Fuel Standard (RFS-2), which mandates that the United States increase 

the volume of biofuel that is blended into transportation fuel from 9 billion gallons in 

2008 to 36 billion gallons by 2022. Long-term technological advances are needed to 

meet this mandate. This report examines how meeting the RFS-2 would affect various 

key components of the U.S. economy. If biofuel production advances with cost-reducing 

technology and petroleum prices continue to rise as projected, the RFS-2 could provide 

economywide benefits. However, the actual level of benefits (or costs) to the U.S. 

economy depends importantly on future oil prices and whether tax credits are retained 

in 2022. If oil prices stabilize or decline from current levels and tax credits are retained, 

then benefits to the economy would diminish.

Keywords: Bioenergy, economywide, ethanol, petroleum, trade, macroeconomic factors, 

RFS-2 

Acknowledgments

The authors thank the following individuals for their valuable insights and

 recommendations: Peter Dixon, Maureen Rimmer, Hosein Shapouri, and Wally Tyner.

Mark Gehlhar, mgehlhar@ers.usda.gov

Ashley Winston

Agapi Somwaru, agapi@ers.usda.gov

Effects of Increased Biofuels on 

the U.S. Economy in 2022

Economic

Research

Report

Number 102

October 2010
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Contents

Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iii

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Scenario Alternatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Quantifying the Effects of the RFS-2 on the U.S. Economy . . . . . . . . . . 5

Macroeconomic Impacts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Energy Fuel Impacts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Farm Production and Trade Impacts . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Limitations and Further Considerations . . . . . . . . . . . . . . . . . . . . . . . . 16

Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Appendix 1: Developing the Reference Scenario . . . . . . . . . . . . . . . . . . 20

Appendix 2: Energy Price Projections . . . . . . . . . . . . . . . . . . . . . . . . . . 23 

Appendix 3: Modifications for Modeling Energy Fuels . . . . . . . . . . . . 26

Appendix 4: Sensitivity Analysis for Imported Crude Petroleum . . . . 29 

Recommended citation format for this publication: 

Gehlhar, Mark, Ashley Winston, and Agapi Somwaru. Effects of 

Increased Biofuels on the U.S. Economy in 2022. ERR-102. U.S. Dept. 

of Agriculture, Econ. Res. Serv. October 2010.
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Summary

Diversifying the Nation’s energy supply is one of the primary means for 

providing long-term energy security. A diverse energy portfolio can also 

have far-reaching economic impacts by reducing dependence on foreign 

oil. The Energy Independence and Security Act of 2007 (EISA) mandates 

a Renewable Fuel Standard (RFS-2) under which the United States will 

annually produce 36 billion gallons of biofuel, primarily ethanol, by 2022. 

Transitioning away from nonrenewable fossil fuels (such as petroleum oil) 

without placing additional burden on the U.S. economy is a long-term challenge. Although experts and policymakers generally agree on the importance 

of energy security, how best to achieve this goal and at what cost is subject to 

debate.

What Is the Issue?

Reducing dependence on foreign energy by expanding domestic renewable 

fuels can have impacts for the overall U.S. economy because of energy’s 

importance in consumption, production, and trade. In the past, increasing 

energy independence would generally be expected to place a greater burden 

on the U.S. economy because of the higher domestic costs of producing alternative energy to replace relatively inexpensive foreign petroleum. However, 

according to the U.S. Department of Energy, petroleum prices are more 

likely to continue rising in the long term relative to the cost of producing 

domestic biofuels. Although the exact timing is uncertain, cost-reducing 

technology in biofuel production is expected to be a key factor in expanding 

production and making biofuels competitive with petroleum. However, 

without policies that provide incentives to deploy renewable energy technology, biofuel producers likely will shy away from investing in new technology because of market uncertainty. The RFS-2 mandate is accompanied 

by incentives in the form of tax credits to ethanol blenders. Tax credits, 

however, could add to taxpayers’ costs and place greater burden on the 

economy. This study examines the potential effects of the RFS-2 on the U.S. 

economy as measured by gross domestic product (GDP), household income 

and consumption, price and quantity of energy fuels, and agricultural production and trade. We compare the U.S. economy in 2022 with and without the 

RFS-2. 

What Did the Study Find?

If biofuel production technology advances and petroleum prices continue to 

rise as projected, the RFS-2 could benefit the U.S. economy. U.S. household 

consumption would rise because of higher real wages, increased household 

income, and lower import prices. By substituting domestic biofuels for 

imported petroleum, the United States would pay less for imports overall 

and receive higher prices for exports, providing a gain for the economy from 

favorable terms of trade. Improved technology and increased investment 

would enhance the ability of the U.S. economy to expand.
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Gross Domestic Product

Changes in GDP and the magnitude of benefits (or costs) are highly dependent upon assumptions about alternative biofuel support policies and the 

future price of oil. The greater the value of displaced petroleum for each 

dollar of biofuel produced and the lower the tax credits, the greater the 

benefit to the U.S. economy. Cost-reducing technology would not only 

reduce the costs of producing biofuels but also contribute to national GDP 

because production would rise as efficiency improves. 

Household Welfare

Household consumption would increase regardless of whether or not tax 

credits were retained, with the gains primarily due to increased real income, 

favorable terms of trade with relatively lower import prices, and hence, 

greater purchasing power to the household. Consumption would increase by 

about $13-$28 billion, depending largely on oil prices. The RFS-2 would 

raise real wages and household disposable income as returns to labor and 

capital increase. Replacing imported oil with domestic biofuels would lower 

the cost of motor fuels. Thus, households would spend less on, but consume 

more, motor fuels. In addition, lower prices for imports and fuel would 

encourage greater consumption of other goods and services. 

Energy and Trade

Expansion of domestic biofuel production would reduce petroleum demand, 

thereby reducing the quantity of imported crude petroleum. Crude oil, which 

is a major input for gasoline, would be displaced by ethanol. U.S. imports 

of crude oil would fall by 16-17 percent in 2022. The United States is the 

largest importer of crude oil, with imports accounting for about two-thirds of 

total U.S. supply. Reduced U.S. demand for petroleum would lower the price 

of crude oil. As a result of lower demand and a decline in the import price, 

the U.S. import bill for crude oil would decline by $61-$68 billion. With a 

smaller import bill, the U.S. dollar would appreciate. A stronger dollar would 

reduce the cost of importing other goods, including agricultural commodities, and reduce export volume because of increased prices in foreign markets 

for U.S. products. In addition, with greater demand for land to use for both 

energy crop production and all other agricultural activities, meeting the 

RFS-2 would reduce U.S. agricultural commodity exports and increase the 

demand for agricultural imports as crops must compete for limited land.

Caveats

This study does not predict the future but addresses the question of what 

would be the likely impacts on the U.S. economy should the RFS-2 mandate 

be met under different price/policy scenarios. The study acknowledges the 

uncertainty in meeting the mandate in 2022. The exact timing of the commercialization of new technologies to produce biofuels cannot be determined 

because of a myriad of uncertain factors. Future developments will also 

depend on new investments in infrastructure needed to support a transportation and distribution network for biofuels. Determining when such developments would take place is beyond the scope of this study. Long-term 

impacts on the U.S. economy from meeting the RFS-2 will depend partly 
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on future petroleum prices. This study adopts a price projection from the 

U.S. Department of Energy that assumes that satisfying the growing world 

demand for petroleum will require accessing higher cost supplies of oil. 

Under these conditions, petroleum prices are likely to be higher in 2022 than 

current prices. Unlike previous decades, petroleum prices are likely to rise 

relative to the cost of producing biofuels. 

How Was the Study Conducted? 

The study used a detailed computable general equilibrium model for the 

United States—the U.S. Applied General Equilibrium (USAGE) model—

comprising 534 industries. The model is a multipurpose framework for 

addressing a broad set of questions, including domestic and trade policy as 

well as macroeconomic links to trade. The model was modified to include 

additional sectors and industries involved in biofuel production, including 

conventional ethanol (corn-starch) produced from dry-milling and secondgeneration ethanol made from crop residues, dedicated energy crops, and 

other advanced biofuels. Other modifications include explicit treatment of 

U.S. agricultural land and regional land allocation for the production of 

biomass (organic material) and all other agricultural activities. A base, or 

reference, scenario without the RFS-2 was conducted for the year 2022 using 

the U.S. Department of Energy’s projections. The effects of RFS-2 were 

determined as alternative scenarios using scenario analysis. Volumes of all 

types of ethanol were based on those established by EISA. 

Impact of RFS-2 on U.S. gross domestic product

Note: In real prices.

