Renewable Energy Newsletter

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1 Renewable Energy Newsletter in this issue... The Role of Greenhouse Gas Offsets to Agriculture... 1 Updated Trends in U.S. Wet and Dry Corn Milling Production New Energy Economics: Why Do Gas Prices Rise in Summer? Carbon Tax A Different Twist prices, profitability and supply/demand The following spreadsheets have been updated on the AgMRC Renewable Energy web site, org/renewable_energy/. prices midwest ethanol prices ethanol basis fuel vs. grain (annual) fuel vs. grain (monthly) profitability ethanol profitability corn profitability biodiesel profitability supply/demand corn/ethanol balance sheet soy oil biodiesel balance sheet soybean balance sheet distillers grains balance sheet The Role of Greenhouse Gas Offsets for Agriculture - Part I by Don Hofstrand, Co-director, Agricultural Marketing Resource Center, dhof@iastate.edu Concerns about climate change and the impact it may have on the world s economy and society have led to efforts to mitigate its impact by controlling greenhouse gas emissions. Several gases have been identified as drivers of the warming of the earth. These greenhouse gases are: Carbon Dioxide (CO 2 ) The major greenhouse gas. Although it occurs in large quantities in nature, its concentration in the atmosphere increases primarily through the burning of fossil fuels. It stays in the atmosphere for a very long period of time. So, reducing emissions does not result in lower levels of atmospheric carbon dioxide. It simply reduces the rate of increase. Methane (CH 4 ) Greenhouse gas 21 times more powerful than carbon dioxide Nitrous Oxide (N 2 0) Greenhouse gas 310 times more powerful than carbon dioxide Hydrofluorocarbons A variety of manmade gases that are very powerful greenhouse gases but exist in the atmosphere at very low concentrations. Agriculture currently emits significant quantities of carbon dioxide, methane and nitrous oxide. Controlling the build-up of greenhouse gases in the environment can be accomplished by one of three methods: Regulation Regulating industries that emit greenhouse gases. Cap and Trade Capping the emissions of emitting industries and allowing these industries to meet their cap requirements by purchasing greenhouse gas offsets. Tax Taxing greenhouse gas emissions. In 2007, the U.S. Supreme Court ruled that the U.S. Environmental Protection Agency (EPA) is responsible for regulating greenhouse gas emissions through the Clear Air Act (CAA). With EPA regulations, it appears as though many agricultural production businesses would come under EPA s regulatory authority. Also, agriculture would not be allowed to create greenhouse gas offsets that could be sold to other regulated industries. There are currently efforts by some congressional members to remove EPA s authority to regulate greenhouse gas emissions. Controlling greenhouse gases emissions through climate change legislation is an alternative to EPA regulation. The U.S. House of Representatives has passed legislation titled the American Clean Energy Security Act (H.R. 2454) that focuses on reducing greenhouse gas emissions through a cap and trade system. Although the U.S. Senate has worked on similar legislation, as of the date of this article it has not been voted on. The House legislation (1) sets greenhouse gas emission target reductions of 42 percent (below 2005 levels) by 2030 and 83 percent by To meet these targets, AgMRC encourages the use and distribution of material from this newsletter, but asks that individuals please inform us of your intention to reprint or distribute materials for our records at agmrc@iastate.edu.

