Production of Renewable Diesel from Domestick Feedstocks and Palm Oil in the EU: Market Equilibrium, Greenhouse Gas

Emissions and Biofuel policy

Presenter: Liisa Saikkonen, University of HelsinkiCo-authors: Markku Ollikainen, University of

Helsinki and Jussi Lankoski, OECD

Research questions

• Is it socially profitable to produce renewable diesel from domestically grown rapeseed or imported palm oil in Finland/EU ?

• Does the current biofuel policy support socially profitable production of renewable diesel ?

Research frame

• Renewable diesel is produced in Finland from domestically grown rapeseed and imported palm oil.

• Renewable diesel can then be sold in Finland or in EU biofuel market (Central Europe).

• The by-product of rapeseed based renewable diesel is animal feed.

Methods

• We develop a market equilibrium model for four cases:

i) private optimum in the absence of policies ii) social optimum where the life-cycle

greenhouse gas emission damages of the diesel products are taken into account

iii) traditional fiscally-motivated energy policy iv) current biofuel policy

Methods

• We calculate prices and produced and demanded quantities for diesels and their feedstocks in all four equilibria.

• We also assess the social welfare impacts of renewable diesel production in these equilibria.

Estimates for greenhouse gas emissions by production stages (kg CO2-eq/t fos.dies.-eq)

Stage Rapeseed Palm Oil Fossil Diesel1. Cultivation and transport of the crop

3794 282 (2959) 0

2. Oil production and transport 198 955 177

3. Pretreatment and hydro treatment of vegetable oil /Crude oil refining to diesel

217 217 371

4. Transportation and distribution of the diesel

28 28 30

5. Diesel use 0 0 3148

6. Greenhouse gas emission offsets due to by-product

-276 0 0

Total e1 =3961 e2 =1482 (4151) E =3726

Emission damage €/fossil diesel equal ton of diesel (Damage = 0.02€/kgCO2eq)

79.2 29.6 (83.1) 74.5

Summary of greenhouse gas emissions

• Renewable diesel production from palm oil can be warranted by lower life-cycle greenhouse gas emissions compared to rapeseed based renewable diesel and fossil diesel, but only if oil palm cultivation does not result into clearing of rainforests.

• The rapeseed cultivation in Finland leads to significant greenhouse gas emissions, mostly due to nitrogen fertilizer and lime application.

• The life-cycle greenhouse gas emissions of rapeseed based renewable diesel can thus be higher than for fossil diesel.

Summary of greenhouse gas emissions

• If the palm oil used in diesel production is from a plantation that is established by clearing natural rainforest, the life-cycle greenhouse gas emissions of palm oil based renewable diesel can be higher than those of rapeseed based renewable diesel or fossil diesel.

• EU’s sustainability requirements followed by renewable transport fuel producers are criticized for neglecting the indirect land use change caused by oil palm cultivation.

• Indirect land use change caused by oil palm cultivation can result in clearing of rainforest when for example food crop cultivation has to expand elsewhere to make room for oil palm plantations.

Theoretical model: supply and demand

• In the theoretical model country A produces renewable diesel from domestic feedstock and from feedstock imported from country B.

• Inverse supplies for renewable diesels produced from domestic (1) and imported (2) feedstocks:

• Total supply of renewable diesel:

Theoretical model: social supply

• Social inverse supplies (marginal social costs) of renewable diesels (i=1 or 2)

• Social price of fossil diesel

• Social supply of renewable diesel are the life-cycle greenhouse gas emissions of renewable diesels.

D is the damage caused by one unit of emissions.P is the exogenous tax-free price of fossil diesel.E are the life-cycle emissions of fossil diesel.

Theoretical model: private and social optimum

• Renewable diesel is produced in the private optimum if .

• The demand of diesel in the private optimum in country A is .

• Renewable diesel is produced in the social optimum if .

• The demand of diesel in the social optimum in country A is .

• The diesel taxes according to the social optimum are , and .

Theoretical model: energy policy

• The producer price of renewable diesel in country A is .

• Demand of diesel in country A is . • Supply of renewable diesel in country A is .

is the value added tax in country A. is the tax for renewable diesel in country A. is the tax for fossil diesel in country A.

Theoretical model: biofuel policy• Under biofuel policy the producer price of renewable diesel is

determined by biofuel policies in the EU.• The blend mandate in country A is .• Following De Gorter and Just the demand of blended diesel in country A:

• The demand of renewable diesel in country A:

• The producer price of renewable diesel in country A:

• The supply of renewable diesel in country A:

where denotes the renewable diesel exports from country A to international market.