$ billions

Tax credits retained

Tax credits

 reduced by 50%

Tax credits

 eliminated

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

Oil price $80/barrel

Oil price $101/barrel
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Introduction

Diversifying the Nation’s energy supply is the primary means for reducing 

long-term energy dependence on foreign sources. Although experts and 

policymakers generally agree on the importance of reducing dependence on 

imported petroleum, how best to achieve this goal is debatable. The Energy 

Independence and Security Act of 2007 (EISA) calls for a Renewable Fuel 

Standard (RFS-2), which mandates that the United States increase the volume 

of biofuel that is blended into transportation fuels from nearly 9 billion 

gallons in 2008 to 36 billion gallons by 2022. The RFS-2 mandate is accompanied by incentives in the form of tax credits, which are subject to change 

over time, to ethanol blenders. This study assesses the long-term effects of 

the RFS-2 by projecting into 2022 its impact on U.S. gross domestic product 

(GDP), trade, and household welfare.

Success in meeting the mandate depends on overcoming various challenges. 

One challenge is to diversify the sources of ethanol feedstocks beyond 

conventional corn, which involves greater reliance on cost-reducing technology, particularly if ethanol is to compete with petroleum in the future. 

A second challenge is to ensure sufficient demand for biofuels. Demand for 

transportation fuels in the United States is expected to continue to decrease 

as fuel efficiency standards for vehicles are raised. A third challenge is to find 

a solution to the “blend wall” constraint, in which increased ethanol production meets the 10-percent ethanol-to-gasoline blending limit. Regardless of 

the cost competitiveness of ethanol, the blend constraint could technically 

halt ethanol’s growth unless domestic use is increased by altering automotive 

engine requirements to accommodate higher ethanol blends.

The effect on the U.S. economy in meeting the RFS-2 could depend on the 

incentives used to encourage investment. Without policies that provide incentives, underinvestment to advance renewable energy technology is likely due 

to risk aversion from market uncertainty (Rajagopal et al., 2009). Some argue 

that tax credits could be justified on the basis of achieving national energy 

security (Tyner, 2007). Others argue in favor of providing temporary protection to an infant industry, where learning by doing and adapting new technologies have future payoffs (Sheldon and Roberts, 2008). Although policies 

may be needed to correct market failures, sustaining incentives indefinitely 

may not be beneficial as industries mature. Economic incentives in the form 

of tax credits could add to taxpayers’ costs and place greater burden on the 

economy. Some argue that industries with a mature technology, such as corn 

ethanol production, may no longer need tax credit incentives.1 This report 

considers implications of tax credits on the U.S. economy in 2022.

Another factor that can affect the impact of the RFS-2 on the U.S. economy 

is the competitiveness of biofuels. In the past, biofuels have not been 

competitive with petroleum oil. However, with cost-reducing technology, the 

prospects improve for biofuels to become competitive. In this case, biofuels 

might compete with imported petroleum oil in the future. Based on the U.S. 

Department of Energy’s (DOE) (2009) long-term projections, ethanol prices 

in real terms are expected to fall, whereas petroleum-based gasoline prices 

would continually rise as crude oil prices rise with growing world demand. 

If DOE’s projections hold, they may present an opportunity for the United 

1The U.S. Government Accountability Office (2009) suggests that the 

Volumetric Ethanol Excise Tax Credit 

(VEETC), a 45-cent-per-gallon Federal tax credit for ethanol, may not be 

needed to stimulate conventional corn 

ethanol production because production 

capacity is near the RFS limit of 15 billion gallons per year. 
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States to reduce its reliance on tax credits as ethanol becomes more competitive with petroleum. This study determines the impacts of the RFS-2 based 

on the DOE’s price forecast.

The long-term gains to the economy from using cost-reducing technology in 

the production of ethanol, especially advanced biofuels, could offset costs 

associated with tax credits. The RFS-2 requires that ethanol be produced 

from a broad variety of organic material (biomass), with production of cellulosic ethanol (made from wood, grasses, algae, or nonedible parts of plants) 

increased from that of the previous mandate. Second-generation biofuels, 

such as cellulosic ethanol, have yet to exploit commercially existing technology advances. The farm and energy sectors are connected in many ways 

that can have important implications for meeting the RFS-2. The type of 

biomass used to satisfy the mandate can affect regional land allocation, farm 

production, and commodity trade.

In this study, we examine the interactions among energy and other sectors 

of the economy and estimate the long-term effects of the RFS-2 on the U.S. 

economy—that is, GDP, trade, and household welfare (income and consumption). Although there is much momentum for producing cellulosic ethanol, 

this study neither predicts when the technology for producing cellulosic 

ethanol will be adopted for commercial use nor determines the feasibility of 

meeting the timetable set by the 2007 EISA. 

However, the study does present scenarios that take into account projected 

energy prices based on DOE long-term forecasts and tax credits for different 

types of ethanol. The study demonstrates that the RFS-2 mandate, when met 

under different conditions, involves tradeoffs for the U.S. economy.
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Scenario Alternatives 

To analyze the effects of the RFS-2, we compare the U.S. economy with and 

without the mandate in the year 2022. This comparison allows us to ascertain 

the impact of only the RFS-2, holding other factors constant. The projection 

of the U.S. economy in 2022 without RFS-2 is called the reference scenario 

(see appendix 1). Alternative scenarios of the U.S. economy with the RFS-2 

assume full implementation of the mandate for the year 2022. However, it is 

unknown whether the RFS-2 will be met by retaining current tax credits for 

the duration of the mandate. Because the impact of the RFS-2 could depend 

on tax credits and petroleum oil prices, we present alternative scenarios with 

different tax credits and oil prices (see box, “Scenarios and Energy Price 

Projections”). We adopt the projected prices determined by DOE’s long-term 

forecast.

The combination of different oil price assumptions, a low price (LP) of $80 

dollars per barrel, a high price (HP) of $101 per barrel, and three tax credit 

assumptions provide six scenarios (S) to draw upon for the analysis:

(1) S1-LP: tax credits retained and low oil price.

(2) S2-LP: 50-percent reduction in tax credits and low oil price.

(3) S3-LP: no tax credits and low oil price.

(4) S1-HP: tax credits retained and high oil price.

(5) S2-HP: 50-percent reduction in tax credits and high oil price.

(6) S3-HP: no tax credits and high oil price. 
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Long-term crude oil price projections depend on 

changing but highly unpredictable global petroleum 

supply and demand conditions. A number of factors may 

influence future prices of petroleum oil. For example, 

decisions made by the Organization of the Petroleum 

Exporting Countries (OPEC) can significantly affect 

global crude oil supply. DOE provides long-term forecasts of crude petroleum prices, supply, and use. We 

adopt DOE’s forecast because projecting or forecasting 

petroleum prices is beyond of the scope of this report. 

According to DOE’s reference forecast that assumes 

normal world growth, the price of crude oil is expected 

to gradually rise to $111 per barrel by the year 2030. The 

demand for petroleum oil would increase primarily from 

steady growth in developing countries (see appendix 2). 

Under normal growth conditions, the price of crude oil is 

projected to reach about $101 per barrel in 2022.

DOE projects the wholesale price of ethanol to remain 

near $2 per gallon through 2022. According to DOE, 

production costs are expected to fall in the long term, 

lowering the wholesale price of ethanol to below $2 per 

gallon through 2030. Improved efficiency in producing 

advanced ethanol, which would make ethanol more 

competitive with petroleum, is a key factor for the 

widening price gap between ethanol and gasoline over 

the next two decades. For this study, we adopt DOE’s 

price for 2022 of $2.12 per gallon for ethanol in all 

scenarios, including scenarios that reduce or eliminate 

tax credits.

In our scenarios, we use DOE’s projected oil price 

for 2022 of $101 as a high price and a corresponding 

energy-equivalent oil price using DOE’s projected 

ethanol price of $2.12 per gallon. The figure below 

illustrates the correspondence between petroleum oil 

and ethanol prices on an energy-equivalent basis.1 An 

oil price of $80 per barrel would correspond to DOE’s 

projected ethanol price of $2.12 per gallon in 2022 on 

an energy-equivalent basis. For example, blenders could 

be willing to pay up to $2.12 per gallon for ethanol on 

an energy-equivalent basis when the price of crude oil is 

$80 per barrel and when the blender receives the 45-cent 

tax credit currently paid for corn ethanol. With oil prices 

above $80 per barrel, blenders could afford to pay more 

than $2.12 per gallon for ethanol. With the oil price of 

$101 per barrel and the tax credit retained at 45-cents 

per gallon, blenders could afford to pay $2.52 per gallon 

for ethanol. If ethanol suppliers were to receive $1.01 

per gallon, blenders could offer up to $3.08 per gallon 

for cellulosic ethanol. Depending on future costs and 

technology advancement, this price could profitably 

compensate cellulosic producers.2

1This assumes ethanol contains two-thirds the energy of gasoline 

and a constant price relationship between petroleum oil and gasoline 

we adopt from Tyner and Taheripour (2007).

2The cost of producing cellulosic ethanol will depend on the size 

of the biorefinery, which could range from 20 to 100 million gallons 

per year. The production cost for producing cellulosic ethanol ranges 

from $1.60 to $2.00 per gallon, with yields ranging from 76 to 88 gallons per dry ton, depending on feedstock material. For further details, 

see National Academies Press (2009).

