Liberalization of Trade in Biofuels: Implications for GHG Emissions and Social

Welfare

Xiaoguang ChenMadhu Khanna

Hayri ÖnalUniversity of Illinois at Urbana-Champaign

Motivations for Biofuels

• Energy Security• Reducing dependence on foreign oil• Rising oil prices

• Greenhouse Gas Mitigation• Larger potential for reduction in GHG emissions

relative to gasoline

• Rural Economy Development

Energy Independence and Security Act, 2007

Mandates: 36 B gallons to be produced annually by 2022– Of this, 21 B gallons to come from advanced biofuels

that reduce greenhouse gas emissions by at least 50%

0

5

10

15

20

25

1975

1978

1981

1984

1987

1990

1993

1996

1999

2002

2005

2008

2011

2014

2017

2020

Bill

ion

gallo

ns p

er y

ear Brazil US Corn Ethanol Mandate Advanced Biofuel Mandate

Some Options for Second-Generation Biofuels• Crop and Forest Residues: Corn stover, wheat straw• Dedicated energy crops: Perennial grasses

• Miscanthus, Switchgrass

Switchgrass

Miscanthus

Food Conservation and Energy Act of 2008

• Reduced tax credit for corn ethanol to $0.45/gallon

• Provides subsidy of $1.01/gallon for cellulosic ethanol

• Assistance for cellulosic biorefineries, R&D

• Biomass Crop Assistance Program: • $45/ton for collection, harvesting, storage and transportation of

cellulosic feedstocks for 2 years• 75% cost share for establishment costs

Biofuel Trade Policy

• A 2.5% ad valorem tariff and a per unit tariff of $0.54 per gallon against Brazilian sugarcane ethanol

• Duty-free ethanol from Caribbean Countries with quantity quota

• Duty-free ethanol restricted to no more than 7% of U.S. ethanol consumption

Research Questions

• Implications of expanding biofuel production under biofuel policies• For land use, crop production, food and fuel prices

and GHG emissions• Costs to the economy, for consumer and producers in

agricultural and fuel markets

• Economically viable mix of feedstocks and resulting spatial pattern of land use• Simulated yields of Miscanthus and Switchgrass• Availability of land for food and fuel crops

Miles

Panel a: Vehicle Miles

$

Gasoline

Panel b: Domestic Gasoline

$

Gasoline

Panel d: Domestic Ethanol

PwM

Pw0

$

Panel e: Ethanol Trade

$

Panel c: Gasoline Trade

$

Sugarcane ethanol

Corn ethanol

P0

PM

No Intervention

Mandate

Rest of World Gasoline Supply to the US

US Demand for Gasoline Import

US Gasoline Supply

US Gasoline Demand

US VMT Demand

US Ethanol Supply

US Ethanol Demand

Rest of World Ethanol Supply to the US

US Demand for Ethanol Import

Impact of A Mandate

Miles

Panel a: Vehicle Miles

$

Gasoline

Panel b: Domestic Gasoline

$

Gasoline

Panel d: Domestic Ethanol

PwM

Pw0

$

Panel e: Ethanol Trade

$

Panel c: Gasoline Trade

Ethanol

Sugarcane ethanol

Corn ethanol

P0

PM

Rest of World Gasoline Supply to the US

US Demand for Gasoline Import

US Gasoline Supply

US Gasoline Demand

US VMT Demand

US Ethanol Supply

US Ethanol Demand

Rest of World Ethanol Supply to the US

US Demand for Ethanol Import

No Intervention

Mandate

Subsidy and Mandate

PwMS

Impact of A Mandate and A Subsidy

Miles

Panel a: Vehicle Miles

$

Gasoline

Panel b: Domestic Gasoline

$

Gasoline

Panel d: Domestic Ethanol

$

Panel e: Ethanol Trade

$

Panel c: Gasoline Trade

Ethanol

Sugarcane ethanol

Corn ethanol

PMS

Rest of World Gasoline Supply to the US

US Demand for Gasoline Import

US Gasoline Supply

US Gasoline Demand

US VMT Demand

US Ethanol Supply

US Ethanol Demand

Rest of World Ethanol Supply to the US

US Demand for Ethanol Import

Subsidy and Mandate

PwMS

t

PwMST

Pw*

Subsidy, Mandate and Tariff

Impact of A Mandate with Subsidies and Tariff

Dynamic Land Use Model and Data

Biofuel and Environmental Policy Analysis Model (BEPAM)• Multi-market; Dynamic; Spatial; Partial Equilibrium

