An Economic Analysis of Fossil-Fuel Substitution for Climate Change Mitigation

Transcription

1 An Economic Analysis of Fossil-Fuel Substitution for Climate Change Mitigation by PETER JOHN GRAHAM, RPF B.Sc.F., University of New Brunswick, 1994 A THESIS SUBMITTED IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF FORESTRY in THE FACULTY OF GRADUATE STUDIES Department of Forest Resources Management Faculty of Forestry We accept this thesis as conforminq to the inquired standard/ THE UNIVERSITY OF BRITISH COLUMBIA August 2001 Peter John Graham, 2001

2 In presenting this thesis in partial fulfilment of the requirements for an advanced degree at the University of British Columbia, I agree that the Library shall make it freely available for reference and study. I further agree that permission for extensive copying of this thesis for scholarly purposes may be granted by the head of my department or by his or her representatives. It is understood that copying or publication of this thesis for financial gain shall not be allowed without my written permission. Department of jor&i The University of British Columbia Vancouver, Canada DE-6 (2/88)

3 ABSTRACT In 1997, the Kyoto Protocol was adopted to limit greenhouse gas emissions in an attempt to mitigate climate change. The impetus for this thesis is Canada's commitment under this international agreement to reduce national greenhouse gas emissions to 6% below its 1990 levels by as well as reducing our dependency on fossil fuels. The question posed here is: can using biomass from afforested lands and industrial wood waste as a fuel for energy production be an economically viable tool to reduce greenhouse gas levels in the atmosphere? To answer this, I first examine the two stages of afforestation's role in reducing greenhouse gas levels: its initial use as a carbon sink, and then its use as a renewable energy source that substitutes for fossil fuels. Next I examine the potential supply of biomass from afforested lands as well as from industrial wood waste. The production of ethanol from wood-biomass is then considered. Ethanol offers an excellent opportunity for greenhouse gas mitigation due to market potential, an ability to offset significant emissions from the transportation sector, and reduce emissions from COyintensive waste-management systems. I follow with a case study of the economics of a hypothetical ethanol production facility using mathematical modeling. The results indicate that a facility capable of producing 122 million litres of ethanol annually would have a net present value of $245 million over a planning horizon of 36 years. This facility would require a supply of up to 960 oven-dry tonnes of wood-biomass per day and would result in net annual reductions of greenhouse gas emissions of approximately 349,000 tonnes of COyequivalent (non-discounted). This includes the carbon sequestered through the afforestation of 66,000 hectares over 24 years as well as avoided emissions from fossil fuel substitution. ii

4 In conclusion, then, I am able to answer the question with which I began: using biomass from afforested lands and industrial wood waste as a fuel for energy production can be an economically viable tool for reducing greenhouse gas levels in the atmosphere. By doing so, Canada can take a step towards meeting its Kyoto Protocol commitment, and would be taking a leading role in the vital move toward mitigating climate change. This will also reduce reliance on fossil fuels and reduce the sensitivity of transportation fuel prices to changes in gasoline prices. iii

5 TABLE OF CONTENTS ABSTRACT TABLE OF CONTENTS iv LIST OF TABLES vii LIST OF FIGURES viii ACKNOWLEDGEMENTS x CHAPTER 1: INTRODUCTION CLIMATE CHANGE DEFINITIONS 3 CHAPTER 2: OPTIONS TO MITIGATE GREENHOUSE GAS EMISSIONS FORESTRY MEASURES: SEQUESTERING CARBON Land-Use Change Afforestation / / 2.2 ENERGY SECTOR MEASURES: REDUCING EMISSIONS Renewable Energy Fossil fuel Displacement : / CONCLUSIONS 19 CHAPTER 3: WOOD-BIOMASS SUPPLY SUPPLY FROM AFFORESTATION Availability of Land Cost of Land. 22 iv

6 3.1.3 Productivity of Afforested Land SUPPLY OF INDUSTRIAL WOOD WASTE Availability of Wood waste Cost of Wood waste CONCLUSIONS 34 CHAPTER 4: THE MITIGATIVE POTENTIAL OF WOOD-ETHANOL WOOD-ETHANOL TECHNOLOGIES MARKETS AND INCENTIVES FOR ETHANOL PRODUCTION Markets Incentives CONCLUSIONS 43 CHAPTER 5: A CASE STUDY - AN ECONOMIC ANALYSIS OF A HYPOTHETICAL ETHANOL PRODUCTION FACILITY ACCOUNTING AND ECONOMIC ASSESSMENT PROCEDURES Carbon Accounting Cost Accounting The Significance of Time in Carbon Mitigation Studies METHODOLOGY Objective Function Constraints RESULTS Model Descriptions Optimal Allocation of Resources SENSITIVITY ANALYSIS Sensitivity to Elements of Objective Function Sensitivity to Constraints 72 V

7 5.5 ANALYSIS OF RESULTS IN TERMS OF GHG EMISSIONS REDUCTION CONCLUSIONS 84 CHAPTER 6: DISCUSSION RECOMMENDATIONS FOR FURTHER STUDY 92 BIBLIOGRAPHY 94 VI