Energy price equivalent values

Source: Authors’ calculations based on U.S. Department of Energy price projections.

Ethanol $/gallon

0.0

0.5

1.0 

1.5 

2.0

2.5 

3.0 

3.5

50 60 70 80 90 100 110

Oil $/barrel

Ethanol energy value without tax credit

With $0.45 blenders’ credit

With blenders’ credit + $0.56

to producers of cellulosic ethanol 

Scenarios and Energy Price Projections 
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Quantifying the Effects of the RFS-2 on the 

U.S. Economy 

This section reports the results from the series of scenarios for the RFS-2. 

Results are simulated from an economywide modeling framework (see box, 

“The USAGE Model”). In doing so, the analysis identifies key links and 

interactions between energy, trade, and the farm sector from an economywide perspective.

Macroeconomic Impacts

Macroeconomic factors, such as GDP, household income and consumption, 

and international trade, are the broadest impact measures on the national 

economy. Meeting the RFS-2 results in multiple long-term effects on the 

U.S. economy. One effect is from the substitution of ethanol for gasoline in 

motor fuels. Replacing petroleum gasoline with less expensive ethanol would 

reduce domestic spending on motor fuels. This reduction would occur as 

long as ethanol is competitive with imported petroleum oil. The cost savings 

from reduced motor fuel expenditure are passed on to households. A second 

effect is from the reallocation of factors of production (production inputs). 

Industries with relatively high rates of technological progress generate 

increased returns to factors employed, thereby raising income to households. 

The overall economy benefits from resource allocation as returns to labor 

and capital increase. A third effect is from changes in trade and international 

prices for exports and imports. Household welfare increases when export 

prices rise relative to import prices (known as a “terms of trade effect”).

This study measures gains or losses from changes in GDP and household 

welfare (in real terms).2 The larger the value of displaced petroleum for each 

dollar of biomass produced, the greater the benefit to the U.S. economy. The 

higher the projected oil price, the greater the increase in GDP and household 

welfare. With oil at $80 per barrel and tax credits fully retained (S1-LP), 

GDP would decrease by $5.8 billion, partly because of the forgone revenue 

from tax credits. However, with oil at $101 per barrel and tax credits fully 

retained (S1-HP), GDP would fall a little less, by $3.9 billion (fig. 1).

Cost-reducing technology plays an important role in meeting the RFS-2 not 

only by reducing ethanol’s costs but also by contributing to national GDP. 

Assuming that reductions in tax credits are coupled with greater technological advances, lower tax credits would provide additional benefits to the 

economy. Reducing tax credits by 50 percent would increase GDP by $1.2 

billion under the high oil price scenario. However, eliminating tax credits 

could raise U.S. output by nearly $6 billion under the high oil price scenario 

and by almost $4 billion under the low oil price scenario. Technological 

improvements in biofuel production could offset the negative effects associated with tax credits by improving efficiency and raising output in meeting 

the mandate. The contribution from technology would vary, depending on 

the price for oil (table 1). Under the assumption that technological progress permits ethanol of all types to become competitive with petroleum, the 

U.S. economy would benefit in meeting the RFS-2 as imported crude oil 

is reduced. The higher the U.S. import bill is for petroleum, the greater the 

potential for GDP to increase in meeting the RFS-2.

2In this report, household consumption and household welfare are used 

interchangeably.
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Household consumption would increase in all scenarios, and the consumption gains would be higher than GDP gains (fig. 2). Increases in consumption would depend on crude oil prices, tax credit reductions, and technology 

advances for meeting DOE’s price projections. With oil at $80 per barrel and 

tax credits fully retained (S1-LP), consumption would increase by about $13 

billion. With oil at $101 per barrel (S3-HP), consumption would increase by 

$28 billion from meeting the RFS-2. Consumption gains are primarily the 

result of increased real income, lower import prices, and higher export prices, 

all of which lead to greater purchasing power to the household.

Returns to factors of production in the form of wages and returns to capital 

would be enhanced by replacing more expensive imported petroleum (table 

1). Real wages and real household disposable income would increase from 

meeting the RFS-2. With oil at $80 per barrel and tax credits fully retained 

(S1-LP), household disposable income would increase by 0.10 percent, 

but if tax credits were eliminated (S3-LP), income would increase by 0.15 

The USAGE Model 

This study uses a model known as the United States Applied General 

Equilibrium model (USAGE). The model is an economywide framework 

of the U.S. economy and is designed for projections and policy analysis. 

USAGE is a multipurpose model developed by the Centre of Policy Studies 

at Monash University in collaboration with the U.S. International Trade 

Commission (USITC). The original theoretical basis for the model is 

based on Dixon and Rimmer (2002). The agricultural cost component is 

constructed from the Agricultural Resource Management Survey (ARMS) 

developed by USDA’s Economic Research Service.

Several modifications were made for this application by adding additional 

industries, which provide explicit treatment for distinct types of biomass 

material for ethanol production and use (Winston, 2009). Modifications 

were necessary to represent implementation of the RFS-2, which specifies 

that ethanol be produced domestically from different sources, and to link 

agricultural production to regional land categories. One of the significant 

modifications to the USAGE model is the individual treatment of different 

types of ethanol using different feedstock materials.1 This modification was 

necessary in order to implement the specified volumetric requirements of 

the RFS-2, which calls for different amounts of ethanol from three sources: 

corn ethanol, cellulosic ethanol, and other advanced biofuels.

Decisions for changes in land allocation are determined by producers’ profitmaximizing behavior. The model includes biomass material—including 

cornstarch, cellulosic (crop residues and perennial energy crops), and other 

advanced (primarily from forestry residue)—for producing different types of 

ethanol. Differences in tax credits are also taken into account for individual 

types of ethanol. The model allows for flexibility in the substitution of multiple 

inputs for production of different types of ethanol (see appendix 3).

1Previous versions of the USAGE model did not distinguish different types of ethanol 

and biomass. 
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percent (table 1). A higher oil price ($101 per barrel) with tax credits retained 

(S1-HP) would raise household disposable income by 0.14 percent. Similarly, 

real wages for consumers would increase with reduced tax credits and a 

higher oil price (S3-HP), while the dollar would appreciate in real terms.

Figure 1

Impact of RFS-2 on U.S. gross domestic product

RFS-2 = Renewable Fuel Standard.

Source: USAGE model simulation.

$ billions

S1: tax credits retained

S2: tax credits

 reduced by 50%

S3: tax credits

 eliminated

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

Oil price $80/barrel

Oil price $101/barrel

Figure 2

Impact of RFS-2 on U.S. household consumption 

RFS-2 = Renewable Fuel Standard.

Source: USAGE model simulation.

$ billions

S1: tax credits

retained

S2: tax credits

reduced by 50%

S3: tax credits

eliminated

0

5

10

15

20

25

30

Oil price $80/barrel

Oil price $101/barrel
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Replacing higher priced imported oil with domestic biofuels yields greater 

benefits as consumer spending on motor fuels is reduced. Among all 

consumer expenditures, those for motor fuels would fall the most, which 

in turn would encourage greater spending on other goods and services. 

The impact on expenditures for motor fuels would depend on the oil price. 

Expenditures for motor fuels would fall by about $9 billion with oil at $80 

per barrel and by about $11 billion with oil at $101 per barrel. In addition, 

under the high oil price scenario, returns to factors of production would 

increase. Because household income is derived from wages and returns on 

capital, disposable income would also be greater. Higher incomes would also 

increase consumption of other goods and services.

Energy Fuel Impacts 

The impacts on the U.S. economy in meeting the RFS-2 would come partly 

from lower priced imported petroleum oil and reductions in the price of 

domestic fuel. Table 2 presents the effects of the RFS-2 on price and quantity 

of energy fuels. The United States, as the largest single-country importer of 

crude oil, could potentially lower the world price of crude oil by reducing its 

imports. Reduced U.S. demand for petroleum would lower both the price and 

quantity of imported crude petroleum. The decrease in oil imports is significant because of the importance of petroleum in the total U.S. import bill.3 The 

impact of meeting the RFS-2 on oil imports would affect the terms of trade for 

the United States as import prices would fall relative to export prices. The price 

of oil would fall about 4 percent. The reduction in the price of oil would also 

depend on future supply and demand conditions in the rest of the world.

Expansion of domestic biofuel production would reduce petroleum demand 

but increase the quantity demanded for motor fuels as the price of motor 

fuels falls (see box, “The RFS-2 and Implications for the Price and Quantity 

of Motor Fuels”).4 The price of motor fuels is indirectly affected by the price 

3U.S. imports of petroleum oil and 

petroleum-based products make up 

about 11 percent of total U.S. imports.

4Reformulated or blended fuel is produced by the “motor fuels” industry in 

the USAGE model.

