January 11, 2010 

MEMORANDUM 

TO: Docket EPA-HQ-OAR-2005-0161 

SUBJECT: Economy-Wide Impacts of Renewable Fuels Standards 

 EPA has undertaken an analysis of the economy-wide impacts of the renewable fuels 

standards (RFS2) as an exploratory exercise that EPA believes could provide additional insights 

into the potential impacts of the increased use in renewable fuels. The results presented in this 

memo were not a factor regarding the appropriateness of the RFS2 standards. It is important to 

note that the results of this modeling exercise are dependent on the assumptions associated with 

the cost of renewable fuels relative to petroleum prices in the future. 

It is anticipated that the increase in renewable fuels associated with this RFS2 rulemaking 

will have impacts on the U.S. economy that extend beyond the U.S. transportation sector. By 

requiring 36 billion gallons of renewable fuels in the U.S. transportation sector, it is anticipated 

that the price of motor vehicle fuels will decrease modestly by 2022. This is due to two reasons. 

First, the costs of renewable fuels are estimated to decrease over time, while the price of 

petroleum is projected to increase over time. Therefore, by 2022, the cost of renewable fuels is 

expected to be lower than the cost of gasoline and diesel fuels. Secondly, the decreased demand 

for petroleum products as a result of using more renewable fuels will modestly lower the world 

price of oil. The resulting overall decrease in the price of motor vehicle fuels will affect all 

sectors of the economy that use these fuels as intermediate inputs to production. For example, 

firms that transport products (i.e., shipping companies) will see a decline in their costs of 

production. Also, households will also be beneficially affected as consumers of these goods, and 

directly as consumers of motor vehicle fuels. 

In the U.S. agriculture sector, it is anticipated that the production of renewable fuels will 

increase the demand for farm products, and increase farm incomes. U.S. food prices are 

anticipated to increase modestly as a result of higher agricultural commodity prices. For 

example, corn and soybean prices are anticipated to increase with the RFS2 rule since there is 

greater demand for these commodities for use as feedstocks to produce ethanol and biodiesel 

fuels. Increased agricultural commodity prices will have ripple effects on sectors of the 

economy that supply inputs to the farm sector (e.g., tractors), and sectors that demand outputs 

from the farm sector. The sum of all of these market impacts, both fuel market and agricultural 

sector impacts, will affect the total levels of output (i.e., Gross Domestic Product) and 

consumption of the U.S. economy. 

A further issue that arises in assessing the economy-wide impacts of the RFS2 rule is 

renewable fuel subsidies. For example, for corn ethanol, the current subsidy is $0.45/gallon. 

Alternatively, for biodiesel, the current subsidy is $1.00/gallon. Cellulosic biofuel qualifies for a 

subsidy of $1.01/gallon. By the year 2022, the increase in renewable fuels volumes associated 

with the RFS2 rule will result in an increase in renewable fuel subsidy expenditures of 
approximately $14.2 billion annually. To account for the economy-wide impacts of the 

renewable fuel subsidies associated with the RFS2 renewable fuel volumes, we look at two 

cases. Case one looks at the economy-wide impacts of the increased renewable fuel volumes 

required by the RFS2 rule without accounting for the increase in renewable fuel subsidies. Case 

two examines the impacts of the RFS2 renewable fuel volumes with renewable fuel subsidies 

included. For case two, we assume we assume that the biofuel subsidies will be offset by raising 

taxes to maintain the “revenue neutrality” of the U.S. federal government’s overall budget. 

Since it is not clear what taxes would be raised, we have assumed that the marginal tax rate on 

labor income will be raised to offset the impact of the increase in renewable fuel subsidies on the 

federal government’s budget. Any remaining adjustments required to restore real government 

expenditures to their reference case levels are accomplished through changes in zero bracket 

exemptions (i.e., lump-sum transfers). 

To estimate the impacts of this rule on U.S. Gross Domestic Product (GDP) and personal 

consumption, EPA has used an economy-wide, computable general equilibrium (CGE) model. 

The economy-wide model used in this analysis is the Intertemporal General Equilibrium Model 

(IGEM).1

 IGEM is a model of the U.S. economy with an emphasis on the economy’s energy and 

environmental aspects. IGEM is a dynamic model which depicts growth of the economy due to 

capital accumulation, technical change and population change. The model utilizes a unified 

accounting framework consistent with the National Income and Product Accounts and the 

Industry Classification System. 

IGEM is a detailed multi-sector model covering thirty-five industries, consisting of five 

energy and thirty non-energy sectors. The model ensures market balances (i.e., supply equals 

demand) in value and quantity terms, including limits placed on private investment dictated by 

domestic and foreign saving behavior and by the fiscal policies of federal, state and local 

governments. Capital accumulation in the model arises from the saving and investment behavior 

of households and businesses and provides an essential input to production and consumption. 