2 The Role of Greenhouse Gas Offsets for Agriculture, continued from page 1 emitting industries like oil refineries, electric utilities and others would be required to reduce their emissions of greenhouse gases, mainly carbon dioxide, over time. Companies in these industries have the choice of either reducing their own emissions or paying someone else to reduce their emissions. The cap and trade system establishes the mechanics of this process. Production agriculture is not included as one of the capped industries in this legislation. So there is no penalty for agriculture s greenhouse gas emissions. Moreover, agriculture has the opportunity to provide greenhouse gas offsets that can be sold to company s in capped industries like electric utilities and oil refineries. Greenhouse gas offset mechanics Offsets are verifiable greenhouse gas reductions created by a business (e.g. the agriculture sector) that can be sold to a business in a capped industry and used by that business as a greenhouse gas reduction in meeting its emissions cap. These offsets act as a credit to be used in meeting the regulated entity s emissions reduction threshold. The mechanics of how an offset program would work are uncertain. However, if offset policies and procedures were enacted similar to those outlined in H.R (1), they would look something like the following. In general, the procedures would allow the issuance of offset credits to qualifying offset projects for the reduction or avoidance of greenhouse gas emissions or the sequestration of greenhouse gas emissions. However, these emission reductions must be in addition to the level of current activities and must be verifiable. An Advisory Board is established and composed of individuals adept at evaluating scientific and technical information to provide advice to the governmental decision makers. To ensure that the reductions actually occur, a methodology would be established that addresses the following issues: 1) The government, along with input from the advisory board, creates a list of eligible types of projects that can receive offsets. This list is revised periodically. 2) Baselines levels of current emissions from the eligible activities are established. The amount of emission reductions from this baseline level represents the reductions that qualify as offsets. 3) Specific metrics and monitoring protocols are established for the various types of activities. These metrics and protocols including accounting for the uncertainty of any leakage that may occur from this activity. 4) In addition, procedures will be established to account for any reversals of emission reductions, avoidance or sequestration. To accomplish this, a portion of the offsets may be held in reserve in case a reversal occurs. 5) One offset credit will be issued for each ton of carbon dioxide that is reduced, avoided or sequestered. Other greenhouse gases offsets will be computed on a carbon dioxide equivalency based on their potency as a greenhouse gas relative to carbon dioxide. For example, methane is 21 times more powerful greenhouse gas as carbon dioxide, so one ton of methane will receive 21 offset credits. Likewise, nitrous oxide is 310 times more powerful, so one ton of nitrous oxide will receive 310 offset credits. 6) The offset credits must be fungible, meaning that each credit is identical so that credits can be aggregated and/or separated in a manner similar to fungible commodities like corn and soybeans. Energy prices Under any of the above methods of controlling greenhouse gas emissions described above, U.S. energy prices will increase due to the increased cost imposed on the energy industries that use fossil fuels. Agriculture is an energy intensive industry using a variety of fossil fuel based energy sources. Examples are gasoline and diesel fuel to propel machinery and equipment, natural gas to make nitrogen fertilizer, propane to dry grain and electricity used for a variety of farmstead activities. Due to agriculture s energy intensive nature, controlling greenhouse gas emissions by either of the means above will result in increases in the cost of producing crops and livestock as discussed in AgMRC Renewable Energy newsletter article Impact of Cap and Trade Legislation on U.S. Agriculture. Although studies differ as to the size of the energy price increases, they all indicate that the increase will be modest in the early years but increase in subsequent years. Much of this increase will eventually be passed on to consumers. Regulation Production agriculture, under a system of controlling emissions through EPA regulation, may suffer from increased regulatory responsibility and decreased net returns. Regulation imposed through the CAA involves permitting and control requirements. Permitting USDA (2) estimates that many farming operations that are not currently subject to permitting requirements would come under this requirement. It further states that the CAA s 100-tons-peryear emissions permitting threshold may even include smaller agricultural operations. Imposing costly and time consuming requirements on these operations would be burdensome. In addition, it Table 1. Comparison of EPA regulation and Cap and Trade Legislation with Offsets to Baseline (billion dollars) ( ) Scenario Net Returns Net Carbon Flux * Baseline $4,067 1,820 EPA Regulation 3,912 1,388 Cap and Trade with Offsets 4,276 1,357 * Net carbon flux is the net amount of carbon leaving the system. Source: Analysis of the Implications of Climate Change and Energy Legislation to the Agricultural Sector, Department of Agricultural Economics, Institute of Agriculture, The University of Tennessee, November 2009.