Table 1

Macroeconomic impact of RFS-2 in 20221

Macroeconomic factors S1-LP S2-LP S3-LP S1-HP S2-HP S3-HP

Percent change

Household disposable income 0.10 0.12 0.15 0.14 0.17 0.20

Real wages for consumers 0.40 0.40 0.40 0.49 0.49 0.49

Real appreciation 0.91 0.94 0.96 1.16 1.19 1.21

Terms of trade 0.80 0.81 0.81 1.00 1.01 1.02

Export price 0.09 0.08 0.07 0.09 0.08 0.07

Import price -0.70 -0.72 -0.73 -0.89 -0.91 -0.93

Import volume -0.02 -0.04 -0.06 0.08 0.05 0.04

Export volume -0.93 -0.96 -0.98 -1.05 -1.08 -1.10

Returns to factors of production 0.307 0.310 0.313 0.378 0.381 0.384

Technology contribution (to GDP growth) 0.244 0.261 0.274 0.240 0.262 0.271

12022 reference base year. 

RFS-2 = Renewable Fuel Standard.

S1: tax credits retained; LP: Low oil price, HP: High oil price. S2: tax credits reduced by 50 percent; LP: Low oil price; HP: High oil price. 

S3: tax credits eliminated; LP: Low oil price; HP: High oil price. 

Source: USAGE model simulation.
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The effect of the RFS-2 on motor fuels plays an important role in determining economywide impacts. The 

impacts of the RFS-2 depend partly on the price and 

quantity changes for blended motor fuels and petroleum-based gasoline. Meeting the RFS-2 could result in 

either an increase or a decrease in the price of motor 

fuels, depending on supply assumptions for gasoline 

and ethanol. Our price projections are based on the 

DOE’s long-term price forecast for petroleum oil and 

ethanol. According to this projection, increased ethanol 

production over the long term could take place without 

the price of ethanol rising in real terms. To impose the 

DOE’s price projection in our model, the ethanol industry’s technological change is treated as endogenous. In 

other words, the model solves for technological change 

needed to satisfy the given quantity change according 

to the RFS-2 while imposing the longrun price projection. In this setting, meeting the RFS-2 is not binding as 

the supply increases to meet the DOE price forecast. In 

meeting the RFS-2 in 2022, the prices of gasoline and 

motor fuels are endogenous. The supply of gasoline is 

determined by the supply of crude petroleum oil, which 

depends on assumed supply and demand conditions in 

the rest of the world. Technological change is constant 

for gasoline and motor fuels production as prices for 

these fuels change.

The change in the equilibrium prices and quantities are 

depicted graphically in the accompanying diagrams. 

Meeting the requirement of the RFS-2 shifts the demand 

curve for ethanol from DE to D’E (top diagram). Costreducing technical change is denoted as a rightward shift 

in the supply of ethanol from SE to S’E . The quantity 

of ethanol increases from QE to Q’E, while the price of 

ethanol PE remains constant. 

In this case the mandate is not binding and the market is 

able to satisfy the quantity demanded by RFS-2 without 

increasing the market price for ethanol. The price is 

determined from long-term reductions in the cost of 

producing ethanol, particularly for advanced ethanol.

Motor fuels, a mixture of gasoline and ethanol, get an 

increasing proportion of ethanol in meeting the RFS-2. 

The mixture of gasoline and ethanol depends on how 

much motor fuel quantity changes, which depends on 

the price of gasoline and ethanol. Ethanol displaces 

gasoline, thereby reducing gasoline demand, which is 

denoted as a shift from DG to D’G (bottom diagram). 

Given that the supply curve for gasoline (SG) is upward 

sloping, the price of gasoline falls. The price of motor 

fuels falls as a result of substituting ethanol for gasoline 

and from using lower priced gasoline. The reduction in 

the price of gasoline allows the motor fuel industry to 

sell a greater quantity, shown as a rightward shift in the 

supply of motor fuels SMF. Demand for motor fuels is 

depicted as a downward sloping curve DMF. Consumers 

of motor fuels demand a higher quantity of motor fuels. 

The equilibrium quantity supplied and demanded for 

motor fuels increases from QMF to Q’MF, as the price of 

motor fuels fall from PMF to P’MF. Total expenditures 

on motor fuels fall as a result of the drop in the price of 

motor fuels. The quantity demanded will depend on how 

responsive consumers are to a given change in the price 

of motor fuels.

1Previous versions of the USAGE model did not distinguish 

different types of ethanol and biomass. 

RFS achieved with cost-reducing technology in 

ethanol production

 Price

 

Longrun impact on price of motor fuels with reduced 

demand for gasoline

Fuel

price

PE

DE

QE Q’E Ethanol quantity

S’E with cost-reducing

technology and tax

credits

SE

D’E with RFS

QE Q’E QMF Q’MF

Fuel quantity

PMF

P’MF

PE

DE

D’E D’G DG

DMF SG

SMF

S’M

The RFS-2 and Implications for the Price and Quantity of Motor Fuels
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of crude petroleum. Crude oil is a major input for petroleum-based gasoline, 

which affects the cost of gasoline. The price of motor fuels (a blended price) 

would fall as the price of petroleum-based gasoline decreases.

The price of gasoline would fall by about 9 percent under the low oil price 

scenario and by about 8 percent under the high oil price scenario (table 

2). The 12-percent drop in the price of motor fuels is largely the result of 

substituting lower cost ethanol for gasoline. The ethanol price would remain 

at $2.12 per gallon according to the projection we adopt from DOE for the 

year 2022. As consumption of motor fuels (blended) increases, gasoline use 

increases. Thus, in meeting the RFS-2, U.S. gasoline consumption would not 

be reduced by the same amount of gasoline replaced by ethanol.5

The value of imported crude oil would fall by $61 billion under the low oil 

price scenarios and by $68 billion under the high oil price scenarios (table 3). 

The total value of U.S. imports of all goods would fall under each scenario 

but would fall more with reduced tax credits and under the high price 

scenario for crude oil because the cost of importing goods would fall with an 

appreciating dollar. Non-oil imports would increase but would increase less 

with reductions in tax credits.

5In this analysis, we assume that the 

consumer preference for higher blends 

of motor fuels would not change as a 

result of the RFS-2.

Table 2

Impact of RFS-2 on domestic fuel and imported crude oil in 20221

Item Unit S1-LP S2-LP S3-LP S1-HP S2-HP S3-HP

Percent change

Crude oil imports Price -4.11 -4.13 -4.15 -3.77 -3.79 -3.82

Quantity -17.46 -17.51 -17.55 -15.96 -16.00 -16.05

Gasoline Price -8.71 -8.72 -8.78 -7.82 -7.83 -7.83

Quantity -20.31 -20.31 -20.31 -18.13 -18.13 -18.13

Motor fuels (blended gasoline) Price -11.73 -11.74 -11.74 -12.02 -12.02 -12.02

Quantity 2.47 2.47 2.47 2.53 2.53 2.54

12022 reference base year. 

RFS-2 = Renewable Fuel Standard.

S1: tax credits retained; LP: Low oil price, HP: High oil price. S2: tax credits reduced by 50 percent; LP: Low oil price; HP: High oil price. 

S3: tax credits eliminated; LP: Low oil price; HP: High oil price. 

Source: USAGE model simulation.

Table 3

Impact of RFS-2 on U.S. oil and non-oil imports in 20221

Oil/non-oil imports S1-LP S2-LP S3-LP S1-HP S2-HP S3-HP

Change in $ billions

Crude oil imports -61.23 -61.42 -61.59 -67.52 -67.75 -67.95

Non-oil imports 20.48 18.22 16.29 21.05 18.79 16.88

Total imports -40.75 -43.20 -45.30 -46.47 -48.95 -51.07

12022 reference base year. 

RFS-2 = Renewable Fuel Standard.

S1: tax credits retained; LP: Low oil price, HP: High oil price. S2: tax credits reduced by 50 percent; LP: Low oil price; HP: High oil price. 

S3: tax credits eliminated; LP: Low oil price; HP: High oil price. 

Source: USAGE model simulation.
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Farm Production and Trade Impacts

As previously discussed, meeting the RFS-2 mandate would reduce fuel 

prices and contribute to the dollar’s appreciation. Both of these factors have 

the effect of lowering costs for the farm and food sector. However, competition for limited land could place upward pressure on land rents. This analysis 

considers the returns to land by location and production allocation to crop 

and livestock activities. Producers tend to allocate land to production activities that are expected to yield the largest benefit. The expected returns to land 

depend on the price of outputs and inputs, producers’ preferences, and land 

quality (Lubowski et al., 2006). If meeting the mandate under the RFS-2 

could be accompanied by cost-reducing technology for biomass and ethanol 

production, the land requirement to produce energy crops would be lower, 

which in turn, would mean less competition for land reallocation.

The analysis assumes that producers would not make alterations to enhance 

land capability, such as capital investment in irrigation, land reclamation, or 

conversions that might enable crops to grow on acreage previously classified 

as not suitable for growing crops. With fixed acreage, land rents would be a 

reflection solely of reallocating land to activities with higher returns. Demands 

on land differ because of the regional differences in acreage availability for 

growing energy crops and production characteristics of other crop and livestock activities. Producers alter acreage toward more profitable activities.