8 LIST OF TABLES TABLE 1. CHANGES IN COMPONENTS OF TERRESTRIAL CARBON STOCKS UNDER DIFFERENT LAND-USE CHANGES...9 TABLE 2. RATE OF SOIL CARBON INCREASE (ODT/HA) COMPARED TO ADJACENT AGRICULTURAL CROPS FOR A NUMBER OF SHORT-ROTATION PLANTATIONS AT DIFFERENT DEVELOPMENTAL STAGES IN BOTH NORTH AMERICA AND EUROPE 10 TABLE 3. C0 2-EQUIVALENT GREENHOUSE GAS EMISSIONS BY SECTOR, ACTUAL 1990, PROJECTED 2010 AND KYOTO TARGET 13 TABLE 4. ALBERTA ELECTRICITY GENERATION CAPACITY 17 TABLE 5. CARBON EMISSION FACTORS FOR SELECTED ENERGY SOURCES 18 TABLE 6. PERCENTAGE OF FARMS BY TYPE 21 TABLE 7. ALBERTA'S WOOD RESIDUE ESTIMATES (1998) - ANNUAL QUANTITY, ODTS 32 TABLE 8. BY-PRODUCT YIELD FACTORS - GREEN TONNES / MFBM (MILLION METRIC BOARD FEET) LUMBER 33 TABLE 9. SUMMARY OF CANADIAN INCENTIVE PROGRAMS 42 TABLE 10. VALUES OF Y A, B A, AND E A USED IN MODELED SCENARIOS 54 TABLE 11. TOTAL MILL RESIDUES BY DISTANCE ZONE (R D) 64 TABLE 12. SHADOW PRICES OF WOOD WASTE ASSOCIATED WITH SCENARIO-A IN $/ODT 68 TABLE 13. SUMMARY OF RESULTS OF SCENARIO-A BY PLANNING PERIOD 68 TABLE 14. SHADOW PRICES OF WOOD WASTE ASSOCIATED WITH SCENARIO-D IN $/ODT 69 TABLE 15. SUMMARY OF RESULTS OF SCENARIO-D BY PLANNING PERIOD 70 TABLE 16. SUMMARY STATISTICS FROM THREE SCENARIOS FOR BOTH SCENARIO-A AND SCENARIO-D 73 TABLE 17. CONVERSION RATES USED IN THE CASE STUDY OF A HYPOTHETICAL WOOD-ETHANOL PRODUCTION FACILITY 80 TABLE 18. SUMMARY OF G H G EMISSIONS STATISTICS FROM THREE SCENARIOS OF SCENARIO-A AND OF SCENARIO-D. 81 vu

9 LIST OF FIGURES FIGURE 1. SURVEY RESPONSE TO STATEMENT: CANADA NEEDS TO INVEST IN REDUCING EMISSIONS OF GREENHOUSE GASES : 23 FIGURE 2. SURVEY RESPONSE TO STATEMENT: PLANTING TREES WILL YIELD BENEFITS TO MY FARM (E.G., REDUCE WIND, IMPROVE WATER QUALITY) 24 FIGURE 3. SURVEY RESPONSE TO QUESTION: WHAT TYPE OF TREE PLANTING PROGRAM WOULD YOU PARTICIPATE IN TODAY IF YOU WERE ADEQUATELY COMPENSATED FOR LAND AND PRODUCTION LOSSES? RESPONDENTS CAN CHOSE MULTIPLE PROGRAMS 25 FIGURE 4. SURVEY RESPONSE TO QUESTION FOR THOSE RESPONDENTS WHO WOULD VOLUNTARILY PLANT TREES ON THEIR LAND IF IT DID NOT HAVE A NEGATIVE EFFECT ON THEIR ELIGIBILITY FOR GOVERNMENT AGRICULTURAL PROGRAMS OR ANY TAX BENEFITS: WHAT TYPE OF PLANTING WOULD YOU ENGAGE IN? 25 FIGURE 5. SURVEY RESPONSE TO QUESTION: WHAT WOULD YOU SAY WAS YOUR MAIN REASON(S) FOR NOT CONSIDERING PLANTING TREES ON YOUR LAND? 26 FIGURE 6. SURVEY RESPONSE TO QUESTION: AT THE END OF THE CONTRACT, IF THERE WAS NO POSSIBILITY TO EXTEND IT, HOW LIKELY ARE YOU TO TAKE THE FOLLOWING ACTIONS? 26 FIGURE 7. TOTAL ABOVEGROUND GROWTH FUNCTION FOR HYBRID POPLAR 30 FIGURE 8. ANNUAL CARBON ACCUMULATION CURVES FOR POPLAR 31 FIGURE 9. REPRESENTATION OF STUDY AREA DIVIDED INTO ZONES 52 FIGURE 10. CHART OF LINEAR CAPITAL COST FUNCTIONS AS DESCRIBED IN EQUATIONS (5.4A) AND (5.4B) 56 FIGURE 11. CHART OF LINEAR OPERATING COST FUNCTIONS AS DESCRIBED IN EQUATIONS (5.5A) AND (5.5B) 57 FIGURE 12. GRAPHICAL REPRESENTATION OF THE QUADRATIC LAND RENTAL RATE FUNCTION, EQUATIONS 5.7A AND 5.7B 59 FIGURE 13. EFFECT OF EVEN-FLOW CONSTRAINTS ON PLANTING DECISIONS OVER THE PLANNING HORIZON OF SCENARIO-A (THE SMALL-SCALE FACILITY) 75 viii

