Are subsidies for biodiesel economically efficient?

Biodiesel produces less pollution than petrodiesel; however, it is more expensive and will only be a viable alternative if market prices of the products are comparable. This paper examines whether the external benefits from biodiesel use justify subsidies required for adoption outside of niche alternative fuel markets. The authors establish a range of subsidies required to make biodiesel a viable substitute for petrodiesel. Published estimates of the emissions reductions from biodiesel and the dollar benefits of unit reductions in emissions are used to compute a per-gallon external benefit from use of biodiesel, versus petrodiesel. Under conservative estimates of the benefits from biodiesel use in non-road equipment, the external benefits outweigh the required subsidies.(JEL Q48, Q42, H2)