Increases in dedicated energy crop production would increase competition 

for all land types and consequently would raise rental rates. The effect of 

RFS-2 on land rents would depend on the proportion that energy crops would 

contribute to total cellulosic requirements. The magnitude of the increase 

in rental rates by region would capture differences in regional competition for land. Land types capable of supporting energy crops, including the 

Mississippi Portal, Heartland, and Eastern Uplands, are more likely to see 

higher rents (fig. 3). These areas would experience higher increases in land 

rents because of the land suitability for accommodating different crops, 

Figure 3

Impact of RFS-2 on regional land returns, 2022 

RFS-2 = Renewable Fuel Standard.

Source: USAGE model simulation.

Rental index (percent change from reference scenario)

Basin

and Range

Prairie

Gateway

Fruitful

Rim

Southern

Seaboard

Eastern

Uplands

Northern

Great Plains

Northern

Crescent

Heartland Mississippi

Portal

0

2

4

6

8

10

12

14

S1−LP: tax credits retained and low oil price

S2−LP: tax credits reduced by 50% and low oil price

S3−LP: tax credits eliminated and low oil price
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including energy crops. The land rents would also rise in the Fruitful Rim 

and Basin and Range, but the increase would be smaller.

The abundance of farmland is not as important as its suitability for crop 

growing. For example, the Basin and Range region, with abundant and lowcost farmland, would be mostly unsuitable for growing energy crops due to 

inadequate rainfall and poor soil conditions. On the other hand, the Fruitful 

Rim region, with its suitable climate and soil conditions, would provide an 

ideal location for energy crops. However, energy crops would face greater 

competition with other traditional crops in this region. Land rents for rice 

would increase more than rents for other crops because of the indirect 

competition between rice and energy crop production (fig. 4). Because livestock and horticultural crops are produced in many places throughout the 

country, production of those commodities may face less intense competition 

from energy crops.

The RFS-2 would impact food prices considerably less than it would farm 

commodity prices in the long term (2022). For example, corn and rice prices 

would increase more than prices for downstream products, such as prepared 

feeds, for which prices increase by less than 0.5 percent (table 4). Farm 

commodity prices would rise partly because of increased competition for 

land, thereby raising production costs. Prices would increase less under alternative scenarios where tax credits are reduced.

The effects of the RFS-2 on crop production would vary, depending on the 

particular demand for each crop (table 5). Production of corn, used partly 

as an energy crop, would increase by 7-11 percent, whereas production of 

other crops not directly used for energy would likely fall. Improvements in 

cost-reducing technology, coupled with reduced tax credits, would reduce 

the effect of the RFS-2 on production under each scenario (S1-LP through 

S3-HP). Technological gains made for cellulosic energy crops could reduce 

the effects on production for all crop and livestock sectors.

Figure 4

Impact of RFS-2 on agricultural sector land rents, 2022 

RFS-2 = Renewable Fuel Standard.

Source: USAGE model simulation.

Rental index (percent change from reference scenario)

Rice Feed grains Oilseeds Other crops Cotton Wheat Horticulture Livestock

0

2

4

6

8

10

12

14 S1−LP: tax credits retained and low oil price

S2−LP: tax credits reduced by 50% and low oil price

S3−LP: tax credits eliminated and low oil price
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Table 4

Impact of RFS-2 on selected U.S. farm and food prices in 20221

Commodity S1-LP S2-LP S3-LP S1-HP S2-HP S3-HP

Percent change

Corn 4.81 4.06 3.23 4.68 3.94 3.12

Rice 2.03 1.81 1.59 1.71 1.50 1.30

Fruits 0.71 0.62 0.52 0.63 0.54 0.45

Tree nuts 0.26 0.23 0.21 0.23 0.20 0.18

Meat 0.48 0.42 0.37 0.47 0.42 0.37

Fluid milk 0.52 0.46 0.40 0.53 0.48 0.42

Cheese 0.43 0.38 0.33 0.43 0.38 0.33

Flour 0.51 0.46 0.40 0.48 0.43 0.37

Prepared feeds 0.48 0.41 0.35 0.47 0.41 0.34

Bread 0.15 0.14 0.14 0.17 0.17 0.16

12022 reference base year. 

RFS-2 = Renewable Fuel Standard.

S1: tax credits retained; LP: Low oil price, HP: High oil price. S2: tax credits reduced by 50 percent; LP: Low oil price; HP: High oil price. 

S3: tax credits eliminated; LP: Low oil price; HP: High oil price. 

Source: USAGE model simulation.

Table 5

Impact of RFS-2 on U.S. farm output in 20221

Commodity S1-LP S2-LP S3-LP S1-HP S2-HP S3-HP

Percent change

Corn 11.64 9.56 7.25 11.62 9.54 7.24

Rice -1.43 -1.34 -1.25 -1.47 -1.37 -1.28

Cotton -1.18 -1.17 -1.17 -1.15 -1.14 -1.12

Wheat -0.65 -0.64 -0.64 -0.63 -0.63 -0.62

Other feed grains -0.06 -0.10 -0.14 -0.05 -0.09 -0.14

Soybeans -0.46 -0.55 -0.66 -0.47 -0.56 -0.66

Other oilseeds -0.74 -0.77 -0.82 -0.72 -0.75 -0.79

Dairy -0.39 -0.33 -0.27 -0.43 -0.37 -0.30

Beef -0.53 -0.49 -0.45 -0.54 -0.50 -0.46

Other livestock -1.01 -0.93 -0.84 -1.00 -0.92 -0.83

Tobacco -1.25 -1.19 -1.13 -1.22 -1.16 -1.10

Fruits -1.38 -1.25 -1.11 -1.45 -1.31 -1.17

Tree nuts -1.71 -1.63 -1.55 -1.65 -1.56 -1.47

Vegetables -1.66 -1.52 -1.37 -1.65 -1.50 -1.35

Other nonenergy crops -0.41 -0.40 -0.40 -0.42 -0.41 -0.41

12022 reference base year. 

RFS-2 = Renewable Fuel Standard.

S1: tax credits retained; LP: Low oil price, HP: High oil price. S2: tax credits reduced by 50 percent; LP: Low oil price; HP: High oil price. 

S3: tax credits eliminated; LP: Low oil price; HP: High oil price. 

Source: USAGE model simulation.
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Total land availability is constrained in this analysis. Thus, meeting the 

RFS-2 would reduce U.S. agricultural commodity exports and increase 

imports (tables 6 and 7) because domestic crops must compete with limited 

land. However, with gains from technological advances, the impacts on 

trade for all commodities would be reduced. Corn export and import flows 

would be affected more than those of other commodities by the RFS-2, 

with exports decreasing by 3-4 percent and imports rising 9-13 percent. For 

other commodities, reduced production would limit exports and increase 

imports. For example, with lower rice production, rice imports would rise 

by 3-4 percent, whereas exports would fall 1-2 percent. With imports further 

weakened by improved technology for cellulosic ethanol, most commodity 

imports would rise by less than 2 percent (table 7).

Increased biomass production would raise demand for farm inputs purchased 

from both domestic and foreign sources. This analysis assumes no capacity 

constraints in the United States or the rest of the world for farm input 

supplies. The responsiveness of farm input supply would moderate the 

impact of the RFS-2 on farm production and trade. Increased imports of farm 

inputs and lower energy prices would play an important role in determining 

domestic input supply response. Lower energy prices would reduce costs for 

domestic manufacturing of farm inputs. Both domestic fertilizer production 

and imported fertilizer would increase to meet increased demand (table 8).

Table 6

Impact of RFS-2 on U.S. farm exports in 20221

Commodity S1-LP S2-LP S3-LP S1-HP S2-HP S3-HP

Percent change

Corn -3.82 -3.36 -2.85 -3.81 -3.36 -2.86

Rice -2.16 -2.03 -1.89 -2.10 -1.98 -1.85

Cotton -1.30 -1.28 -1.26 -1.33 -1.31 -1.30

Wheat -0.96 -0.95 -0.95 -0.99 -0.99 -1.00

Other feed grains -0.54 -0.60 -0.67 -0.59 -0.65 -0.72

Soybeans -0.79 -0.85 -0.93 -0.77 -0.84 -0.92

Other oilseeds -1.15 -1.13 -1.12 -1.17 -1.15 -1.15

Dairy -1.87 -1.74 -1.58 -1.97 -1.83 -1.68

Beef -1.76 -1.65 -1.54 -1.84 -1.74 -1.63

Other livestock -1.25 -1.18 -1.11 -1.30 -1.24 -1.17

Tobacco -3.74 -3.44 -3.15 -3.47 -3.20 -2.92

Fruits -2.71 -2.53 -2.35 -2.75 -2.58 -2.41

Tree nuts -2.21 -2.07 -1.93 -2.31 -2.18 -2.04

Vegetables -3.30 -3.09 -2.87 -3.46 -3.26 -3.05

Other crops -1.77 -1.70 -1.62 -1.80 -1.73 -1.66

12022 reference base year. 

