Policy instruments can be designed to shift a larger potion of the social costs (e.g., environmental impacts) to users and producers or reduce the risk of developing new technologies, particularly to private sector investors. Energy policy can be developed to affect the demand for, and/or supply of energy and can be generic or specific to a particular technology, source, or use. Different policy instruments work in different ways and consequently affect consumers and producers differently.
Currently, ethanol production is federally subsidized via a flat tax credit which is paid per gallon regardless of ethanol prices, profits, or other market factors. Flat tax subsidies provide large profits to ethanol producers when oil prices are high, but may be insufficient to maintain production when oil prices are low. Additionally, they lead to increasing corn demand when oil prices are high, causing corn prices to increase substantially and can be costly to the government. A variable rate subsidy (i.e., a subsidy that is active only at crude oil prices below a trigger price and which vary as a function of the crude oil price) can, depending on design, reduce the cost of the subsidy to the government, maintain a safety net for ethanol producers, and provide less pressure on corn prices relative to flat rate subsidies.
Renewable Fuel Standards mandate a minimum amount of an alternative that must be used. Under fuel standards, changes in cost are typically passed on to the consumer through changes in fuel prices which differs from subsidies which are paid through the government budget funded by taxes. When the alternative fuel (such as ethanol) costs less than crude oil, consumer fuel costs are lower, but the change is relatively small. When the alternative fuel cost exceeds the cost of petroleum, consumer prices increase more. Increases in consumer fuel prices can be limited by combining a variable subsidy with a fuel standard in which a subsidy is provided only when crude oil prices fall below some predetermined level. In this option, when oil prices are low, the higher price of the alternative fuel is shared between the government and consumers.