10 s FIGURE 14. EFFECT OF EVEN-FLOW CONSTRAINTS ON DISCOUNTED COSTS (NPC) AND REVENUES (NPR) OVER THE PLANNING HORIZON OF SCENARIO-A, 75 FIGURE 15. EFFECT OF EVEN-FLOW CONSTRAINTS ON PLANTING DECISIONS OVER THE PLANNING HORIZON OF SCENARJO-D (THE LARGE-SCALE FACILITY) 76 FIGURE 16. EFFECT OF EVEN-FLOW CONSTRAINTS ON DISCOUNTED COSTS (NPC) AND REVENUES (NPR) OVER THE PLANNING HORIZON OF SCENARJO-D 76 FIGURE 1 7A. GRAPH REPRESENTING THE EFFECT OF TIME AND TRANSPORT DISTANCE ON THE SHADOW PRICE OF WOOD WASTE IN SCENARIO-A, THE SMALL-SCALE FACILITY WITH 25% EVEN-FLOW CONSTRAINTS 77 FIGURE 18. EFFECT OF EVEN-FLOW CONSTRAINTS ON GHG BALANCE OVER THE PLANNING HORIZON OF SCENARIO-A.. 82 FIGURE 19. EFFECT OF EVEN-FLOW CONSTRAINTS ON GHG BALANCE OVER THE PLANNING HORIZON OF SCENAR/O-D. 83 FIGURE 20. EFFECT OF EVEN-FLOW CONSTRAINTS ON NET G H G BALANCE (DISCOUNTED AND NON-DISCOUNTED PHYSICAL CARBON EQUIVALENT) AT THE END OF THE PLANNING HORIZON OF SCENARIO-A AND SCENARIO- D 83 FIGURE 21. EFFECT OF EVEN-FLOW CONSTRAINTS ON MAXIMUM ABOVEGROUND CO, SEQUESTRATION (NON- DISCOUNTED) OF SCENARIO-A AND SCENARJO-D 84 ix

11 ACKNOWLEDGEMENTS The research for this thesis has been partially funded by the Sustainable Forestry Management Network. I would like to thank my advisory committee: Dr. G.C. van Kooten; Dr. E. Krcmar-Nozic; Dr. J. Saddler; and Dr. G. Bull. I would also like to thank Dr. Ali Esteghlalian, Pavel Suchanek, Dr. Bryan Bogdanski, and Diane Park for their valuable contributions at various stages of my research. x

12 CHAPTER 1: INTRODUCTION In this thesis, I examine the costs and benefits of substituting wood-biomass for fossil fuels in conjunction with a policy of afforestation. If afforestation is adopted as part of Canada's strategy to reduce greenhouse gas emissions, what are the costs and benefits of using the trees as a substitute for fossil fuels? The impetus for this thesis comes from two related issues: climate change and the international commitment to its mitigation; and the importance of the reduction in our dependency on fossil fuels for energy. Reducing our dependency on fossil fuels, of which there is an essentially finite supply, would reduce the effects of sudden and major fluctuations in oil and gas prices on consumers. The incentive for mitigating climate change through the reduction of greenhouse gas emissions is to avoid the resulting economic, social and environmental impacts of the potential damages. In this thesis I do not enter into arguments about whether the current period of global warming is entirely (or in part) due to human activity or a phase in a natural cycle or natural phenomena (e.g., solar flares). Nor will I argue one way or another on the relationship between climate change and greenhouse gases. The scope of this paper is limited to specific strategies and recommendations identified by the Canadian Government (Forest Sector Table, 1999) as helping Canada meet its commitment to reduce greenhouse gas emissions. 1

