Current Research and Emerging Economic and Environmental Issues on

Biofuels

Madhu Khanna

University of Illinois

Research Collaborators

H. Onal, A. Jain, X. Chen, H. Huang, C. Crago,

S. Kang

Economic Issues: Current Research

Integrated analysis of the agricultural and fuel sectors to examine

Determinants of the economic viability of alternative types of biofuels/feedstocks

Implications of biofuels for land use, for food and fuel prices

Cost-effectiveness of alternative policies to support biofuels GHG implications of biofuels and social welfare costs of GHG

mitigation with alternative biofuel policies

Implications and potential for trade in biofuels with Brazil

Determinants of spatial location of feedstock production and refineries

Conceptual Analysis

What should the policy for transportation fuels be? Performance based vs Technology Standards

Targeted to specific externalities: Carbon price to control GHG emissionsWhat should the carbon price be in the presence of biofuels? When revenues from carbon tax could be recycled to reduce other taxes

What are the implications of existing biofuel policies and is there a rationale for them?Effects depend on demand side factors and supply side factors- Ease of substitution between gasoline and biofuels- Cost of producing biofuels and the responsiveness of gasoline supply to the US- Biofuel subsidies can have unintended effects of increasing GHG emissions and

vehicle miles travelled.

Justification for mandates: To stimulate innovation With an open economy, portion of the costs of

themandates borne by foreign oil producers Reduce transfer of monopoly rents to OPEC

Crop Yield ElasticitiesStudy Crop Elasticity Trend

(bushel/acre/year)Choi and Helmberger (1993) Corn 0.27 2.98

Soybeans 0.13 1.04 Wheat 0.03 0.57

Houck and Gallagher (1976) Corn 0.24 – 0.76 2.63 Kaufmann and Schnell (1997) Corn - 0.87 Lyons and Thompson (1981) Corn 0.22 -Menz and Pardey (1983) Corn 0.61 0.95 McCarl et al. (2008)(using state level data)

Corn - 1.88 Soybean - 0.28 Wheat - 0.57

Our study (using county level data for 30 years)

Corn 0.15 2.42 Soybean 0.06 0.29 Wheat 0.43 0.64

Econometric Estimation: Crop Productivity Growth

Crop Acreage ElasticitiesStudy Crop Own-price elasticity Cross-price elasticity

Chavas and Holt (1990) Corn 0.15 -0.15 (Soybeans)Soybeans 0.45 -0.30 (Corn)

Chembezi and Womack (1992) Corn 0.10 -0.05 (Soybeans)-0.05 (Wheat)

Wheat 0.05 -0.05 (Corn)-0.10 (Soybeans)

Lee and Helmberger (1985) Corn 0.05 -0.15 (Soybeans)Soybeans 0.25 -0.15 (Corn)

Lin and Dismukes (2007) Corn 0.17 – 0.35 -Soybean 0.30 -Wheat 0.25 – 0.34 -

Miller and Plantinga (1999) Corn 0.95 -0.45 (SoybeansSoybeans 0.95 -0.40 (Corn)

Morzuch et al. (1980) Wheat 0.35 -Orazem and Miranowski (1994) Corn 0.05 0.00 (Soybeans)

Soybeans 0.25 0.00 (Corn)Tegene et al. (1988) Corn 0.20 -Our study (2010) Corn 0.510 -0.118 (Soybeans)

-0.345 (Wheat)Soybeans 0.487 -0.295 (Corn)

0.00 (Wheat)Wheat 0.067 0.306 (Corn)

-0.054 (Soybeans)Total acres 0.257 (Composite crop price index)

Determinants of the competitiveness of biomass feedstocks

Yield per hectare; costs of harvesting and method of storage Availability of non-cropland

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Relative Costs of Cellulosic Feedstocks

Comparative advantage of different feedstocks depends on whether a high cost or a low cost scenario materializes for a particular crop

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Variability Across States in the Cost of Production of Miscanthus and Switchgrass

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Biomass (MMT)

Low Costs of Production of Switchgrass and High Costs of Production of Miscanthus