• Multi-markets in agricultural sector: several crops, sugar, livestock, DDGs • Fuel sector with corn ethanol, cellulosic ethanol, imported gasoline and

ethanol• Food and fuel prices, demand for cropland determined within model• 16 year planning period (2007-2022); 10-year rolling horizon; annual time

scale

Data• Simulated yields of bioenergy crops: miscanthus and switchgrass• CRD-level data on productivity, returns to various activities• CRD-level life-cycle analysis• Cropland expansion based on crop price expectation from the conversion of

marginal land (idle cropland and cropland pasture)• Yield changes for major crops

Yield of Miscanthus and Switchgrass

Yield(Bushels/Acre)

0

1 - 69

70 - 88

89 - 104

105 - 119

120 - 134

135 - 149

150 - 165

166 - 186

187 - 220

Miscanthus

Corn Yields

Ala

bam

a

S. C

arol

ina

Okl

ahom

a

Ark

ansa

s

Mis

sour

i

N.C

arol

ina

W. V

irgi

nia

Ken

tuck

y

Ten

ness

ee

Vir

gini

a

Mis

siss

ippi

Geo

rgia

Mar

ylan

d

New

Jer

sey

Kan

sas

Ohi

o

Illi

nois

Indi

ana

Neb

rask

a

Pen

nsyl

vani

a

Sou

th D

akot

a

Iow

a

New

Yor

k

Mic

higa

n

Lou

isia

na

Flo

rida

Tex

as

Nor

th D

akot

a

Wis

cons

in

Min

neso

ta

45

95

145

195

245

Breakeven Cost of Production Under Alternative Assumptions

Miscanthus Optimistic Switchgrass Optimistic Miscanthus Pessimistic Switchgrass Pessimistic

$ p

er m

etri

c to

n o

f d

ry m

atte

r

Life Cycle GHG Emissions of Biofuels

Key Results

Fuel Consumption and the Mixes of

Biofuels0

200

400

600

800

1000

1200

1400

0100020003000400050006000700080009000

10000

BAU Mandate Mandate and Subsidies

Mandate with Subsidies and

Tariffs

Cumulative Gasoline and Biofuel Consumption (B Liters)

Gasoline Consumption Corn Cellulosic ethanol Ethanol Imports

0

200

400

600

800

1000

1200

1400

BAU Mandate Mandate and Subsidies

Mandate with Subsidies and Tariffs

Mixes of Biofuels Under Alternative Policies (B Liters)

Corn Stover Straw Miscanthus Switchgrass Ethanol Imports

Food and Fuel Prices

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

BAU Mandate Mandate and Subsidies

Mandate with Subsidies and

Tariffs

$/Li

ter

Fuel Prices in 2022

sugarcane ethanol Gasoline Corn ethanol Cellulosic ethanol

0

50

100

150

200

250

300

350

BAU Mandate Mandate and Subsidies

Mandate with Subsidies and

Tariffs

$/M

TCrop Prices in 2022

Corn Soybeans Wheat

Cropland Allocation

0

5

10

15

20

25

30

35

40

Corn Soybeans Wheat Hay Stover Straw Miscanthus Switchgrass

Cropland Allocation in 2022 (M Ha)

BAU Mandate Mandate and Subsidies Mandate with Subsidies and Tariffs

Switchgrass Miscanthus

Corn Stover Wheat Straw

Spatial Distribution of Cellulosic Feedstocks under Mandate Alone in 2022

Corn Stover Wheat Straw

Switchgrass Miscanthus

Spatial Distribution of Cellulosic Feedstocks under Mandate and Subsidies in 2022

GHG Emissions and Social Welfare

-250

-200

-150

-100

-50

0

50

100

150

200

250

Miles Consumers

Gasoline Producers

World gasoline Producers

Agricultural Consumers

Agricultural Producers

Government Revenue ($B)

Welfare Changes Relative to BAU($B)

Mandate Mandate and Subsidies Mandate with Subsidies and Tariffs

-6.0%

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

Mandate Mandate and Subsidies Mandate with Subsidies and Tariffs

Social Welfare and GHG Emissions Relative to BAU

GHG Emissions Social Welfare

Conclusions

A diverse mix of cellulosic feedstocks likely to be used to meet the RFSHeavy reliance on miscanthus

The RFS provides the assurance needed for industry to invest in cellulosic biofuels

But biofuel mandates and tax credits may not necessarily be good climate policy

Imposing tariffs decreases ethanol imports and increase GHG emissions and social welfareSmall effects on agricultural and fuel sectors