13 1.1 CLIMATE CHANGE In December, 1997, at the Third Conference of the Parties in Kyoto, Japan, the Parties to the 1992 United Nations Framework Convention on Climate Change signed a document known as the Kyoto Protocol, agreeing to limit emissions of six greenhouse gases (GHG's). Canada committed to reducing GHG emissions by 6% below 1990 levels by the first commitment period, 2008 to Unfortunately this target does not appear to have been based on an adequate amount of scientific study or economic analysis; when economic growth is taken into account, the 6% figure jumps dramatically. Under business-as-usual scenarios, emissions are projected to increase to 764 megatonnes (Mt) of carbon annually by Canada's Kyoto commitment amounts to approximately 565 Mt of carbon. Therefore, meeting our target requires an effective decrease in emissions not of 6%, but of approximately 26% (van Kooten and Hauer, 2000). In April, 1998, a process was initiated by Canada's federal and provincial/territorial Ministers of Energy and Environment to develop a national implementation strategy on climate change and help determine the costs and impacts of reaching our Kyoto Protocol target. To do this, sixteen committees or Tables were established covering various economic sectors, including the forest sector. In November, 1999, the Forest Sector Table published its Options Report that evaluated options "in terms of their costs and mitigation potential as well as a number of other considerations including their implications for competitiveness, environmental and health impacts and employment" (Forest Sector Table, 1999). As stated above, this thesis examines the costs and mitigation potential of the production of ethanol from biomass supplied from industrial wood waste as well as from trees harvested 2

14 from afforested land. Ethanol's contributions to meeting Canada's Kyoto target are its use as a substitute for fossil fuels, its substitution for other octane-boosting gasoline additives, and its potential to be used in electricity generation. Also, the wood-biomass to be used as feedstock for ethanol production can itself be useful in reducing net emissions of GHG's: afforestation increases the size of the terrestrial carbon sink; using industrial wood waste replaces other carbon-dioxide intensive management methods such as landfill and incineration. Clearly, the production of ethanol from wood-biomass merits serious consideration. 1.2 DEFINITIONS The Parties to the United Nations Framework Convention on Climate-Change (UNFCCC) have agreed to a definition of 'forest' as it applies to land-use, land-use change and forestry activities. Therefore, the definitions of afforestation, reforestation, and deforestation are linked to the definition of a forest. These UNFCCC definitions will be followed throughout this thesis. Forest is a minimum area of land of hectares with tree crown cover (or equivalent stocking level) of more than per cent with trees with the potential to reach a minimum height of 2-5 metres at maturity in situ. A forest may consist either of closed forest formations where trees of various storeys and undergrowth cover a high proportion of the ground or open forest. Young natural stands and all plantations which have yet to reach a crown density of per cent or tree height of 2-5 metres are included under forest, as are areas normally forming part of the forest area which are temporarily unstocked as a result of human intervention such as harvesting or natural causes but which are expected to revert to forest. Afforestation is the direct human-induced conversion of land that has not been forested for a period of at least 50 years to forested land through planting, seeding and/or the human-induced promotion of natural seed sources. Reforestation is the direct human-induced conversion of non-forested land to 3

15 forested land through planting, seeding and/or the human-induced promotion of natural seed sources, on land that was forested but that has been converted to non-forested land. For the first commitment period, reforestation activities will be limited to reforestation occurring on those lands that did not contain forest on 31 December Deforestation is the direct human-induced conversion of forested land to nonforested land. Internationally, these terms have been a matter of contention. The general definition of afforestation is the most agreed upon, and was therefore the only action for which assessed options were closely analyzed by the Forest Sector Table in its 1999 report. However, Canada's definition of afforestation overlaps with Europe's definition of reforestation. Reforestation is defined by European countries as planting trees on land that was once forested (implying a long period of time since the land was denuded), while the Canadian definition includes the reestablishment of trees after harvesting. Despite the fact that the definition of reforestation proposed by Canada is similar to the one used by the United Nations Food and Agriculture Organization (FAO), it was not accepted internationally. Also, under the Protocol, deforestation occurring during the commitment period is considered a debit (source of C0 2 emissions); however, deforestation is not included in the baseline year (1990) measurement. Therefore, the full level of deforestation in the commitment period is a liability (Forest Sector Table, 1999; MacLaren, 1999). In effect, this methodology did not directly acknowledge any change in deforestation rates between the baseline year and the commitment period. In the recent negotiations at the 6th Conference of the Parties in Bonn, Germany (COP6-2, June, 2001), a general consensus was reached regarding the definitional framework. It was agreed that the definitions should pertain to the human-induced change in land-use, and not the exact condition of the land prior to, and following, land-use change. This avoids problems 4

16 related to the wide range of definitions for 'forest' and 'agriculture' for example. As a result, although the final definitions have not been set in the Protocol, the international community, including governments (except the United States) and industry, is now more confident in what activities will be included under the Protocol. First I briefly examine the various international and federal agreements and commitments related to the potential policy options. In Chapter 2, options to mitigate greenhouse gas emissions from both the forestry and the energy sector are discussed. The potential supply of wood-biomass from industrial wood waste and from the harvesting of afforested lands is discussed in Chapter 3. In Chapter 4,1 look specifically at the production and benefits of ethanol as an energy product derived from wood-biomass. The formulation and results of a mathematical model of a hypothetical wood-ethanol facility are discussed in Chapter 5, with conclusions and recommendations presented in Chapter 6. 5