3 The Role of Greenhouse Gas Offsets for Agriculture, continued from page 2 would be an inefficient method of controlling emissions. Control Imposing requirements to control all of the various sources of greenhouse gas emissions of production agriculture would be difficult. Although some sources could be controlled, other emissions sources, many of them from natural interactions, would be difficult to calculate and control with current technology. Examples include methane emissions from the digestive process of cattle and nitrous oxide emissions from tilling the soil. Economic impact In addition to the regulatory impact, production agriculture would suffer from higher production costs due to higher energy prices, as described above. However, agriculture would not be eligible for income from the sale of emission offsets. Results from research conducted the University of Tennessee (3) are shown in Table 1. The baseline net return is a projection of the cumulative returns from 2010 to 2025, assuming the Renewable Fuel Standard under EISA continues in place. The regulation and cap and trade scenario results show how the baseline results would change with the implementation of these alternatives. Greenhouse gas regulation through EPA would lower net returns for production agriculture (about four percent) during the 2010 to 2025 period as shown in Table 1. Average returns for six of nine crops analyzed would be reduced from the baseline level. Net carbon emissions from agriculture would be reduced by about 24 percent. Cap and trade with offsets Production agriculture, under a system similar to the U.S. House Legislation, would be eligible for the sale of agricultural generated greenhouse gas offsets to capped industries. A variety of studies of the value of the offsets to the agriculture sector have been conducted. Some of them are discussed here. Additional studies will be forthcoming in the future. An example analysis is The University of Tennessee research (3) that analyzed the economic impact on production agriculture of a variety of combinations of agriculturally based greenhouse gas offsets. The scenario presented here includes the following offset sources. The price of carbon dioxide was assumed to be $27 per ton before discounts. A key variable in determining the impact of an offset program is the number and types of offsets available. Any legislation should be flexible enough to include a variety of offset programs as long as they are verifiable and meet the offset requirements. The assumed discount for each source is also shown. Methane capture An example, is the anaerobic digestion of livestock manure 20% discount due to the initial cost of verification, low ability for aggregation and high monitoring and documentation cost. Afforestation Planting trees to sequester carbon on land where trees have not existed before 30% discount due to the cost of quantification and verification and the danger of leakage and reversals. Conservation tillage Tilling the soil in a manner that reduces the release of organic matter carbon 40% discount due to uncertainty of duration and permanence. The carbon sequestration value of conservation tillage is being challenged as discussed in AgMRC Renewable Energy Newsletter article Crop Residue A Valuable Resource. Bioenergy crop production Due to their deep root structure and low input requirements, herbaceous dedicated perennial energy crops contribute significantly to sequestering carbon and reducing GHG emissions from agriculture 20% discount due to quantification and verification costs. Grassland sequestration Biomass sources for offsets included corn grain, soybeans, crop residues, switchgrass, hybrid poplar, willow, wood resides and manure. Crop residue removal was limited to an amount that would not reduce soil organic matter. This is an important factor in crop residue management as discussed in AgMRC Renewable Energy Newsletter article Crop Residue A Valuable Resource. As shown in Table 1, cumulative net farm returns increased (5 percent) and net carbon emissions decreased (25 percent) under the cap and trade scenario. Improvements under cap and trade occur for all crops studied except rice. As shown in Table 2, the greatest increase in net crop returns and net offset returns is from energy crops. In addition to the crop returns listed above, net carbon payments to livestock producers from methane capture was estimated at $120 million for hogs production and $208 million for dairy production by The beef industry is impacted by reduced pasture acreage. Regardless of whether the shortfall is made up by increased forage productivity on the reduced acres or reduced beef cattle numbers, the impact does not cause major disruptions in the industry. Table 2. Average Change in Net Returns from Cap and Trade Legislation, by Crop (million dollars) ( ) * Crop Baseline Net Returns 1/ Change in Net Returns from Cap & Trade Net Offset Returns Corn $31,713 $1,937 $131 Wheat 7, Soybeans 21, Energy Crops 737 4, / Includes the renewable fuels standard of the Energy Independence and Security Act of Source: Analysis of the Implications of Climate Change and Energy Legislation to the Agricultural Sector, Department of Agricultural Economics, Institute of Agriculture, The University of Tennessee, November 2009.

