An optimal U.S. biodiesel fuel subsidy
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Enhanced environmental quality, fuel security, and economic development along with reduced prices of blended diesel are often used as justifications for U.S. federal excise tax exemption on biodiesel fuels. However, the possible effect of increased overall consumption of fuel in response to lower total price, mitigating the environmental and fuel security benefits, are generally not considered. Taking this price response into account, the optimal U.S biodiesel subsidy is derived. Estimated values of the optimal subsidy is less than the current subsidy, revealing the subsidy’s environmental and security benefits are still questionable. However, positive environmental and security benefits from the biodiesel tax-exemption subsidy may be obtained if the subsidy is combined with an increase of the share of biodiesel in blended diesel.