Empirical application

• The theoretical model is applied to production and market data from Finland (country A), Malaysia (country B) and EU biofuel market.

• Prices and other market data are from year 2010.• Greenhouse gas emissions and quantities of production inputs

are based on Finnish studies :-Inventory of greenhouse gas balances for different biofuels (Mäkinen et al., 2006). -greenhouse gas and energy intensities of renewable diesels (Nikander, 2008)

• The empirical model is defined in more detail in Section 3 of the paper.

Results: prices

  Private equilibrium Social equilibrium Traditional energy policy Biofuel policy

Producer price of renewable diesel from rapeseed (€/t fos.dies.-eq)

653.00 648.27 625.99 1116.38

Producer price of renewable diesel from palm oil (€/t fos.dies.-eq)

653.00 697.86 625.99 1116.38

Price of rapeseed (€/t)

316.77 315.04 306.93 485.58

Price of palm oil (€/t)

629.71 629.71 629.71 902.71

Value of animal feed (€)

19 622 074 19 372 387 18 132 419 31 853 649

Retail price of blended diesel in Finland (€/t fos.dies.-eq)

653.00 727.51 1341.77 1376.45

Results: quantitiesPrivate equilibrium Social equilibrium

Traditional energy policy

Biofuel policy

Amount of rapeseed (t) 189 335 186 926 174 961 307 359

Amount of palm oil (t) 0 0 0 2 656 258

Production of renewable diesel from rapeseed (t fos.dies.-

eq)

68 975 68 097 63 739 111 971

Production of renewable diesel from palm oil (t fos.dies.-eq)

0 0 0 2 232 675

The amount of rape seed meal produced as

by-product (t)107 342 105 976 99 193 174 254

Demand of renewable diesel in Finland (t

fos.dies.-eq)68 975 68 097 63 739 130 920

Export of renewable diesel from Finland (t

fos.dies.-eq)0 0 0 2 213 726

Demand of diesel in Finland (t)

2 363 368 2 350 634 2 279 781 2 276 874

Results: Social welfare impacts in Finland (M€)

  Private equilibrium Social equilibriumTraditional energy

policyBiofuel policy

Producer surplus 8.99 8.66 7.20 53.25

Consumer surplus 2492.30 2491.84 896.87 817.85

Climate damage -176.43 -175.47 -170.17 -178.49

Tax revenue 0.00 0.00 1525.58 1586.54

Social welfare 2324.86 2325.03 2259.47 2279.16

Foreign welfare impacts under biofuel policy

• If the exported renewable diesel is used to substitute for fossil diesel, the resulting loss in greenhouse gas emissions is 8.18 million CO2-equal tons, which equals climate benefit of M€163.69.

• If the diesel is exported to a country which has a tax exemption for renewable diesel, can this lead in a significant loss in the tax revenue in that country.

• The loss in the consumer welfare can be considerable if the diesel is sold in a country with a binding blend mandate for biofuels.

• In Malaysia the increased production of palm oil results in a social welfare gain of M€320.71, but only if oil palms are cultivated sustainably and no rainforest is cut down.

• If all palm oil used in renewable diesel production (2 656 258 tons) is from oil palm plantations which are established by cutting down natural rainforests, the social welfare in Malaysia decreases to M€201.17.

Greenhouse gas emissions in the equilibria (CO2-equal tons)

  Finland EU Malaysia Total

Emissions in the private equilibrium 8.82 0 0 8.82Emissions in the social equilibrium 8.77 0 0 8.77Emissions under traditional energy policy 8.51 0 0 8.51Emissions under biofuel policy 8.92 -8.18 (M€163.69) 2.76 (M€55.22) 3.50Emissions under biofuel policy, when clearing of rainforests is taken into account 8.92 -8.18 8.74 (M€174.75) 9.48

Conclusions

• According to our results the production of renewable diesel from imported palm oil is neither privately nor socially profitable.

• It is the high renewable diesel price set by the current EU biofuel policies that promotes the production of palm oil based renewable diesel.

• The use of domestically produced rapeseed in renewable diesel production is socially profitable in Finland, but only if rapeseed meal is produced as a by-product.

Conclusions

• However, the greenhouse gas emissions balance shows that life-cycle emissions from palm oil based renewable diesel are significantly lower than those of fossil diesel or rapeseed based renewable diesel, but only if oil palm cultivation does not result in clearing of rainforests.

• If palm oil production results into clearing of rainforest, the greenhouse gas emissions resulting from renewable diesel production and consumption under biofuel policy can be higher than under traditional energy policy.

Thank you!