4 The Role of Greenhouse Gas Offsets for Agriculture, continued from page 3 Research conducted at Texas A&M University and Duke University (4) came to a similar conclusion that a properly constructed cap and trade system with a carbon offset program would result in a net economic gain for agricultural producers. However, their research showed that the majority of the offset payments would come from afforestation and forest management. Afforestation is the red portion of the bar shown in Figure 1. It would be responsible for at least half of the offset payments. Afforestation (growing trees on land that previously did not have trees) is a way of sequestering carbon due to the carbon stored in the tree. Much of the tree plantings could occur on cropland and pastureland. So, it has the potential to undermine the production capacity of the agriculture sector. Also, there is the potential of other land use changes. These will be addressed in Part 2 of this article that will appear in next month s newsletter. References: 1. American Clean Energy Security Act of 2009 (ACES), H. R EPA --Advance Notice of Proposed Rulemaking: Regulating Greenhouse Gas Emissions under the Clean Air Act 3. Analysis of the Implications of Climate Change and Energy Legislation to the Agriculture Sector, Bio-Based Energy Analysis Group, Agricultural Policy Analysis Center, Department of Agricultural Economics, Institute of Agriculture, The University of Tennessee, November, The Effects of Low-Carbon Policies on Net Farm Income Working Paper, Agrilife Research and Extension, Texas A & M University; and the Nicholas Institute for Environmental Policy Solutions, Duke University, NI WP 09-04, September, Market Impact of Domestic Offset Programs, Working Paper 10-WP 502, Center for Agriculture and Rural Development, January 2010 Figure 1. Annualized GHG offset payments across mitigation schemes to forestry and agricultural sectors. Source: The Effects of Low-Carbon Policies on Net Farm Income Working Paper, Agrilife Research and Extension, Texas A & M University; and the Nicholas Institute for Environmental Policy Solutions, Duke University, NI WP 09-04, September, 2009.

5 Updated Trends in U.S. Wet and Dry Corn Milling Production by Daniel O Brien, Extension Agricultural Economist, Kansas State University The purpose of this article is to examine the production of feed byproducts originating from wet and dry corn milling processes in the United States. Two distinct processes for processing corn are common in the U.S., i.e., wet-milling and dry-milling. Ethanol is the primary product of the U.S. dry milling process, and also is also one of the products produced via wet milling processes. This article is an updated version of a February 2009 article on U.S. wet and dry corn milling industry grain use and byproduct production. It utilizes monthly information presented from U.S. Census Bureau Division of Manufacturing, Mining and Construction Statistics - M311J - Fats and Oils, Oilseed Crushing Report up through the latest reported information for November It also references and builds upon information presented by Kelly S. Davis at the 2001 Minnesota Nutrition Conference of the Minnesota Corn Growers on Corn Milling, Processing and Generation of Co-products. An August 2007 report on Utilization of Corn Milling Co-Products in Beef Cattle from the Nebraska Corn Board & UNL-IANR, Erickson, et al. was also a key resource for this article. Corn use in wet and dry milling processes According to U.S. Census Bureau data, the amount of corn processed in U.S. wet-milling systems grew by an average of 1.2 million bushels per month, from million bushels to as much as million bushels per month during the January 2007 November 2009 period (see figure 1). During this same 35 month period, the amount of corn processed in dry-milling systems in the U.S. grew by an average of 3.3 million bushels per month, from 105 to as much as 227 million bushels per month (in November 2009). Corn wet-milling processes The corn wet-milling process is designed to efficiently separate various products and parts of shelled corn for various food and industrial uses. The primary products of the corn wet milling process include corn starch and edible corn oil. On average a bushel of corn weighs 56 pounds at 10% Figure 2. Overview of the Corn Wet Milling Process Source: Utilization of Corn Milling Co-Products in Beef Cattle. Nebraska Corn Board & UNL-IANR, Erickson, et al., August 2007 moisture, and produces 31.5 pounds of corn starch, 12.5 pounds of corn gluten feed, 2.5 lbs. of corn gluten meal, and 1.6 lbs. of corn oil. Figure 2 provides a schematic overview of the inputs and outputs corn wet milling process. As