Stand in the Angle of the consumer, analyze low-carbon fuel standard.

Stand in the Angle of the consumer, analyze low-carbon fuel standard.

Assume that the stringency of this
policy is chosen to reduce greenhouse gas emissions by exactly the same amount—10% below baseline
levels. Thus, the impact on greenhouse gas emissions is identical in each case, but the impacts on other
outcomes will differ. The outcomes to be considered are the following:
• Fuel prices, fuel consumption, and miles driven
• Automobile prices, sales, and fuel economy
• Consumer surplus from cars and miles
• Producer surplus for the automobile, gasoline, and ethanol industries
• Environmental externalities (i.e., air and water pollution and ecosystems)
• Automobile safety (i.e., accidents, injuries, and fatalities)
• Government revenues
• Overall social welfare impacts

A low-carbon fuel
standard would impose a maximum average carbon content per gallon of fuel consumed nationwide.

Low-carbon fuel standard (LCFS): The low-carbon fuel standard imposes a maximum average carbon
content on all fuel sold. Thus, sales of fuel whose carbon content exceeds this maximum must be offset by
sales of fuel whose carbon content is lower. Since different fuels are often measured in different units
(e.g., gasoline in gallons and natural gas in thousands of cubic feet) and since fuels measured in the same
units often have different energy contents (e.g., one gallon of ethanol contains only 2/3 the energy content
of one gallon of gasoline), it is important to measure carbon content on a per-BTU basis or in “energyadjusted” or “gasoline-equivalent” gallons (i.e., the amount of energy needed to displace one gallon of
gasoline).

Consumers: You represents consumers. You care about maximizing consumer welfare. You gain
utility from owning cars that have more desirable features (including but not limited to size, safety, and
horsepower) as well driving more miles. You also care about the amount of money you have to spend on
other goods. Thus, you get disutility from paying higher prices for cars and/or spending more money on
gasoline to drive a given number of miles. You don’t like high fuel prices, but you understand that money
from carbon taxes could be used to offset taxes on labor and capital gains, which is important to consider
as you weight different policies. Lastly, you care about the environmental quality in your local city as
well as the accident risk posed to you by other drivers on the road.

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