Understanding U.S. Ethanol Consumption and Its Implications for Policy: A Study of the Impact of State-Level Incentives

Policies to promote ethanol consumption were implemented on both the federal and state levels during the past decade. Several new biofuel incentives and regulations are expected to be enacted in the near future. Understanding current ethanol consumption is an important first step in assessing the impacts of enacted legislation and formulating sound economic policies that will promote ethanol consumption. Despite the important implications for policy, our understanding of ethanol consumption patterns is quite limited. This Article examines historical state-level ethanol consumption data to understand how ethanol consumption responds to regional macro-economic conditions and incentives set by state governments. Our empirical analysis reveals that changes in ethanol consumption patterns occurred before and after 2005, the year the original Renewable Fuel Standard (RFS) program was signed. Prior to 2005, ethanol consumption responded to incentives set by state governments. These relationships weakened after 2005, however, and ethanol consumption became more uniform across states. These empirical findings can be interpreted as indicating the emergence of a nascent, national market for biofuels. If biofuels are no longer simply local phenomena, some coordination in policy making between the federal and the state governments is necessary to promote biofuels consumption within the United States. Furthermore, technological progress in biofuel production is needed to serve as an engine for the growth of biofuel consumption.

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