described by Davis (2001), when shelled corn is physically delivered to a wet milling facility, it is first sampled to determine whether it meets the required physical quality standards. Assuming it meets these standards, the shelled corn is then transferred through a grain cleaning system to grain handling/storage facilities that are associated with the corn wet milling plant. From there, the corn feedstock is soaked in heated chemical solutions, resulting in a softening of the corn kernels and the absorption of soluble nutrients into the water solution. From this point forward in the process, various categories of corn wet milling process byproducts are produced. Figure 3 illustrates the amount of these various corn wet mill process byproducts produced monthly during the May 2007 November 2009 time period. Production of wet

6 Updated Trends in U.S. Wet and Dry Corn Milling Production, continued from page 5 corn gluten feed has increased over this time period, while other wet milling process byproducts have declined. Production of corn gluten meal from wet milling processes during this period averaged million pounds per month, with an average decline of approximately 600,000 pounds per month. Corn gluten feed production averaged 498 million pounds per month, with an average monthly decline of 1.7 million pounds over the period. Wet corn gluten feed production averaged million pounds per month, with an average monthly increase of 5.9 million pounds. Production of corn germ meal averaged million pounds per month, with an average monthly decline of 400,000 pounds. During November 2009, 44% of the weight of wet milling process byproducts produced were in the form of wet corn gluten feed, followed by corn gluten feed at 30.4% (see figure 3a). Corn germ meal (15.7%) and corn gluten meal (9.9%) made up the rest of U.S. corn wet mill byproduct production. Condensed corn fermented extractives The concentrate product formed after water is partially removed via evaporation is identified as condensed corn fermented extractives. This is a high-energy liquid feed ingredient whose protein value content is 25% on a 50% solids basis. Condensed corn fermented extractives are sometimes combined with the corn gluten feed or sold separately as a liquid protein source for beef or dairy rations. It also can be used as a pellet binder and is a source of B-vitamins and minerals (Davis 2001). Corn germ meal Corn germ is then removed from the water soaked kernel in the wet milling process, and is then further processed to recover corn oil. What remains of the corn germ after removal of the corn oil product is identified as corn germ meal (in either wet or dry form), which is collected for use as a livestock feed. It typically contains 20% protein, 2% fat, and 9.5% fiber - with an amino acid balance that gives it value in poultry and swine rations and as a carrier of liquid feed nutrients. After removal of the corn germ, the remainder of the corn kernel is screened to remove the bran leaving corn starch and corn gluten protein to pass though a screening process (Davis 2001). Corn bran is combined with other wet mill process co-products to produce corn gluten feed. This product is a medium protein ingredient composed of the bran and fibrous portions which may or may not contain condensed corn extractives and can be sold in wet or dry form. Wet and dry forms of corn gluten feed are widely used in complete feeds for dairy and beef cattle, poultry, swine and pet foods. Dried corn gluten feed The dried form of corn gluten feed is made into pellets to facilitate handling and becomes dried corn gluten feed. It typically contains 21% protein, 2.5% fat, and 8% fiber. Wet corn gluten feed The wet form of corn gluten feed, i.e., wet corn gluten feed (45% dry matter) is perishable within 6 10 days and must be fed or stored in an anaerobic environment. Corn gluten meal A slurry of starch and gluten (making up corn gluten feed) is further processed using centrifugal separators, causing the lighter corn gluten protein to separate from the heavier corn starch (Davis 2001). The corn gluten protein is concentrated and dried to form corn gluten meal. This high protein concentrate product typically contains 60% protein, 2.5% fat and 1% fiber. See Davis (2001) for infor-