Households in the model make choices regarding present and future consumption (i.e., saving) 

and make choices regarding the allocation of time between labor and leisure. The model covers 

all aspects of long-run growth including the supply of capital, labor, imported and intermediate 

inputs to production; the rates and directions of exogenous and endogenous technical change for 

each producing sector; and the degrees of substitutability among inputs and commodities in 

production and final demand (i.e., consumption, investment, governments and foreign trade). 

The substitution possibilities for both producers and consumers in IGEM are driven by model 

parameters that are based on observed market behavior revealed over the past forty to fifty years. 

5.5.1 Impacts on U.S. GDP 

In order to estimate the real U.S. GDP impacts of the renewable fuel volumes required by 

the RFS2 rule, the CGE model uses outputs of the transportation and agricultural sector models 

as inputs to determine the economy-wide impacts of this rule. Specifically, IGEM uses 

information from other models on the change in fuel costs and renewable fuel subsidies, the 

 

1 The model is developed and run by Dale W. Jorgenson Associates for EPA. Model Homepage: 

http://www.dja.insightworks.com/ 
change in agricultural sector prices, and the change in the world oil price. The change in fuel 

costs were calculated as described in Chapter 4.4 of the RFS2 RIA. The value of the renewable 

fuel subsidies through time were calculated by multiplying the per gallon value of the renewable 

fuel subsidies by the volumes of renewable fuels required by the RFS2 rule. The data on changes 

in agricultural sector prices were taken from the FASOM model, as described in Chapter 5.1 of 

the RFS2 RIA. Finally, the estimates of the changes in world oil price were estimated using the 

Oil Security Metrics Model maintained by Oak Ridge National Laboratory, which is discussed in 

more detail in Chapter 5.2 of the RFS2 RIA. It is important to note that the economy-wide 

analysis does not include a representation of the benefits associated with reducing greenhouse 

gas emissions, and thus the GDP impacts presented here do not represent the results of a 

complete cost benefit analysis. Figure 1 and Table 1 show the Reference Case GDP and GDP 

with the two cases, without and with renewable fuel subsidies. 

Figure 1. 

Annual GDP Impacts for the RFS2 Control Case vs. the AEO2007 Reference Case 

(Billions of 2007 dollars) 

GDP

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

2017 2022 2030

Billion 2007$

Reference Case

Control Case with

Subisidies

Control Case

Without

Subsidies

Table 1. 

Annual GDP Impacts for the RFS2 Control Case vs. the AEO2007 Reference Case 

(Billions of 2007 dollars)

 2017 2022 2030 

AEO2007 Reference 

Case $17,648 $19,853 $24,315 

Case One: Without 

Renewable Fuel $17,636 $19,859 $24,368 
Subsidies 

Case Two: With 

Renewable Fuel 

Subsidies $17,631 $19,847 $24,358 

In the reference case, GDP rises from approximately $17.6 trillion in 2017 to $19.9 

trillion in 2022, and $24.3 trillion in 2030. In case one (without renewable fuel subsidies), GDP 

rises from approximately $17.6 trillion in 2017 to $19.9 trillion in 2022 and $24.4 trillion in 

2030. In case two (with renewable fuel subsidies), GDP rises from approximately $17.6 trillion 

in 2017 to $19.9 trillion in 2022 and $24.4 trillion in 2030. 

Figure 2 and Table 2 show the percentage change in GDP with the RFS2 renewable fuel 

volumes. The combined impact of higher agricultural commodity prices and higher 

transportation fuel prices decrease GDP in the early years of the program. However, the costs of 

renewable fuels are projected to decrease over time, while the cost of petroleum products is 

projected to increase over time. By 2016, renewable fuels are projected to be cheaper than the 

gasoline and diesel that they replace. By 2030, the impacts of lower transportation fuel costs and 

lower world oil prices outweigh the impacts of higher agricultural commodities, resulting in an 

increase in GDP in the two RFS cases relative to the AEO2007 reference case. Lower prices 

permit additional purchases of investment goods from an unchanged saving-investment balance 

which, in turn, leads to a larger capital stock. These price reductions also allow higher levels of 

real government spending while improving U.S. competitiveness thus promoting increased 

exports relative to the growth driven increase in imports. These combined impacts have a 

favorable impact on GDP over time. 

Figure 2. 

Percentage Change in Gross Domestic Product 

for the RFS2 Control Case vs. the AEO2007 Reference Case 

Percentage Change in GDP

-0.15%

-0.10%

-0.05%

0.00%

0.05%

0.10%

0.15%

0.20%

0.25%

2017 2022 2030

Control Case

with Subsidies

Control Case

Without

Subsidies
Table 2. 

Percentage Change in Gross Domestic Product for the 

RFS2 Control Case vs. the AEO2007 Reference Case 

 2017 2022 2030 

Case One: Without 

Renewable Fuel 

Subsidies -0.07% 0.03% 0.22% 

Case Two: With 

Renewable Fuel 

Subsidies -0.10% -0.03% 0.17% 

5.5.2 Impacts on U.S. Consumption 

 In addition to showing the impacts of the RFS2 renewable fuel volumes on U.S. GDP, we 

also show their impacts on real personal consumption expenditures. The following Figure 3 and 

Table 3 show estimates of the Reference Case Consumption and Consumption after the 

imposition of the RFS2 renewable fuel volumes for Case One and Two. 