RFS-2 = Renewable Fuel Standard.

S1: tax credits retained; LP: Low oil price, HP: High oil price. S2: tax credits reduced by 50 percent; LP: Low oil price; HP: High oil price. 

S3: tax credits eliminated; LP: Low oil price; HP: High oil price. 

Source: USAGE model simulation.
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Table 7

Impact of RFS-2 on U.S. farm imports in 20221

Commodity S1-LP S2-LP S3-LP S1-HP S2-HP S3-HP

Percent change

Corn 12.96 11.03 8.91 12.82 10.91 8.82

Rice 4.48 4.08 3.68 4.00 3.63 3.27

Cotton 1.61 1.57 1.54 1.46 1.43 1.41

Wheat 0.85 0.86 0.87 0.71 0.72 0.74

Other feed grains 0.84 0.96 1.10 0.86 0.98 1.13

Soybeans 0.80 0.79 0.80 0.72 0.71 0.73

Other oilseeds 1.46 1.31 1.16 1.44 1.29 1.13

Dairy 1.84 1.73 1.61 2.00 1.89 1.77

Beef 1.10 1.04 0.97 1.19 1.13 1.07

Other livestock 1.55 1.50 1.44 1.65 1.61 1.55

Fruits 0.80 0.78 0.75 0.87 0.85 0.82

Tree nuts 1.29 1.16 1.03 1.33 1.21 1.08

Vegetables 1.68 1.57 1.45 1.77 1.66 1.55

Other crops 1.25 1.14 1.02 1.21 1.11 1.00

12022 reference base year. 

RFS-2 = Renewable Fuel Standard.

S1: tax credits retained; LP: Low oil price, HP: High oil price. S2: tax credits reduced by 50 percent; LP: Low oil price; HP: High oil price. 

S3: tax credits eliminated; LP: Low oil price; HP: High oil price. 

Source: USAGE model simulation.

Table 8

Impact of RFS-2 on U.S. fertilizer in 20221

Item S1-LP S2-LP S3-LP S1-HP S2-HP S3-HP

Percent change

Output 6.27 5.70 5.18 6.26 5.70 5.18

Imports 10.31 9.43 8.61 10.31 9.43 8.61

Exports 4.34 3.93 3.56 4.29 3.88 3.50

Domestic price 0.01 -0.03 -0.07 -0.05 -0.09 -0.13

12022 reference base year. 

RFS-2 = Renewable Fuel Standard.

S1: tax credits retained; LP: Low oil price, HP: High oil price. S2: tax credits reduced by 50 percent; LP: Low oil price; HP: High oil price. 

S3: tax credits eliminated; LP: Low oil price; HP: High oil price. 

Source: USAGE model simulation.
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Limitations and Further Considerations

Some limitations of this study are important in the analysis of the RFS-2. 

The modeling framework does not measure benefits from increased energy 

security or impacts associated with environmental change. Obtaining actual 

production data for second-generation energy crops and other advanced 

biofuels is still premature. How energy crops might affect regional allocation 

of land deserves more study. The underlying cost structure of energy crops 

and the differences in production costs by region could influence regional 

shifts in crop production. The report did not consider additional land that 

could potentially be used that is currently under the Conservation Reserve 

Program (CRP) or forest land. Furthermore, this study does not consider 

future developments in the rest of the world that could affect commodity 

supply and demand for the U.S. farm and food sector.

Another shortcoming of the analysis is in addressing public expenditures on 

research and development for the technological change, which would require 

the model to link technological change to expenditures explicitly. In addition, 

the study does not account for the long-term costs of infrastructure to support 

the biomass and biofuels industry. For example, such an accounting would 

involve including the costs of developing the infrastructure to support the 

transportation system for biomass and ethanol. Comprehensive infrastructure 

costs for meeting the RFS-2 are not yet known. In addition, the public costs 

associated with mitigating risks and financing of renewable energy investments were not taken into consideration. Capturing all future benefits and 

costs is beyond the scope of this study.
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Conclusions

Increasing energy independence has been an aspiration for the United States 

since the early 1970s with the first major oil price spike. However, during 

much of the last 25 years, economic incentives for developing alternative 

energy has been limited because of low petroleum prices that made alternatives uncompetitive. Petroleum price increases were only temporary as oil 

supplies were restored within months. Low prices and policy incentives 

were not adequate to stimulate development of renewable fuels. The RFS-2 

mandate could face similar challenges in the future.

Although global economic fluctuation creates uncertainty for near-term 

energy prices, technological advances play a key role in the success of a 

permanent and viable alternative energy industry. This analysis does not 

address the likelihood of meeting the RFS-2 timetable, but it attempts to 

provide estimates for whether and under what conditions the U.S. economy 

would benefit from meeting the mandate in 2022. Technological progress 

could enable biofuels to become competitive with petroleum, providing 

benefits to the U.S. economy. The larger the value of displaced petroleum for 

each dollar of biomass produced, the greater the benefit would accrue to the 

U.S. economy.

The challenge over the next decade is more likely to confront the uncertainty of short-term conditions that fall in the way of achieving long-term 

gains. Policies that provide incentives for producers may mitigate some risks 

associated with market uncertainties, whereas tax credits are more likely 

to reduce economic welfare. This study shows that, even with tax credits, 

technological progress could offset losses by raising welfare in meeting the 

RFS-2. 
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Rajagopal, D., S. Sexton, G. Hochman, and D. Zilberman. 2009. “Recent 

Developments in Renewable Technologies: R&D Investment in Advanced 

Biofuels,” Annual Review of Resource Economics 1:621-44.
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Sheldon, I., and M. Roberts. 2008. “U.S. Comparative Advantage in 

Bioenergy: A Heckscher-Ohlin-Ricardian Approach,” American Journal 

of Agricultural Economics 90(5):1233-38.

Tyner, W.E. 2007. “Policy Alternatives for the Future Biofuels Industry,” 

Journal of Agricultural & Food Industrial Organization 5(2):Article 2.

Tyner, W.E., and F. Taheripour. 2007. “Future Biofuels Policy Alternatives,” 

Paper presented at the Farm Foundation/USDA conference on Biofuels, 

Food, and Feed Tradeoffs, St. Louis, MO, April. 

U.S. Department of Energy, Energy Information Administration, Office of 

Energy Analysis and Forecasting. 2008. Annual Energy Outlook 2008 

with Projections to 2030.

U.S. Department of Energy, Energy Information Administration, Office of 

Energy Analysis and Forecasting. 2009. Annual Energy Outlook 2010 

Early Release Overview.

U.S. Government Accountability Office, 2009. Biofuels: Potential 

Effects and Challenges of Required Increases in Production and Use, 

GAO-09-446.

Walsh, M.E., R.L. Perlack, A. Turhollow, D. De La Torre Ugarte, D.A. 

Becker, R.L. Graham, S.E. Slinsky, and D.E. Ray. 1999. Biomass 

Feedstock Availability in the United States: 1999 State Level Analysis, 

Working Paper, Oak Ridge National Laboratory.

Winston, A.R. 2009. Enhancing Agricultural and Energy Sector Analysis in 

CGE in Modeling: An Overview of Modifications to the USAGE Model, 

General Paper No. G-180, Centre of Policy Studies and the Impact 

Project, Monash University, Australia, January, http://www.monash.edu.

au/policy/ftp/workpapr/g-180.pdf
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Appendix 1: Developing the Reference Scenario

The base year of the U.S. Applied General Equilibrium (USAGE) model 

for this study is 2005. However, the reference scenario and analysis of the 

Renewable Fuel Standard (RFS-2) through 2022 require that projections 

be made for that year (2022). The modeling framework adopts projections 

for the U.S. economy to develop a reference scenario. Long-term 

macroeconomic and energy projections for the U.S. economy are used to 

simulate economic growth. In our reference scenario, variables are “targeted” 

to match projections determined by other projection models used by the 

U.S. Department of Energy (DOE) and the U.S. Department of Labor. The 

reference scenario, also known as a “forecast scenario” in the USAGE model 

is based upon projected variables, such as gross domestic product (GDP), 

consumption, investment, population, labor force, petroleum prices, exports, 

and imports. These variables are exogenous variables in the reference 

scenario because they are determined independently from the model. The 

scenario serves as a neutral growth scenario where the RFS-2 is not met and 

is consistent with the DOE’s projections. In simulating the effects of the 

RFS-2, most macroeconomic variables are determined by the USAGE model 

and reported as deviations from the reference scenario.

