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A study of subsidizing a biofuel supply chain to incentivize the production of advanced biofuel: An equilibrium problem with equilibrium constraints approach

Energy independence and greenhouse gas emissions have led governments to enact regulations to support renewable energy production. The renewable fuel standard mandate issued by the US Environmental Protection Agency (EPA) requires the production of 36 billion gallons of biofuel by 2022, out of which 21 billion gallons should be non‐corn based. This paper addresses the problem of how a government should adopt a subsidy policy that benefits all engaging parties and how the subsidy plan can enhance advanced biofuel production and meet the EPA's mandate. We find in the research that, as more refineries are built, the US government needs more subsidies to achieve the goal, and the total social welfare increases as the biofuel market consumer surplus increases from a lower fuel price. We also find that the budget required to meet the US government's goal is higher than what other similar works have estimated. We perform a sensitivity analysis on a few critical industry and market parameters and find that the advanced biofuel technology improvement is the most important factor among the considered parameters for the same percentage change of the parameter values.