Biofuels Issues in Farm Bill 2012

Economic and Land Use Implications of Biofuels: Role of PolicyMadhu KhannaWith Xiaoguang Chen and Haixiao Huang

Department of Agricultural and Consumer EconomicsUniversity of Illinois

MotivationsEnergy security and reducing dependence on foreign oil Concerns about climate changeTransportation sector accounts for about 30% of US GHG emissionsLand Use and Economic ImplicationsDepend on the mix of biofuels and feedstocksFeedstocks differ in their land intensity, land suitability, costs and GHG intensityAffects land use patterns at regional levelHas implications for impact on food prices Biofuels displace fossil fuels and thus affect fuel pricesImplications for social welfare in these sectorsDoes the choice of policy influence the land use and economic benefits of biofuels?

IntroductionNot all biofuels are the same

In LCFS march folder file name Assumptions of fuel intensity..3High 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 BiofuelsRenewable 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 PriceWould raise the price of fossil fuels more than the price of biofuels based on their GHG intensity

Energy Independence and Security Act, 2007

Annual Energy Outlook, 2011

Advanced biofuels: Reduce GHG intensityby 50% relative to gasolineSugarcane Ethanol

Cellulosic biofuels: Reduce GHG intensity by 60% relative to gasolineCellulosic ethanol Biomass to Liquids Diesel

36 B gallons by 2022At least 16 B gallons of cellulosic biofuelsMax. cap of 15 B gallons of corn ethanol

Low Carbon Fuel StandardCalifornia has an LCFS to reduce the carbon intensity of fuels by 10% by 2020 relative to 2005 baselineOregon, Washington state and several Northeast and Mid Atlantic states are proposing/analyzing state-wide/regional LCFSWe analyze an LCFS target of 10% reduction (2015-2030)

VISION Model, ANL, 2010Objectives of this ResearchDevelop 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 economyMix of biofuels and fuel consumptionLand useFood and fuel pricesSocial welfareGHG emissions

Consideration of an open economy allows for terms of trade effects of these policiesUnlike 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

BEPAMMaximizes consumer and producer surplus in multiple agricultural and fuel sector markets subject to technology, production and land constraintsDynamic: Planning horizon from 2007 to 2035, in annual time steps10 year rolling horizon for landowners with age specific costs of perennialsDecisions based on lagged prices and land availabilityExpectations 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 fleetPrice of gasoline and biofuels determined endogenously in open world marketsFirst 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 ModelOpen agricultural sector with crop markets, livestock, biomassSpatial heterogeneity in yields and returns to land (295 regions in US)Econometrically estimated regional cropland acreage elasticities and own and cross-price acreage elasticitiesAllow land allocations to various crops to be price responsiveEconometrically estimated trend rate of growth in crop yields and price responsiveness of yieldsIdle cropland and cropland pasture can be converted to conventional crops and energy cropsSimulated yields of perennial grasses, Miscanthus and SwitchgrassCommodity prices, price of land and biomass determined endogenously.Other Features of the ModelOpen agricultural sector with crop markets, livestock, biomassSpatial heterogeneity in yields and returns to land (295 regions in US)Econometrically estimated regional cropland acreage elasticities and own and cross-price acreage elasticitiesAllow land allocations to various crops to be price responsiveEconometrically estimated trend rate of growth in crop yields and price responsiveness of yieldsIdle cropland and cropland pasture can be converted to conventional crops and energy cropsSimulated yields of perennial grasses, Miscanthus and SwitchgrassCommodity prices, price of land and biomass determined endogenously.

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/ha18-28 T/haCrop Yields

CRP LandIdle Land excluding CRP Cropland PastureAll Marginal LandMarginal Land in 2007Rainfed regions 11 M haNonrainfed regions 4 M haRainfed regions 9 M haNonrainfed regions 2 M haRainfed regions 1.5 M haNonrainfed regions 0.6 M haRainfed regions 22 M haNonrainfed regions 7 M ha

Policies differ in their incentives for mix and level of biofuels: Carbon taxWill raise the cost of gasoline more than the cost of biofuels for consumersLead 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 highRaise the cost per kilometer travelledLower the demand for vehicle kilometers travelledLower domestic demand for gasoline and importsLower domestic GHG emissions

Renewable Fuels StandardRFS 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 biofuelsLowers consumer and producer price of gasolineRaises producer price of biofuelsLowers the consumer price of biofuels which equal the energy equivalent price of gasolineReduction in gasoline consumption is likely to be less than the energy equivalent increase in biofuel consumptionImpact on GHG emissions is ambiguous

A Low Carbon Fuel StandardRestricts 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 consumptionimplicitly 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 consumptionLikely to induce a different mix of biofuels than the RFSImpact on GHG emissions is ambiguous

Differential Effects of Alternative Policies

PolicyGasoline UseBiofuel Use/MixGasoline Consumer PriceBiofuel Consumer PriceVehicle MilesGHG emissionsCarbon Price ? LCFS low C fuels ? ? ? RFS low cost fuels ?

Ambiguous effects depend on the elasticity of demand for food, elasticity of demand for miles and elasticity of supply of gasolineEconomic Benefits of Alternative Policies

PolicyMiles ConsumersFuel ProducersAg. ConsumersAg. producersNet econ. BenefitsCO2 Tax??LCFS ? ??RFS

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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 USChange 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 AssumptionsLCFS May 18 2030, Chen directory24

Direct and Indirect Effects of Biofuel Policies on GHG EmissionsRFSLCFSConclusionsThe 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