Based on long-term projections, U.S. economic growth, trade, and consumption spending are expected to resume growth after the 2008-10 global 

economic downturn. Economic growth in the United States is assumed to 

take place as “business as usual” through 2022. GDP is expected to grow by 

2.96 percent per year and by 64.2 percent between 2005 and 2022 (app. table 

1). Private consumption in the United States is expected to grow at an annual 

rate of 2.86 percent. The dollar is expected to continue to weaken. The 

weaker dollar is expected to slow import growth to 4.25 percent per year and 

increase export growth to 5.5 percent per year. A weakening dollar would 

further reduce the U.S. trade deficit.

Appendix table 1

Reference scenario: Key U.S. macroeconomic variables, 2005-22 

Item Annual growth Accumulative growth

Percent change

Private consumption 2.86 61.5

Labor supply 0.91 16.7

Capital stock 2.96 64.1

Real investment 3.20 70.9

Government consumption 1.85 36.5

GDP real 2.96 64.1

Population 0.85 15.6

Exports 5.50 148.5

Imports 4.25 102.9

Consumer price index 2.39 49.4

Source: U.S. Department of Energy and U.S. Department of Labor.
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Projections for energy variables under the reference scenario are also 

determined outside the USAGE model for making projections for the year 

2022 (app. table 2). As vehicle fuel efficiency standards are raised, it is 

expected that total motor fuel consumption will fall (4.6 percent) between 

2005 and 2022. Domestic production of petroleum is expected to rise over 

the projection period, whereas fuel imports are expected to decrease. It is 

assumed that, without the RFS-2, corn-based ethanol would double between 

2005 and 2022, reaching 8 billion gallons. The analysis assumes that 7 billion 

additional gallons of corn-based ethanol are produced due to the RFS-2 

mandate.

In our reference scenario, we adopt two alternative crude oil prices. We use 

an oil price of $80 per barrel (Low Price) as a low bound corresponding 

to ethanol’s energy value for replacing gasoline and $101 (High Price) 

per barrel as an upper bound, which is directly from DOE’s reference case 

for imported crude petroleum. Appendix table 3 shows projections from 

imposing the macroeconomic and the energy component of DOE’s 2022 

reference scenario on the U.S. economy under the two alternative prices for 

crude oil—that is, $80 and $101 per barrel. The projections are expressed as 

percentage changes from the base year (2005). Under the reference scenario, 

we assume that 8 billion gallons of conventional corn-based ethanol are 

available without the RFS-2, which means that corn ethanol would need to 

expand by 94.3 percent from a base of 4.12 billion gallons in 2005 (app. table 

3). The price of gasoline would rise by 73 percent from the base year in 2005. 

However, the price of blended motor fuels (gasoline with ethanol) would rise 

by a lesser amount under the projection that the real price of ethanol would be 

$2.12 per gallon in 2022. Imported petroleum oil would fall with the rise in 

the price of imported petroleum, starting from $40 per barrel in 2005.

Appendix table 2

Reference scenario: U.S. energy-related sectors, 2005-22 

Item Annual growth Accumulative growth

Percent change

Natural gas consumption 0.76 13.67

Motor fuels consumption -0.28 -4.60

Gasoline exports 0.84 15.24

Diesel exports 0.84 15.24

Crude oil exports 1.63 31.70

Gasoline imports -2.21 -31.60

Diesel imports -2.21 -31.60

Other petroleum imports -2.21 -31.60

Natural gas imports -0.69 -11.17

Electric services 1.61 31.22

Diesel production 1.45 27.70

Other petroleum fuels production 0.23 3.90

Crude petroleum production 1.13 21.10

Natural gas production 0.59 10.52

Corn ethanol production 4.16 100.00

Source: U.S. Department of Energy.
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Appendix table 3

Reference scenario: Key U.S. macroeconomic variables, 2005-22 

Item Oil price $80/barrel Oil price $101/barrel

Price Quantity Price Quantity 

Percent change

Gasoline 73.2 -0.2 109.0 -0.2

Motor fuels (blended gasoline) 69.3 0.1 103.5 0.1

Ethanol 0.0 94.3 0.0 94.3

Crude oil imports 100 -2.7 152.5 -2.7

12005 base year. 

Source: USAGE model simulation.
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Appendix 2: Energy Price Projections

Future petroleum prices are likely to depend on the growth of the world 

economy and the underlying longrun costs for producing petroleum. The 

reasons for higher petroleum prices in the long run are discussed in this 

section.

The last time the world economy experienced a major downturn that curbed 

global output, trade, and energy demand was more than a quarter of a century 

ago. For much of the last 25 years, low prices for petroleum limited development of alternative energy. Even as world growth resumed after the 1982 

recession, energy prices did not recover. Between 1985 and 2004, the real 

price of gasoline in the United States remained flat, rarely rising above $2 

per gallon. If those same conditions were to persist over the next decade, 

they would weaken incentives for developing biofuels. Although the recent 

recession is comparable to the downturn of 1982, a repeat of the 1980s, 

with suppressed and prolonged stagnation in petroleum prices, is not likely 

because, since then, a number of factors have altered world energy markets.

The supply of petroleum has always been subject to instability from geopolitical forces. Price surges in the past were mainly from supply disruptions. 

High prices were rarely sustainable for more than several months at a time. 

However, in the recent decade, petroleum prices were elevated over a multiyear period, even without a major supply disruption. Strong demand and 

sluggish supply contributed to higher prices.

World energy demand continues to grow, particularly in developing countries. Their share of world GDP is now much larger than it was in the 1980s, 

and their energy use per dollar of GDP (energy intensity) is higher than it 

is in developed countries. In 1990, China and India accounted for 5 percent 

of demand for global liquid fuels, but their share increased to 11 percent by 

2005 (app. fig. 1). Economic growth was particularly strong for both of these 

countries between 2004 and 2008 and a key driver for raising petroleum 

Appedix figure 1

Projected consumption of liquid fuels, 1990-2030

Source: U.S. Department of Energy, 2009.

Million barrels/day

1990 2004 2005 2010 2015 2020 2025 2030

0

20

40

60

80

100

120

United States

Europe

Japan

Other developed

China and India

Middle East

Other developing
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prices during this time. By 2025, China and India are expected to account for 

17 percent of global liquid fuel consumption, surpassing total consumption 

for all of Europe.

By 2015, other developing countries are expected to surpass the United 

States in liquid fuel consumption. Demand for liquid petroleum fuels is 

expected to remain nearly flat for Europe, Japan, and the United States 

between 2010 and 2025. The United States is expected to consume just 

5 percent more in liquid fuels between 2007 and 2030, from 20.6 million 

barrels to 21.6 million barrels. Given this trend, and assuming improvement 

in fuel efficiency standards for vehicles, energy intensity is likely to fall 

in the United States. Developed countries would account for less than 50 

percent of the world’s liquid fuel consumption, whereas developing countries 

would drive nearly all of the world’s increase in liquid fuel consumption. As 

consumers in developing countries switch to personal motorized transportation, per capita consumption of energy increases. Globally, transportation 

fuel use is expected to account for 74 percent of the increase in liquid fuel 

use. At the same time, industrial sectors are more likely to adopt efficient 

technologies that are lowering energy intensity.

The longrun cost of supplying petroleum fuels is more likely to rise for the 

following reasons. First, new investment would be needed for the world’s oil 

producers to expand beyond current capacity. Second, the cost of extracting 

oil from proven oil reserves is more likely to rise. Third, oil exploration and 

development, which may require riskier investments that require higher rates 

of return, would also drive costs up.

How much costs increase would depend on the source of supply because the 

cost structure of each petroleum source varies, depending on the geographic 

origin. Liquid fuels come from three basic sources: conventional petroleum from the Organization of the Petroleum Exporting Countries (OPEC), 

conventional petroleum from non-OPEC suppliers, and unconventional fuels, 

which could be supplied by both OPEC and non-OPEC sources.

Conventional petroleum supplied by OPEC is the lowest cost and most 

accessible liquid fuel. However, accessibility is a problem for conventional 

fuels supplied by non-OPEC countries. The lack of prospects for large 

conventional petroleum reserves in non-OPEC countries could constrain 

production. Development of small fields is a possibility but would come 

at high cost. Liquid fuels from unconventional sources are generally more 

expensive than those from conventional sources. Unconventional sources 

include oil sands (bitumen), coal-to-liquids (CTL), gas-to-liquids (GTL), and 

extra-heavy oil from Venezuela and Mexico.

In addition to rising costs of exploration and extraction of conventional and 

unconventional liquid fuels, OPEC’s decision for maintaining its own market 

share in the world market adds to uncertainty. Even if OPEC maintains its 

current market share (about 40 percent) by increasing production to meet 

demand with other producers, the price of crude oil is more likely to continue 

its upward movement after 2010 (app. fig. 2). The price in 2022 would be 

$101 per barrel in real terms (U.S. Department of Energy, 2009). If OPEC 

could restrain supply, the price of crude oil would be higher. Limited supply 

from OPEC would raise the costs of producing crude oil as it encourages 
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production of higher cost liquid fuels by non-OPEC and unconventional 

sources.