17 CHAPTER 2: OPTIONS TO MITIGATE GREENHOUSE GAS EMISSIONS Carbon dioxide (C0 2 ) mitigation measures can be divided into two categories: sourceoriented measures and sink-enhancement measures. Source-oriented measures try to reduce emissions of carbon into the atmosphere. They include energy sector activities such as energy conservation and efficiency improvement, fossil fuel switching, renewable energy and nuclear energy. Because the transportation and energy sectors are the largest source of carbon, they have been the focus of most of the mitigation work globally. However, the forestry industry's sinkenhancement measures are also important for mitigating atmospheric C0 2 levels. A terrestrial carbon sink such as a forest effectively captures and disposes of atmospheric C0 2, storing the carbon in solid form (e.g. wood). Thus, enhancing forest sinks is a crucial part of mitigating climate change (Jepma et al., 1996). This chapter begins by examining the options for sequestering carbon in the forestry sector through land-use change, and specifically afforestation. The second half of the chapter looks at the options for reducing emissions in the energy sector through the use of renewable energy and fossil fuel substitution. This review reveals significant opportunities that, if pursued, would move Canada in the right direction and help to meet its Kyoto commitment. 6

18 2.1 FORESTRY MEASURES: SEQUESTERING CARBON In forests, C0 2 is taken from the atmosphere and converted, through photosynthesis to carbon and stored as biomass in four carbon pools: aboveground biomass; dead organic matter; belowground biomass; and soil organic carbon. Aboveground biomass consists of tree stems, branches and foliage. Belowground biomass refers to root biomass, and soil organic carbon (SOC) consists of microbiotic organisms in the soil. The success of forestry measures to sequester carbon must examine their effects on each of these carbon pools. The Kyoto Protocol identifies a number of carbon sequestration options with potential for reducing greenhouse gas emissions. The options related to the terrestrial carbon sink, for which credits or debits are assessed (in Article 3.3 of the Kyoto Protocol), are reforestation, afforestation and deforestation (see Chapter 1). The Intergovernmental Panel on Climate Change GHG inventory guidelines assume that the forest product pool is in equilibrium, and that biomass energy is neutral (i.e. zero emission credits or debits). These assertions assume that the forests are managed sustainably. Jepma et al. (1996, p.246) identify the following seven subclasses of forestry measures to mitigate C0 2 emissions: 1) Halting or slowing deforestation; 2) Reforestation and afforestation; 3) Adoption of agroforestry practices; 4) Establishment of short-rotation woody biomass plantations; 5) Lengthening forest rotation cycles; 7

19 6) Adoption of low-impact harvesting methods and other management methods that maintain and increase carbon stored in forest lands; 7) Sustainable exploitation of forests, sequestering carbon in long-lived forest products. These options are viewed as intermediate responses as they are all ultimately limited (Marland et al., 1997; Wright et al., 1993), the first six by area availability and the seventh through the effect of leakage on market demand for timber and the eventual decay of wood (Jepma et al., 1996). However, as this thesis will show, combining forestry measures with energy measures offers the potential for continuous C0 2 mitigation through sequestration in combination with fossil fuel switching and renewable energy. Thus, these forestry measures are certainly worth further consideration Land-Use Change Converting non-forest land to forests will typically increase the size of the terrestrial carbon sink due to increases in carbon in aboveground, belowground and soil organic pools (Table 1). The diversity of flora and fauna will also increase, except in situations where biologically diverse non-forest ecosystems are replaced by forests that consist of single or a few species (e.g., plantations of monocultures and especially exotic species) (IPCC, 2000). Soil carbon plays a significant role in the effects of land-use change (including afforestation) on the carbon balance, and is recognised in the accounting approaches regarding land-use change in the Kyoto Protocol. The amount of carbon stored in the soil organic carbon pool is about 3 times that found in aboveground and belowground pools, and twice the amount 8

20 found in the atmosphere (Eswaran et al., 1993). Whether the soil organic carbon levels increase or decrease with afforestation depends on the initial conditions of the soil and its location. In most regions, conversion of natural to agricultural land-use results in a rapid depletion of soil organic carbon (SOC) content. Only in those regions with low inherent fertility (nutrient deficiency or toxicity), that have been cultivated for an extended period using best management practices (e.g., fertilisation), is it possible for afforestation to lead to SOC depletion (Lai and Bruce, 1999). SOC depletion is also possible with afforestation if the length of rotation is too short, thereby not allowing sufficient carbon transfers from litterfall and root growth into the soil. Table 1. Changes in components of terrestrial carbon stocks under different land-use changes Source: IPCC (2000). (Direction of arrows indicate either and increase or decrease in carbon stocks. Double arrows indicate a faster relative rate of change.) Land-use Change Cultivated land to forest Non-cultivated land to forest Forest to cultivated land Biomass Litter/Woody Debris Above Below Short-term Long-term Soil Wood ground ground Organic Products Matter and Landfills ft ft ft ft ft b ft fi fi? fi b u u u fi - Forest to grazing land a b uu u fi a u? - It is assumed here that upon conversion of forest to grazing land, woody debris is not, or is only partly, removed. Dead roots, in particular, would not normally be removed. If woody debris is removed or burned, only dead roots would add to the short-term increase of woody litter. Assuming that the forested land is subsequently harvested and used for wood production. 9