7 Updated Trends in U.S. Wet and Dry Corn Milling Production, continued from page 6 mation on specific characteristics of this feed and livestock species for which it is particularly suited. At this stage of the corn wet milling process, some of the starch is then washed and dried, or modified and dried and marketed to the food, paper and textile industries. The remaining starch can be processed into sweeteners or ethanol. Corn dry-milling processes The large majority of ethanol plants built during the expansion-phase of the U.S. grain/starch ethanol industry leading up to the period made use of corn dry-milling processes. Through the corn dry mill process, a bushel of corn weighing 56 pounds (test weight) typically produces 2.7 gallons of ethanol, 18 pounds of distillers dried grains with solubles, and 18 pounds of CO2. Figure 4 provides an overview of the corn dry milling process, from the introduction of shelled corn as a feed stock through the production of ethanol, carbon dioxide (CO2) and wet and dry distillers grains with solubles. In the corn dry milling process, shelled corn arrives at the dry-mill processing facility and is first checked for quality (Davis 2001). Through a procedure of mashing, Figure 4. Overview of the Corn Dry Milling Process Source: Utilization of Corn Milling Co-Products in Beef Cattle. Nebraska Corn Board & UNL-IANR, Erickson, et al., August 2007 fermentation, cleaning and processing via a hammer mill, corn is milled into a medium-coarse to fine grind meal. This finely ground corn meal is mixed with fresh and recycled waters to form a slurry. At the liquefaction stage of the process, hydrolysis is used to facilitate the conversion of corn starch to dextrin (long chain sugars). After liquefaction of the starch is completed, the resulting mash is cooked and then cooled to 90 F and sent to a fermentation vessel to convert the dextrin into the simple sugar dextrose. Yeast species are then used to metabolically convert this dextrose into ethanol and carbon dioxide. This fermenting mash is referred to as a beer. In this stillage form, corn protein and recycled waters provide nitrogen compounds that are absorbed by the yeast microbes in the fermentation process. Ethanol is formed from corn-based starch at this stage of the dry milling process through a process of distillation (Davis 2001). Then, whole stillage in the form of water and solids containing protein, fat and fiber are collected from the distillation base. Coarse solids are then separated from the liquid via centrifuge. The liquid is called thin stillage. This thin stillage is then recycled to the beginning of the process or concen- trated in an evaporator to become corn condensed distillers solubles. Figure 5 illustrates the amount of various corn dry mill process byproducts produced monthly during the January 2007 November 2009 time period. Production of distillers wet grain, distillers dried grain, and distillers dried grains with solubles have each increased over this time period, while production of distillers dried solubles and condensed distillers solubles have remained approximately the same. Production of distillers wet grain from dry mill processes during this period averaged 1,997.9 million pounds per month, with an average increase of approximately 21.1 million pounds per month. Distillers dried grains with solubles production averaged 1,600.4 million pounds per month, with an average monthly increase of 29.3 million pounds. Distillers dried grain production averaged million pounds per month, with an average increase of 8.1 million pounds per month. Production of distillers dried solubles and condensed distillers soluble averaged 25.6 and 130 million pounds per month, respectively, with no change in monthly output over the time period. During November 2009, 44% of the weight of dry mill process byproducts produced were in the form of distillers wet grain, followed by distillers dried grain with solubles at 38.6% (see figure 5a). Distillers dried grains (14.1%), condensed distillers soluble (2.7%) and distillers

8 Updated Trends in U.S. Wet and Dry Corn Milling Production, continued from page 7 dried solubles (0.5%) made up the rest of U.S. corn dry mill byproduct production. Corn condensed distillers solubles On a dry matter basis corn condensed distillers solubles typically contain 29% protein, 9% fat and 4% fiber. The dry matter content is typically between 25 50%, but can be dried to 5% moisture and marketed. Condensed distillers solubles are a highly palatable feedstuff, which can be used as a supplement to other poorer quality feed ingredients and/or roughages in livestock rations. Coarse solids collected from the centrifuge process are called wetcake. Distillers wet grains (wetcake) Production and sales of the coarse solids collected from the centrifuge process (referred to as wetcake ) is common in the western Corn Belt states of Nebraska and Kansas. Corn distillers dried grains with solubles Wetcake and condensed solubles are then combined and dried in a rotary dryer to form the feed co-product corn distillers dried grains with solubles. This