In the long term, without advances in cost-reducing technology, the cost of 

imported crude oil will largely drive the wholesale price of gasoline (app. 

fig 2). Technological advances in producing alternative fuels would keep 

ethanol prices from rising. The longrun costs of producing alternatives fuels, 

like second-generation biofuels, are expected to decrease over the next 

decade. Although the exact timing is unknown, a growing share of ethanol is 

expected to be produced by second-generation biofuels as costs fall. Even as 

production of second-generation ethanol would expand over the decade, the 

real price of ethanol is not expected to increase over the long term. Improved 

efficiency in producing biomass and converting it to ethanol would be the 

key reasons for the widening price gap between ethanol and gasoline over the 

next two decades. 

Appedix figure 2

Fuel price projections, 2006-30

Source: Department of Energy, 2009.

$/gallon $/barrel

2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034

0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

0

20

40

60

80

100

120

Wholesale ethanol price projection (real)

Motor gasoline price (real)

Reference oil price projection (real)
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Appendix 3: Modifications for Modeling 

Energy Fuels

Production of cellulosic ethanol from dedicated energy crops does not yet 

exist on a commercial scale. This study does not attempt to make annual 

forecasts of production of dedicated energy crops. However, to fully implement the RFS-2 scenario, we need to make reasonable assumptions about 

future locations for growing dedicated energy crops. We assume that the 

potential for supplying dedicated energy crops varies by location because of 

the characteristics of the land (such as soil conditions), topography, climatic 

conditions, and competition with other crops.

To provide better treatment for farmland in the USAGE model, this study 

adopted a geographical categorizations scheme for the United States, known 

as Farm Resource Regions (FRR). The Farm Resource Regions were developed by USDA’s Economic Research Service for depicting geographic 

specialization in production of U.S. farm commodities. It is used for 

addressing economic and resource issues in U.S. agriculture. The FRR designations consist of nine regions with boundaries defined by information on 

U.S. farm characteristics, county-level production, and land resource information. Regional boundaries are determined by the clustering of similar farm 

characteristics intersected with similar geographic climatic conditions. This 

type of regional grouping delineates geographical farm specialization more 

precisely than what would be possible using State-level groupings and aggregate farm production. For example, the Heartland region comprises three 

entire States but includes areas of five other States. The partial inclusion is 

because of the differences in farm characteristics and the underlying crop 

growing patterns. Each FRR has a distinct crop mix underpinning the uniqueness of each region’s geography.

This study does not attempt to treat distinct types of perennial grasses in 

modeling cellulosic biomass. A perennial energy crop commodity, switchgrass is used to represent all related species of grasses used as dedicated 

energy crops in the USAGE model. Dedicated perennial energy crops may 

comprise multiple herbaceous species of which switchgrass is one. Although 

switchgrass has high potential for being grown in many regions, other species 

could be more suitable, depending on local conditions. Reliance on a single 

species, such as switchgrass, poses production risks for epidemic pest and 

disease outbreak. More than one species likely will be grown in any one location. Multiplicity of herbaceous species can also provide stability of yields 

over time. Among the promising species of perennial grasses are Miscanthus, 

reed canary grass, tall fescue, and Bermuda grass (Biomass Research and 

Development Board, 2008a). Miscanthus has higher yields than switchgrass 

and greater profit potential for a wide range of growing regions. The potential 

for dedicated energy crops varies by each FRR region (app. table 4). Regions 

with the highest potential are the Mississippi Portal, Eastern Uplands, the 

Heartland, and the Southern Seaboard. These regions would account for 80 

percent of total production of dedicated energy crops. The “pre-simulated” 

shares reflect the potential for growing dedicated energy crops. The “postsimulated” shares reflect production based on economic returns. The USAGE 

model determines changes in the allocation of land for each crop based on 

profit maximization. Higher profits translate into higher returns to land. As 
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the relative returns to land with greatest potential increase from competition among competing crops, land is reallocated to the most productive uses. 

Production can be limited as profitability diminishes from increased competition for limited land in any one region.

The USAGE model uses multi-level nests of the CRESH (constant ratio of 

elasticities of substitution, homothetic) functional form, representing each 

industry’s production structure. Each pair of inputs is governed by a common 

parameter for all pairs of inputs. This structure, however, can pose some 

limitations in allowing flexibility in the substitution of intermediate inputs for 

ethanol. For example, cellulosic ethanol made from dedicated energy crops 

is highly substitutable with ethanol made from crop residues. However, other 

intermediate inputs, such as chemicals and enzymes, would not be substitutable with other materials from biomass. The reason for a separate cellulosic 

material industry is to permit a high degree of substitution of crop residue 

material with energy crop material but not with other intermediates, such as 

chemicals and enzymes. In the USAGE model, a fictional cellulosic material industry produces a product that is a combination of switchgrass and 

crop residue purchased by the cellulosic ethanol industry (app. fig. 3). Unlike 

other conventional industries, the production of cellulosic material does not 

employ labor or capital (value-added).

Crop residues for cellulosic ethanol production could potentially come from 

multiple crops, such as corn, wheat, sorghum, barley, and rice. Milbrandt 

(2005) estimated that approximately 157 million dry tons of biomass for 

producing cellulosic ethanol was available in 2005. Availability of crop 

residues is a function of several factors, including the crop-to-residue ratio, 

moisture content, and alternative uses, such as animal feed and compost.6 In 

this study, the supply of crop residue comes from corn only. We assume that 

1 ton of corn stover, on average, is produced for every ton of corn. USDA 

guidelines for soil erosion require that a minimum of 30 percent be left on the 

ground for anti-erosion coverage. The model uses a mixed complementarity 

6See Biomass Research and Development Board (2008b) and De La Torre 

et al. (2003) for the potential supply of 

biomass in the United States. 

Appendix table 4

Estimates of the distribution of perennial energy crops for meeting 

the RFS-2 in 2022 

Region Pre-simulation Post-simulation

Percent

Heartland 19.0 19.0

Northern Crescent 7.0 8.7

Northern Great Plains 6.0 7.4

Prairie Gateway 6.0 6.4

Eastern Uplands 20.0 19.6

Southern Seaboard 9.0 9.8

Fruitful Rim 2.0 2.4

Basin and Range 0.0 0.0

Mississippi Portal 32.0 26.6

Total 100.0 100.0

RFS-2 = Renewable Fuel Standard. 

Source: USAGE model simulation.
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approach to capture demand and supply relationships. Supply is governed by 

the feed grain industry facing a joint-profit maximizing decision for corn and 

corn stover.

Appedix figure 3

Ethanol production structure in USAGE model 

Ethanol 

Other

intermediates

Value-added

 

Other

intermediates

Other

intermediates

Value-added

Cellulosic ethanol Other advanced ethanol Corn ethanol 

Cellulosic material 

Value-added

Switchgrass Crop residues Organic

material Corn
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Appendix 4: Sensitivity Analysis for Imported 

Crude Petroleum

The impact of meeting the RFS-2 on the U.S. economy will depend partly 

on the responsiveness of the supply of crude oil in the rest of the world. The 

reduction in U.S. demand for petroleum reduces both quantity supplied and 

the price for crude oil. The more responsive the supply is for crude petroleum, the smaller the decrease in the price of crude oil. Smaller declines in 

the price of oil translate into lower GDP and household welfare. The import 

supply elasticity captures the net effect of both the demand by non-oilproducing countries and the supply of oil-producing countries. Household 

welfare from the impact of the RFS-2 is positive over the entire range of 

import supply elasticities (10-0.5) (app. table 5). However, GDP becomes 

negative for elasticities greater than 1. This study adopts a midpoint import 

supply elasticity of 5. Although GDP and welfare are higher with the greater 

drop in petroleum, energy independence is reduced as imports of crude petroleum fall less and motor fuels output is greater. 

Appendix table 5

Sensitivity analysis of the import supply elasticity for crude petroleum in meeting the RFS-2 

Import supply 

elasticity

Crude oil 

imports Crude oil price 

Motor fuels 

output Gasoline output Welfare GDP

Percent change

10 -18.0 -2.6 2.3 -20.0 0.084 -0.026

9 -17.9 -2.8 2.3 -20.0 0.087 -0.025

8 -17.7 -3.0 2.3 -19.9 0.090 -0.024

7 -17.5 -3.2 2.4 -19.9 0.093 -0.023

6 -17.3 -3.5 2.4 -19.8 0.098 -0.021

5 -17.0 -4.0 2.5 -19.7 0.105 -0.019

4 -16.0 -5.2 2.8 -19.4 0.123 -0.013

3 -15.4 -6.1 2.9 -19.2 0.136 -0.009

2 -14.2 -7.6 3.2 -18.9 0.159 -0.001

1 -11.1 -11.3 4.0 -18.0 0.216 0.016

0.5 -7.8 -15.1 4.8 -17.0 0.277 0.035

RFS-2 = Renewable Fuel Standard. 

Source: USAGE model simulation.