This dissertation consists of three essays that explore the effects of biofuel and environmental policies on relevant industries. The first essay focuses on examining the market impacts and welfare consequences of U.S. biofuel policies. The second essay quantifies the U.S. agricultural supply response during the biofuel policy period. The third essay focuses on understanding the performance of a different kind of market-based policies in reducing industry-wide emissions.

The U.S. renewable fuel standard (RFS), initiated in 2005 and extended in 2007, has been rationalized as pursuing, for example, reduction of greenhouse gas emission and reduction of the U.S. dependence on foreign energy sources. While its effects on food prices and actual environmental benefits remain controversial, the first essay constructs a multi-market equilibrium model and assesses the current and future economic effects of the RFS. The model integrates the U.S. agricultural sector with the energy sector and explicitly considers both U.S. ethanol and biodiesel production. The model is parameterized to represent observed 2015 data as status quo and then simulated to analyze alternative scenarios. The results confirm that the current RFS program considerably benefits the agricultural sector but also leads to overall welfare gains for the United States. Implementation of projected 2022 mandates, which would require further expansion of biodiesel production, would lead to a considerable welfare loss (relative to the status quo).

While the abovementioned analysis relies on elasticities from the literature, the second essay directly quantifies the U.S. corn and soybean dynamic supply response. The RFS has been credited with being one of the main causes of (i) the recent global commodity price increases and (ii) the spatial changes in prices by affecting local basis nearby biofuel plants. The presence of these two demand-induced price effects provides an ideal opportunity to revisit the econometric analysis of the agricultural supply response. By focusing on recent years (2005-2015), therefore, the acreage and yield responses are estimated by using county-level panel data for the twelve Midwest states. The results indicate that the acreage and yield responses are highly inelastic. With relatively significant cross-price acreage elasticities, when corn and soybean prices move together, the response of the total acreage of these two key crops is very small. This result indicates that the ability of the U.S. corn and soybean production sector to accommodate the demand shock caused by the RFS is limited.

As alternatives to command-and-control-type instruments such as mandates, market-based policies, such as voluntary agreement (VA) and Pigouvian tax, can be used to deal with environmental externalities. Given the increasing use of VAs, the third essay examines the performance of VA, relative to a tax policy and laissez faire policy, as a way to reduce environmental pollution. We find that when the market is non-competitive, the VA, relative to other policy options, improves welfare despite suffering from free-riding behavior. It is also found that as consumers value the green good more, the VA increases the number of green firms and provides a less competitive environment for free-riders, who increase the price of regular goods. As a result, the total market under the VA becomes less covered, at some point, than the tax policy. As for implementation, the potential gains from of the VA are attainable provided the regulator’s threat is credible and sufficiently strong.