product contains all the nutrients from the incoming corn less the starch and has at least three times as many nutrients on a per unit basis as unprocessed shelled corn. Distillers dried grains with solubles typically contains 27% protein, 11% fat and 9% fiber, and can be used as a source of bypass protein in ruminants (beef and dairy cattle) and a feed ingredient for other livestock species (poultry, swine, aquaculture and pet foods). This product is also available in a wet form. Distillers dried grains The production of distillers dried grains (absent solubles) make up the remainder of U.S. corn dry mill byproducts. Conclusions The availability of U.S. Census Bureau data on livestock feed byproducts from wet and dry corn milling processes is potentially a great benefit to analysts of both the livestock feeding and the ethanol production industry. Further analysis is needed to determine how local and regional variation in the price of these feed products impacts the profitability of the U.S. ethanol industry. Livestock feed related byproducts of the U.S. corn wet and dry mill industries in the United States have become economically viable inputs into feeding rations. Future expansion or contraction of the U.S. corn wet and dry milling industries will have an impact upon the continued availability of these feed products to U.S. livestock feeders.

9 New Energy Economics: Why Do Gas Prices Rise in Summer? By Cole Gustafson, Biofuels Economist, NDSU Extension Service am writing this article as North Dakota enjoys a reprieve from I the record cold weather of early January. Gas prices have risen during the past few weeks to around $2.69 per gallon in Fargo. While national oil prices are dropping under $78 a barrel, it is possible that gasoline and diesel prices will moderate as we approach spring. As spring and summer appear on the horizon, we normally expect gasoline prices to increase. Interestingly, the reason why they increase might surprise you. Traditionally, gasoline prices rise in the summer because more people travel and take longer vacations. Economists refer to this as increased demand, which leads to higher prices if suppliers only produce a fixed quantity of gasoline. This used to be partially true, but people are now more mobile in general, take vacations throughout the year and fly to destinations rather than drive. Therefore, the miles people travel during the year is relatively stable. The people traveling more argument isn t as important a factor as it used to be. What is a more important reason is environmental regulation. Since 1990 under the Clean Air Act, the Environmental Protection Agency (EPA) has required the use of reformulated gasoline blends during April through September in major metropolitan cities. This fuel costs more to produce, so it leads to higher gas prices during the summer months. The EPA has estimated the impact to be 2 to 4 cents per gallon. However, this only partially explains the summertime increase. Economists also found that petroleum companies have more market power during the summer because of this environmental regulation. Rather than have a single summertime blend, each major city has a unique formulation tailored to mitigating its individual air pollution problem. These unique blends make it difficult to ship fuel from surplus to deficit areas, which would moderate price spikes. Consequently, petroleum companies have more regional monopoly power during the summer months than in winter. Finally, engineering studies have found that it is quite costly for petroleum refiners to switch from one seasonal blend to another. In addition to reconfiguring their production plants, refiners also need additional storage to segregate both blends and prevent comingling. The investment cost of this additional equipment places even greater pressure on summer blend prices. I recently attended a national economics conference where three independent studies concluded that, while refineries have dutifully complied with the Clean Air Act and provided reformulated fuels during the summer months, the policy has not resulted in cleaner air. The policy does not specifically direct how refiners must lower volatile organic compounds, so the refiners select the most inexpensive way, which does little to improve air quality. Consequently, consumers are bearing the cost of the environmental policy without deriving any appreciable benefit. In addition, the reformulated fuel sold during the summer months doesn t provide purchasers with the same mileage as winter blends. Therefore, more fuel has to be purchased to drive the same miles. This increase in quantity of fuel purchased also leads to higher prevailing market prices.