21 Lai and Bruce (1999) suggest that growing specific species for biofuel production is an important strategy for restoring degraded soils. "Assuming C sequestration rate of 0.25 Mg/yr [0.25 tonnes/yr]... the C sequestration potential for restoring severely damaged cropland soils is Pg/yr [25 tonnes/yr]." (Lai and Bruce, 1999, p. 179.) In a review of the limited studies in this area, Samson et al. (1999) found that estimations of soil carbon increases compared to adjacent agricultural crops ranged from -3.5 to +13 Mg ha" 1 yr"', depending on plantation species, site, and age (Table 2). The characteristics of tree species considered suitable for short-rotation plantations provide an excellent opportunity for carbon sequestration in soils. The combination of biomass inputs through litterfall, lignified organic matter and deep root systems, along with increased shading, permits significant soil carbon increases under short-rotation plantations (Samson et al., 1999). Table 2. Rate of soil carbon increase (ODt/ha) compared to adjacent agricultural crops for a a number of short-rotation plantations at different developmental stages in both North America and Europe. Source: Samson et al. (1999). Source Location Species Depth sampled (cm) Plantation Age (years) Carbon (Mg ha'yr 1 ) Zan, 1998 Quebec Willow Mehdi et al., 1999 Quebec Willow Hansen, 1993 North-central U.S. Poplar Grigal & Berguson, 1998 Minnesota Poplar Estimated Data Dewar & United Willow Cannell, 1992 Kingdom Poplar Hansen, 1993 Grigal & Berguson, 1998 North-central U.S. Poplar Minnesota Poplar C= soil carbon accumulation; age = age of plantation; Equation r = Loss (not quantified) 0-30 "C = ( age) / age

22 Land-use change also changes the nature of economic activity. If we look at converting land from agriculture to forestry, there are benefits in the form of new socio-economic opportunities related to the forestry activity. However, there are also costs in the form of forgone agricultural benefits. Fearnside (1997) discusses the social impacts of land-use change including population displacement and loss by some (often disadvantaged) section of society of the use of common property (IPCC, 2000) Afforestation Due to its large areas of marginal agricultural land, Canada can reduce net C0 2 emissions through afforestation. From their studies in New Zealand, Ford-Robertson et al., (1999) conclude that "pastoral farming [e.g. raising livestock] is a considerable source of greenhouse gases, and afforestation would rapidly reverse the situation and provide a substantial carbon sink" (p. 143). There are three general options for lands afforested for carbon sequestration: leave trees standing as a carbon sink, harvest the timber for wood products, or harvest the trees as a biomass-fuel. Leaving wood standing does not take advantage of potential economic opportunities and is not an option likely to appeal to landowners. There are also considerable problems with the second option. First, although sequestering carbon in wood products allows for a relatively slow rate of C0 2 emissions due to the life span of the products, only about 40% of the log volume is used in creating those wood products. That leaves the remaining 60% of the log volume as waste (Row and Phelps, 1995). The second problem is "leakage." In the context of changing land-use, leakage can occur when, due to afforestation, a significant increase in supply of wood products 11

23 results in a drop in prices that lowers the marginal value of forest production. 1 Where that shift in the marginal value is significant enough to result in a switch to agriculture production, the result is deforestation; a reduction in the size of the global carbon sink thereby negates the positive effect of afforestation (Sohngen and Sedjo, 1999). Afforestation itself can result in leakage by reducing the non-timber value of existing trees and forests in other areas. Therefore we look to the third option. Harvesting fast-growing trees such as hybrid poplar from afforested land offers a relatively inexpensive source of wood-biomass for energy conversion. The use of such plantations as a source of energy feedstock can result in emission savings by offsetting fossil fuel use. Also, if managed sustainably (e.g. trees are planted to replace those harvested), such plantations can result in zero net C0 2 emissions depending on the discount rate (MacLaren, 1999; van Kooten and Hauer, 2000). In conclusion, afforestation can increase the size of the terrestrial carbon sink which in turn contributes to net reductions in greenhouse gas emissions. This benefit is relatively shortlived as there is a finite amount of land available. However, the opportunity for long-term reductions lies in the use of the afforested biomass as feedstock for energy production, thereby offsetting emissions from the production and combustion of fossil fuels. 2.2 ENERGY SECTOR MEASURES: REDUCING EMISSIONS Terrestrial sinks keep carbon locked up and out of our atmosphere. However, in order to reduce the level of atmospheric greenhouse gases in the long term, we must reduce our emissions ' This assumes no increase in demand. A concurrent increase in demand reduces the effects of leakage: demand for wood products can increase along with the increasing size of the population 12

