Transcript Biofuels Issues in Farm Bill 2012

Economic and Land Use Implications of
Biofuels: Role of Policy
Madhu Khanna
With Xiaoguang Chen and Haixiao Huang
Department of Agricultural and Consumer
Economics
University of Illinois
Introduction
Motivations
• Energy security and reducing dependence on foreign oil
• Concerns about climate change
– Transportation sector accounts for about 30% of US GHG emissions
Land Use and Economic Implications
Depend on the mix of biofuels and feedstocks
• Feedstocks differ in their land intensity, land suitability, costs
and GHG intensity
– Affects land use patterns at regional level
– Has implications for impact on food prices
• Biofuels displace fossil fuels and thus affect fuel prices
• Implications for social welfare in these sectors
Does the choice of policy influence the land use and economic
benefits of biofuels?
Not all biofuels are the same
High Costs of Cellulosic Biofuels: Need for
Policy Support to Induce Production
Cost of production in cents/MJ (2007 prices)
Alternative Low Carbon Policies to Promote Biofuels
• Renewable Fuels Standard (Technology Standard)
– Volumetric mandate for blending specific types of biofuels with
liquid fossil fuels
• Low Carbon Fuel Standard (Performance Standard)
– Reducing the greenhouse gas intensity of transportation fuel to lie
below a given standard
• Carbon Price
– Would raise the price of fossil fuels more than the price of biofuels
based on their GHG intensity
Energy Independence and Security Act, 2007
36 B gallons by 2022
At least 16 B gallons of cellulosic biofuels
Max. cap of 15 B gallons of corn ethanol
Annual Energy Outlook, 2011
Advanced biofuels: Reduce GHG intensity
by 50% relative to gasoline
Sugarcane Ethanol
Cellulosic biofuels: Reduce GHG intensity
by 60% relative to gasoline
Cellulosic ethanol
Biomass to Liquids Diesel
Low Carbon Fuel Standard
California has an LCFS to reduce the carbon intensity of fuels by 10% by
2020 relative to 2005 baseline
Oregon, Washington state and several Northeast and Mid Atlantic states
are proposing/analyzing state-wide/regional LCFS
We analyze an LCFS target of 10% reduction (2015-2030)
VISION Model, ANL, 2010
Objectives of this Research
• Develop an integrated model of the food and fuel sectors to
numerically compare the effects of the RFS, LCFS and carbon tax
over 2007-2030 in an open economy
– Mix of biofuels and fuel consumption
– Land use
– Food and fuel prices
– Social welfare
– GHG emissions
• Consideration of an open economy allows for terms of trade effects of
these policies
– Unlike in a closed economy, in a large open economy, these
policies have terms of trade effects that can offset at least a part of
their efficiency costs
BEPAM
Maximizes consumer and producer surplus in multiple agricultural and fuel
sector markets subject to technology, production and land constraints
• Dynamic: Planning horizon from 2007 to 2035, in annual time steps
– 10 year rolling horizon for landowners with age specific costs of
perennials
– Decisions based on lagged prices and land availability
– Expectations updated based on realized market outcomes annually
• Fuel sector: Derived demand for gasoline and biofuels based on demand for
vehicle kilometers travelled with 5 types of vehicles based on AEO (2010)
–
–
–
–
Substitutability between gasoline and biofuels determined by vehicle fleet
Price of gasoline and biofuels determined endogenously in open world markets
First and second generation biofuels (Lignocellulosic ethanol, BTL)
Feedstocks: corn, sugarcane, crop and forest residues, energy crops (switchgrass
and miscanthus)
– Location-specific life-cycle carbon intensity of fuels
Other Features of the Model
• Open agricultural sector with crop markets, livestock, biomass
– Spatial heterogeneity in yields and returns to land (295 regions in
US)
– Econometrically estimated regional cropland acreage elasticities
and own and cross-price acreage elasticities
– Allow land allocations to various crops to be price responsive
– Econometrically estimated trend rate of growth in crop yields and
price responsiveness of yields
– Idle cropland and cropland pasture can be converted to
conventional crops and energy crops
– Simulated yields of perennial grasses, Miscanthus and Switchgrass
– Commodity prices, price of land and biomass determined
endogenously.
Other Features of the Model
• Open agricultural sector with crop markets, livestock, biomass
– Spatial heterogeneity in yields and returns to land (295 regions in
US)
– Econometrically estimated regional cropland acreage elasticities
and own and cross-price acreage elasticities
– Allow land allocations to various crops to be price responsive
– Econometrically estimated trend rate of growth in crop yields and
price responsiveness of yields
– Idle cropland and cropland pasture can be converted to
conventional crops and energy crops
– Simulated yields of perennial grasses, Miscanthus and Switchgrass
– Commodity prices, price of land and biomass determined
endogenously.
