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Economics of Lifecycle analysis and greenhouse gas regulations


Interest in alternatives to fossil fuels has risen significantly during the current decade.

Although a variety of different alternative technologies have experienced rapid growth,

biofuels have emerged as the main alternative transportation fuel. Energy policies in

several countries envision blending biofuels with fossil fuels as the main mechanism to

increase energy independence and energy security. Climate change policies in several

regions are also riding on the same hope for reducing emissions from transportation. The main advantage of biofuels is that they are technically mature, cheaper to produce and more convenient to use relative to other alternative fuels. However, the impact of current biofuels on the environment and on economic welfare, is controversial. In my dissertation I focus on three topics relevant to future energy and climate policies. The first is the economics of lifecycle analysis and its application to the assessment of environmental impact of biofuel policies. The potential of biofuel for reducing greenhouse gas emissions was brought to the fore by research that relied on the methodology called lifecycle analysis (LCA). Subsequent research however showed that the traditional LCA fails to account for market-mediated effects that will arise when biofuel technologies are scaled up. These effects can increase or decrease emissions at each stage of the lifecycle. I discuss how the LCA will dier depending on the scale, a single rm versus a region and why LCA of the future should be distinguished from LCA of the past. I describe some approaches for extending the LCA methodology so that it can be applied under these dierent situations. The second topic is the economic impact of biofuels. Biofuels reduce the demand for oil and increase the demand for agricultural goods. To high income countries which tend to be both large importers of oil and large exporters of agricultural goods, this implies two major benefits. One of the one hand it reduces the market power of OPEC (Oil Producing and Exporting Countries), a cartel of nations which is the single largest oil exporting entity in the world, and is an entity considered unreliable. On the other hand, it reduces the demand for domestic farm subsidies. At the same crops comprise a small share of the retail price of food. As a result, the expected negative impact of biofuel was at worst a small increase in the retail price of food. However, the food price in inflation in the year 2008 suggests that the negative impact on food consumers was significantly higher than

expected and also outweighed the impact fuel consumers. I estimate the eect on biofuels on food and oil prices and compare them to other estimates in the literature and also relate these to prices observed in the real world. The third topic is the economics of greenhouse gas regulations of transportation fuels. Climate change policies such as United Nations' Kyoto protocol, European Union Emission Trading Scheme, and the Regional Greenhouse Gas Initiative in the US north-east mandate an aggregate emission target, called a cap and allow regulated entities to trade responsibilities for abatement. Furthermore, these policies have generally and sometimes exclusively targeted the electricity and industrial sector for emission reduction. However, the Low carbon fuel standard and Renewable

fuel standard are two policies about to be implemented by the State of California and the US federal government, which exclusively target the transportation sector for emission reduction. Furthermore, these regulations mandate emission intensity target for fuels rather than aggregate emission reduction. I compare the cost-eeffectiveness of these two types of regulations, namely, aggregate emission caps versus emission intensity standards and discuss how prices, output and emissions vary between these two types of policies.

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