Figure 3. 

Annual Consumption Impacts for the Control Case vs. the AEO 2007 Reference Case 

(Billions of 2007 dollars)

Consumption

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

2017 2022 2030

Billion 2007$

Reference Case

Control Case

with Subsidies

Control Case

Without

Subsidies
Table 3. 

Annual Consumption Impacts for the RFS2 Control Case vs. the AEO2007 Reference Case 

(Billions of 2007 dollars)

 2017 2022 2030 

AEO2007 Reference 

Case $10,936 $12,333 $14,945 

Case One: Without 

Renewable Fuel 

Subsidies $10,923 $12,325 $14,955 

Case Two: With 

Renewable Fuel 

Subsidies $10,921 $12,320 $14,949 

In the AEO2007 reference case, consumption rises from approximately $10.9 trillion in 

2017 to $12.3 trillion in 2022, and $14.9 trillion in 2030. In case one (without renewable fuel 

subsidies), consumption rises from approximately $10.9 trillion in 2017 to $12.3 trillion in 2022 

and $15.0 trillion in 2030. In case two (the case with renewable fuel subsidies), consumption 

rises from approximately $10.9 trillion in 2017 to $12.3 trillion in 2022 and $14.9 trillion in 

2030. 

Figure 4 and Table 4 show the estimated percentage change in consumption with the 

RFS2 rule volumes. The combined impact of higher agricultural commodity prices and higher 

transportation fuel costs decrease consumption in the early years of the RFS2 program. 

However, as the cost of renewable fuels decreases over time, this impact gradually outweighs the 

impact of higher agricultural commodity prices. As a result of the lower renewable fuels costs 

through time, consumption increases relative to the reference case in both RFS2 cases by 2030. 

The increase in labor taxes needed to offset the renewable fuel subsidies partially erodes the 

benefits observed in case one. In case two, the increase in labor taxes reduces the opportunity 

cost of choosing leisure instead of labor. Therefore, households work less when faced with 

higher labor taxes, thereby reducing overall household consumption slightly compared to case 

one. 
Figure 4. 

Percentage Change in Consumption for the RFS2 Control Case 

vs. the AEO2007 Reference Case 

 

Percentage Change in Consumption

-0.15%

-0.10%

-0.05%

0.00%

0.05%

0.10%

2017 2022 2030

Control Case

with Subsidies

Control Case

Without

Subsidies

Table 4. 

Percentage Change in Consumption for the RFS2 Control Case 

vs. the AEO2007 Reference Case 

 2017 2022 2030 

Case One: Without 

Renewable Fuel 

Subsidies -0.12% -0.06% 0.07% 

Case Two: With 

Renewable Fuel 

Subsidies -0.13% -0.11% 0.03% 

 In addition to showing the impacts of the rule on U.S. GDP and consumption, the impacts 

of the RFS2 renewable fuel volumes on personal consumption expenditures per household are 

estimated. The following Figure 5 and Table 5 show estimates of the reference case annual 

consumption per household and consumption per household after the imposition of the RFS2 

renewable fuel volumes for both case one and case two. 

In the reference case, annual consumption per household rises from $83,041 in 2017 to 

$88,298 in 2022, and $98,139 in 2030. In case one (without renewable fuel subsidies), annual 

consumption per household rises from approximately $82,941 in 2017 to $88,243 in 2022 and 
$98,203 in 2030. In case two (with renewable fuel subsidies), annual consumption per 

household rises from approximately $82,930 in 2017 to $88,203 in 2022 and $98,167 in 2030. 

Thus, consumption per household is roughly $100 lower in case one (without renewable fuel 

subsidies) in 2017 compared to the reference case, and consumption per household is roughly 

$55 lower than the reference case in 2022. By 2030, consumption per household is roughly $64 

higher in case one compared to the reference case. For case two (with renewable fuel subsidies), 

consumption per household is roughly $111 lower than the reference case in 2017 and 

consumption per household is roughly $95 lower than the reference case in 2022. By 2030, 

however, consumption per household is higher than the reference case in case two, by $28. 

Figure 5. 

Consumption Expenditures Per Household for the 

RFS2 Control Case vs. the AEO2007 Reference Case (2007 dollars) 

Consumption Per Household

$75,000

$80,000

$85,000

$90,000

$95,000

$100,000

2017 2022 2030

2007$

Control Case with

Subsidies

Control Case

Without

Subsidies

Reference Case

Table 5 

Consumption Expenditures Per Household for the 

RFS2 Control Case vs. the AEO2007 Reference Case (2007 dollars) 

 2017 2022 2030

AEO2007 Reference Case $83,041 $88,298 $98,139

Case One: Without Renewable 

Fuel Subsidies $82,941 $88,243 $98,203

Case Two: With Renewable Fuel 

Subsidies $82,930 $88,203 $98,167