24 of them in the first place. The transportation sector is the largest source of anthropogenic greenhouse gas emissions in Canada, followed by the industry and energy sectors (Table 3). Emissions from these sectors can be reduced through a number of actions including the use of renewable energy, the displacement of fossil fuel use, and by improving the efficiency of energy consumption. The first two actions are discussed below while the third is discussed specifically in regards to ethanol in Chapter 4. Table 3. C0 2 -equivalent greenhouse gas emissions by sector, actual 1990, projected 2010 and Kyoto target, Mt. Source: van Kooten and Hauer (2000). Sector Actual 1990 Projected 2010 Kyoto Target Difference 11 Residential Commercial Industrial Transportation Fossil fuel Production Electricity Agriculture Other TOTAL a Projected 2010 minus Kyoto target. Column entries may not sum to total due to rounding Renewable Energy In the Kyoto Protocol, the emissions from renewable energy production such as the combustion of biofuels are not included in the accounting of a country's GHG inventory. Therefore, in terms of the carbon balance, converting wood-biomass into energy production includes the following benefits: the maintenance of an emission-sequestration equilibrium; the one-time gain in carbon uptake from initial afforestation; and off-setting emissions from reduced 13

25 use of fossil fuels. In order to realise these benefits, the obstacles to achieving an increase in the use of renewable energy must be overcome. Before climate change issues came to the forefront, the doubling of world oil prices in 1979 led to considerable interest in renewable energy alternatives. Studies by Helliwell and Margolick (1980) looked at the economics of electricity generation from wood waste and found that, even before 1979, the use of wood wastes to replace fossil fuels was highly profitable from the point of view of society. The Canadian forest industry is a large consumer of purchased electricity despite the fact that it self-generates approximately half of its energy requirements. The forest industry is constrained in many cases from achieving economies of size in power generation by either an inability to sell excess power into the provincial grid or by a lack of fibre to use as fuel (CPPA 2000). Changes in the structure of the electricity market are required to permit an increase in wood waste utilisation. "The forest products industry is unique among major industrial energy consumers in that its production processes and by-products create the potential for the industry to generate renewable energy and virtually eliminate direct fossil fuel C0 2 emissions. Maximizing the energy generated from biofuels... creates a significant opportunity for the forest sector to contribute to reducing Canada's GHG emissions" (Forest Sector Table, 1999, p. 13). Currently, much of Canada's industrial wood waste is going into landfills. However, as demand for industrial wood waste increases beyond supply, the value of wood fibre from fast growing energy plantations will increase. In British Columbia, the main reasons that large industrial consumers of electricity, such as pulp and paper firms, did not switch to wood waste was because of the low price of natural gas offered by the provincial utility. In their analyses, Helliwell and Margolick (1980) found that the 14

26 optimal scale of electricity generation was bound by the introduction of a spatially determined cost function for wood waste. (This relates directly to transportation costs, which are examined in Chapter 5). They also found that energy policies in British Columbia were foreclosing or delaying a substantial amount of investment in the energy use of wood wastes. This assessment is confirmed by the following comparison of British Columbia and Alberta's policies. The energy policies of British Columbia have not changed significantly in the past 20 years and neither have the levels of investment in renewable energies, except where necessary due to environmental regulations. 2 BC Hydro, a public utility, supplies electricity to the province and export market principally from hydroelectric generating stations (about 90% of its total capacity). The remaining capacity is generated from one conventional thermal station and from two combustion turbine stations. BC Hydro estimates that their current generating capacity can meet demand until 2007 based on an increase in consumption of 2% per year. As new, largescale hydro developments are not politically acceptable, BC Hydro is now looking to wind, small hydro plants, hydrogen technologies and biomass to meet future demand. Currently BC Hydro is assisting in the construction of one biomass-fuelled pilot plant scheduled to produce 500 kilowatts (kw) of electricity by 2001 (BC Hydro, 2001) and has agreed to buy power from a proposed 25 megawatt (MW) wood waste powered generating station operated by Lytton Power Ltd. Studies are also underway to investigate potential locations for wind power generation. Small and micro-scaled hydroelectric generators appear to be the main focus of the utility, and some progress has been made with the help of the provincial 2 Due to air quality concerns, beehive burners, commonly used by sawmills to dispose of wood waste, are being phased out. Some cogeneration plants have been built in the areas where disposal costs and waste volumes are highest but most wood waste is now put into landfills. 15

27 government's restructuring of water rental rates. Unfortunately, based on their progress to date, BC Hydro's commitment to meet 10% of its load growth through green energy sources by 2010 is unlikely to be met. The province of Alberta began restructuring its electric utility industry in 1995 to introduce competitive market forces, thereby increasing incentives for efficiency, eliminating regulatory burden, promoting customer-oriented service, and putting downward pressure on electricity prices (Alberta Energy, 2001). The results of this deregulation in Alberta have included an increase in Power Pool 3 participants from 38 in 1997 to 59 in 2000, and a total of 1,395 MW of new generating capacity between 1998 and 2000.' The new generation for 2001 and proposed generation for 2002 to 2006 is shown in Table 4. Although coal has made the greatest gain, renewable energy sources such as wind and biomass are increasing in usage despite the lack of a specific "green energy" policy in Alberta. The paucity of current, regionally specific research in this area is likely due to the relatively low oil and gas prices in North America. However, the recent substantial increases in North American oil and gas prices as well as concerns over climate change have created renewed interest in renewable energy strategies. In Europe, particularly Scandinavia, where fossil fuel prices are already high, there has been greater development of full-scale biomass energy operations. 16

