Economic and Land Use Implications of Biofuels: Role of Policy Madhu Khanna With Xiaoguang Chen and...
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Economic and Land Use Implications of Biofuels: Role of Policy Madhu Khanna With Xiaoguang Chen and Haixiao Huang Department of Agricultural and Consumer
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
Slide 2
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? Introduction
Slide 3
Not all biofuels are the same
Slide 4
High Costs of Cellulosic Biofuels: Need for Policy Support to
Induce Production Cost of production in cents/MJ (2007 prices)
Slide 5
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
Slide 6
Energy Independence and Security Act, 2007 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 36 B gallons by 2022 At least 16 B
gallons of cellulosic biofuels Max. cap of 15 B gallons of corn
ethanol
Slide 7
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
Slide 8
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
Slide 9
Slide 10
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
Slide 11
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.
Slide 12
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.
Slide 13
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 Crop Yields
Slide 14
CRP Land Idle Land excluding CRP Cropland PastureAll Marginal
Land Marginal Land in 2007 Rainfed regions 11 M ha Nonrainfed
regions 4 M ha Rainfed regions 9 M ha Nonrainfed regions 2 M ha
Rainfed regions 1.5 M ha Nonrainfed regions 0.6 M ha Rainfed
regions 22 M ha Nonrainfed regions 7 M ha
Slide 15
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
Slide 16
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
Slide 17
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
Slide 18
Differential Effects of Alternative Policies Ambiguous effects
depend on the elasticity of demand for food, elasticity of demand
for miles and elasticity of supply of gasoline
Slide 19
Economic Benefits of Alternative Policies
Slide 20
Mix of Biofuels (B liters) Fossil Fuel Consumption (B liters)
Vehicle Kilometers (B Km)
Slide 21
Land Use Under Alternative Policies in 2030 (M ha)
Slide 22
Slide 23
Percentage Change in Food and Fuel Prices: Gain in Terms of
Trade for US
Slide 24
Change in Social Welfare ($B, 2007-2030) MandateLCFSCarbon Tax
% change in Social Welfare0.5%-1.3%0.4%-0.9%0.2%-0.7% Sensitivity
of Welfare Effects to Alternative Assumptions
Slide 25
Direct and Indirect Effects of Biofuel Policies on GHG
Emissions RFS LCFS
Slide 26
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