10 Carbon Tax A Different Twist by Don Hofstrand, Co-director, Agricultural Marketing Resource Center, dhof@iastate.edu An alternative to a Cap and Trade policy to limit greenhouse gas emissions is a tax on emissions, referred to as a Carbon Tax. A primary difference between a carbon tax and cap and trade is that cap and trade sets carbon emissions limits and then lets the marketplace determine the price of carbon. Conversely, a carbon tax sets the price of carbon and lets the marketplace determine the level of emissions reduction. Although current legislation includes a cap and trade system rather than a carbon tax, many economists prefer a carbon tax. A carbon tax would be easier to administer and may require less oversight requirements. Also, the concept of a tax fits with what the legislation is trying to achieve reduce greenhouse gas emissions. We tax items when we want less of them. For example, we tax cigarettes to reduce the amount of cigarettes consumed which reduced the number of cigarette smokers. If we want to reduce greenhouse gas emissions, it makes sense to tax them. However, the concept of tax is unpopular to many people. It implies reducing an individual s disposable income. Although the tax would not be focused on individuals but on companies producing energy from fossil fuels, there is little doubt that the tax would be passed onto consumers through higher energy prices (an indirect tax). A proposed solution to this is called Carbon Tax and 100 Percent Dividend. Under this arrangement, all of the money raised from the tax is given back to people. The tax can be collected anywhere along the supply chain. It can be collected when crude oil is refined into gasoline or collected at the pump when sold to consumers. Regardless, the tax goes into a separate fund where it is subsequently given to the public. Each citizen of the U.S. would receive the same amount of money (there may be smaller shares for minor children or other adjustments). For example, there are approximately 300 million people in the U.S. If the tax generated $30 billion ($30,000 million) of revenue, each person would receive $100 ($30,000 / 300 = $100). Most of the cost of higher energy prices (caused by the tax) would be borne by those who consume the most fossil fuel energy. RV drivers will pay more than Hybrid drivers. However, the benefits will be distributed equally among all people, regardless of the amount of energy consumed. So, RV drivers will experience a net cost while Hybrid driver will experience a net gain. This will create a strong incentive for individuals to reduce fossil fuel consumption in all aspects of their daily lives include transportation, home heating, energy intensive consumers products and others. As per capita fossil fuel consumption is reduced, overall fossil fuel consumption is reduced and greenhouse gas emissions are reduced. Moreover, as fossil fuel consumption decreases, tax collections and the amount subsequently returned to the public also declines. In time, tax collections and payouts may become insignificant. In addition to efforts by consumers to reduce fossil fuel consumption, companies are stimulated to look for ways of reducing fossil energy consumption and/or substituting increased amounts of renewable energy for fossil fuels. In addition, energy producers will be incentivized to switch from fossil fuel energy production to renewable energy production. For example, the tax will raise the cost of coal fired electricity production which will give an incentive to implementing renewable electricity production such as wind and solar. As renewable energy production technologies improve, energy prices will decline, resulting in lower consumer prices. Moreover, renewable energy production will expand, resulting in less fossil fuel energy production, declining tax revenues and smaller tax payments to consumers. and justice for all The U.S. Department of Agriculture (USDA) prohibits discrimination in all its programs and activities on the basis of race, color, national origin, gender, religion, age, disability, political beliefs, sexual orientation, and marital or family status. (Not all prohibited bases apply to all programs.) Many materials can be made available in alternative formats for ADA clients. To file a complaint of discrimination, write USDA, Office of Civil Rights, Room 326-W, Whitten Building, 14th and Independence Avenue, SW, Washington, DC or call The Ag Marketing Resource Center Renewable Energy Newsletter is available on-line at: 10