Supply Curves for Biomass

Possible to produce 1 billion tons of agricultural biomass by 2030 but at a cost of $140/ton +Requires high yielding grasses, optimistic projections of costs of productionUse of idle land and cropland pasture

Mix of Biofuels to Meet RFS Sensitive to Accompanying Policies

Policy Scenarios Affect Regional Production Patterns of Feedstocks and Conventional Crops

Land Requirements

These scenarios restrict bioenergy crop production to cropland and currently idle cropland/ cropland pasture

Restrictions on the use of idle cropland/cropland pasture raise the cost of cellulosic biofuels andreduces production levels

That leaves 254 M ha of pastureland and 62 M ha of forestland pasture at 2007 levels

Intensity of Food vs. Fuel is Policy Dependent

Food and fuel prices can fall with the proposed subsidies but at significant cost to the government $330 B (2007-2022)

Extensions of Economic Analysis to Brazil

• Key questions– What is the potential for trade in biofuels between

US and Brazil and its implications for sugarcane expansion in Brazil?

– Which regions will land expansion occur in and what current land uses will be displaced?

– What is the potential for intensification of pasture and cattle production to release land for sugarcane production?

– How large are the direct and indirect land use change effects in Brazil due to US production of biofuels and trade with Brazil?

Location and Capacityof Biorefineries

Emerging Issues Confronting Biofuels

Going beyond above ground GHG emissions

Soil carbon, biodiversity, water quality

Indirect Land Use Change

Other demands for biomass: electricity, heating, biodiesel

Barriers to perennial energy crops and investments in refineries

Risks and Uncertainty: Technology, policy, prices

Ownership of land

Effects of Land Use Change on GHG Emissions

• Incorporating direct land use change emissions in the LCA and economic model– Crop-specific saturation limits for soil carbon– Crop specific declining rate of soil carbon

sequestration over time– Site-specific variations in rate of sequestration

depending on history of land use

GHG Emissions (g CO2 per MJ)

Above Ground

Soil Carbon Sequestration

ILUC (EPA) Total

Corn 62.09 -3.08 30.33 89.35Switchgrass 10.90 -34.48 14.22 -9.34Miscanthus 3.94 -25.49 14.22 -7.33

ILUC Issues• Understanding the extent and type of land use changes likely in

Brazil

• Literature focusing on determining an ILUC factor and a payback period in terms of GHG savings– Estimation of the ILUC factor of the RFS– Wide variation: 167 years to 15 year payback period

• Empirical question:– In a second best world what should be the ILUC factor used for

regulation of biofuels?– What are the economic/GHG impacts of incorporating ILUC in

an LCFS or other climate policy?

Biodiversity Impacts

• Implications of mono-cropping perennial grasses for various species

• Constraints that it should impose – on contiguous land under grasses– On harvesting frequency, methods– Type of grasses (mixed native species)

• Trade-offs that biodiversity concerns pose with other motivations for biofuels, GHG mitigation and energy security

Barriers to Investment in Dedicated Energy Crops

For growers of energy crops• Chicken and egg dilemma• Upfront establishment costs, lags between investment

and returns• Uncertainty about prices• Potential for technological obsolescence as new crop

varieties emerge• Risk of refinery shutdown/drought

Risks for Refineries• Technological innovation in conversion

process• Uncertainty about demand

– Depends on demand, price of oil

• Uncertainty about costs– Feedstock price, availability and quality

• Large capital costs

• Investment tax credits and loan guarantees vs volumetric tax credits

Implications for the Structure of the Industry and Design of Contractual Arrangements

• Vertically integrated industry vs. having heterogenous independent growers

• Biomass pricing schemes and profit sharing schemes between growers and refineries

• Input provision by growers vs. refineries

Some Directions for Future Research• Expand feedstocks and geographical boundaries

– Other perennials, forest biomass, woody biomass, agave

• Expand environmental impacts and integrate with economic analysis (water, water quality, biodiversity, soil carbon)

• Expand the energy system boundaries beyond ethanol

• Assessment of land availability and suitability• Potential for agricultural productivity improvements/ intensification• ILUC factors – Normative and positive analysis

• Type of governance structures• Standards for sustainability

• Incorporating considerations of risk and uncertainty in economic models• Supply chain analysis• Contract design