Crop Yields
Delivered Yield of Corn Stover (MT/Ha)
Delivered Yield of Wheat Straw (MT/Ha)
Delivered Yield of Switchgrass (MT/Ha)
Delivered Yield of Miscanthus (MT/Ha)
11-16 T/ha
18-28 T/ha
Marginal Land in 2007
CRP Land
Idle Land excluding CRP
Idel Land
Switchgrass
Excluding
CRP
Mg/
ha
1,000 acres
Switchgrass
Mg/
CRPha
Land
1,000 acres
county
selection
county selection
idle / none
crp / none
sg
sg
0.00
0.00
Rainfed regions 11 M ha
Nonrainfed regions 4 M ha
Rainfed regions 1.5 M ha
Nonrainfed regions 0.6 M ha
0.01
- 218
1.0
- 5.24
219--7.83
448
5.25
449--10.13
805
7.84
0.01 - 218
1.0 - 5.24
219 - 448
5.25 - 7.83
449 - 805
7.84 - 10.13
806 - 1623
806 -- 1623
10.14
14.29
10.14 - 14.29
Cropland Pasture
All Marginal Land
Switchgrass
Mg/ ha
Cropland Pasture
county selection
1,000
acres
sg
croppasture
/ none
0.00
Switchgrass
Mg/Marginal
ha
All
Land
1,000
countyacres
selection
sg
marginalland_all
/ none
0.00
0.00
0.00
0.01 - 218
0.01 - 218
1.0 - 5.24
Rainfed regions 9 M ha
Nonrainfed regions 2 M ha
0.00
0.00
5.25 - 7.83
219
- 448
7.84
- 10.13
449- 14.29
- 805
10.14
806 - 1623
Rainfed regions 22 M ha
Nonrainfed regions 7 M ha
1.0 - 5.24
5.25 - 7.83
219 - 448
7.84 - 10.13
449 - 805
10.14 - 14.29
806 - 1844
Policies differ in their incentives for mix and level
of biofuels: Carbon tax
• Will raise the cost of gasoline more than the cost
of biofuels for consumers
– Lead to substitution of biofuels for gasoline to the
extent that it is a cost-effective abatement strategy
– Not induce advanced biofuels unless tax is very high
– Raise the cost per kilometer travelled
– Lower the demand for vehicle kilometers travelled
– Lower domestic demand for gasoline and imports
– Lower domestic GHG emissions
Renewable Fuels Standard
• RFS creates incentives to blend the least cost mix of biofuels given
their energy content and requirements of the mandate.
– No incentive to reduce gasoline consumption other than due to
displacement by biofuels
– Lowers consumer and producer price of gasoline
– Raises producer price of biofuels
– Lowers the consumer price of biofuels which equal the energy
equivalent price of gasoline
• Reduction in gasoline consumption is likely to be less than the energy
equivalent increase in biofuel consumption
• Impact on GHG emissions is ambiguous
A Low Carbon Fuel Standard
Restricts the ratio of GHG emissions from all fuels to total fuel energy
consumed that year to be below a specified level.
Creates incentives to change the blend of fuels by increasing biofuel
consumption and by lowering gasoline/diesel consumption
– implicitly subsidizes a biofuel based on its carbon intensity relative to the
standard; Penalizes fossil fuels based on carbon intensity relative to
standard
Encourages least cost way to reduce GHG intensity by inducing biofuels
with low cost per unit of CO2 intensity reduced.
• Induces both displacement of fossil fuels and possible reduction in
consumption
– Likely to induce a different mix of biofuels than the RFS
• Impact on GHG emissions is ambiguous
Differential Effects of Alternative Policies
Policy
Carbon
Price
LCFS
RFS
Gasoline
Use
Biofuel Gasoline
Use/Mix Consumer
Price
Biofuel
Vehicle GHG
Consumer Miles emissions
Price
?
low
C fuels
low
cost
fuels
?
?
?
?
Ambiguous effects depend on the elasticity of demand for food,
elasticity of demand for miles and elasticity of supply of gasoline
Economic Benefits of Alternative Policies
Policy
Miles
Consumers
Fuel Producers Ag.
Consumers
CO2 Tax
LCFS
RFS
Ag.
Net econ.
producers Benefits
?
?
?
?
?
?
Mix of Biofuels (B liters)
Fossil Fuel Consumption
(B liters)
Vehicle Kilometers (B Km)
Land Use Under Alternative Policies
in 2030 (M ha)
Percentage Change in Food and Fuel
Prices: Gain in Terms of Trade for US
Change in Social Welfare ($B, 2007-2030)
Sensitivity of Welfare Effects to Alternative Assumptions
% change in Social Welfare
Mandate
LCFS
Carbon Tax
0.5%-1.3%
0.4%-0.9% 0.2%-0.7%
Direct and Indirect Effects of Biofuel
Policies on GHG Emissions
RFS
LCFS
Conclusions
• The RFS and LCFS differ in the mix of fuels they induce with the
LCFS requiring larger cellulosic biofuels (BTL diesel) but
significantly less corn ethanol than the RFS. Both policies induce
more biofuel production than a carbon tax
• The RFS increases crop prices and reduces fuel prices by more than
the LCFS or carbon tax
• All three policies increase net social welfare (without considering
external benefits) with the mandate having a larger effect than LCFS
or the carbon tax
• The LCFS is likely to lead to larger GHG reduction than the RFS.
• Policies differ in the trade-offs they offer and a mix of policies is
likely to be needed to achieve multiple objectives with biofuels