28 Table 4. Alberta Electricity Generation Capacity. Source: Alberta Energy (2001). a b c Generation Type Installed Capacity (MW) Coal Natural Gas Cogeneration' Gas Turbine Waste Heat Wind Hydro Flare Gas b Gas Combined Cycle Biomass & Waste Wood TOTAL Cogeneration is the combined production of electrical power and useful heat. Flare Gas is waste gas captured in oil wells before they are flared. The gas is then used to generate electricity. Combined Cycle is a variation on the cogeneration process, in which the useful heat is used to operate a steam-driven generating process to produce additional electrical power Fossil Fuel Displacement The substitution of renewable energy products (such as ethanol produced from sustainably managed plantations) for fossil fuels results in a reduction in the emission of C0 2 and other greenhouse gases into the atmosphere. The few studies that have looked at the net reduction in carbon emissions show a range in estimated emission savings of 1.7 to 9.0 tonnes of carbon per hectare per year depending on forest type, discount rates, energy conversion efficiency, and the particular fossil fuel being displaced (Wright et al., 1993; van Kooten et al., 1999b). Technological innovations resulting in increases in conversion efficiency for biomass- 3 The Power Pool, created under the Electric Utilities Amendment Act, 1998, is an independently governed body through which all electricity generation is bought and sold in the province of Alberta. 17

29 fuels will result in increased benefits in net reductions of atmospheric carbon through the displacement of fossil fuels. The amount of emission savings are primarily a function of the carbon content of the feedstock and the substitution ratio of biomass to fossil fuel required to produce an equivalent amount of energy (Table 5). Van Kooten et al. (1999b) estimate the cost of substituting woodbiomass for coal in electricity production ranges from $27.60 to $48.80 per tonne of carbon. This is based on a value of $7.50 per m 3 for hybrid poplar on energy plantations, a substitution ratio of m 3 of wood per tonne of coal 4 to generate an equivalent amount of energy. Table 5. Carbon Emission Factors for Selected Energy Sources. Source: van Kooten et al. (1999b). Fuel Higher Heating Value Carbon Content Carbon Coefficient (MJ per kg) (kg C per kg fuel) (kg C per GJ) Wood Coal Natural Gas (m" 3 ) 0.482(iri 3 ) Crude Oil Kerosene (jet fuel) Gasoline Diesel fuel Liquid petroleum gas Black Liquor "Source: Levelton (1999). In Table 5 we see that more wood, and therefore more carbon, is required to produce an amount of energy equivalent to fossil fuels. However, wood is a renewable resource and the carbon emitted through energy consumption is assumed to be fully sequestered by the next 4 Based on the range in Higher Heating Value for wood shown in Table 5. 18

30 rotation of trees, resulting in zero net emissions. Fossil fuels on the other hand are nonrenewable and therefore the amount combusted is fully accounted as a debit on a country's GHG emissions inventory, as specified in the Kyoto Protocol. 2.3 CONCLUSIONS Afforestation will result in an increase in the size of the terrestrial carbon sink. As there is a finite amount of land available for afforestation, and trees do not live forever, we must look for a use for the mature trees to provide longer-term carbon sequestration. We encounter the problem of leakage when wood products are considered; therefore, the alternative of using the afforested wood-biomass for energy is a preferred option. Renewable energy production has the advantage of being emissions-neutral under the Kyoto Protocol. Net emissions can be further reduced through the use of wood waste that would have been incinerated or put into landfills, and through the displacement of fossil fuels that would have been burned to provide the energy previously. There are also opportunities for industry and communities to reduce their electricity costs through biomass-fuelled power generators scaled to their particular requirements. The establishment of plantations and the operation of biomass systems will also result in an increase in employment, with most of the jobs created in rural areas. In conclusion, greenhouse gas mitigation would be realised most effectively through the combination of sink-enhancement and source-oriented measures. A system of renewable energy production that would use biomass from afforested land as feedstock would displace the use of fossil fuels in energy production while increasing our terrestrial carbon sink. This certainly would assist Canada in meeting its Kyoto commitment. 19

31 CHAPTER 3: WOOD-BIOMASS SUPPLY The supply of wood-biomass for bioenergy production relies on two main sources from the forest sector: afforested land, and industrial wood waste. (Another potential source not covered in this thesis is forestry residue left over at logging sites and log sorting areas.) This chapter will examine the availability and costs of biomass supply from afforested land and wood waste, as well as productivity from afforestation, as these factors limit the scale and economic potential of wood-based bioenergy and its contribution to greenhouse gas reduction. 3.1 SUPPLY FROM AFFORESTATION The supply of biomass from afforested lands is a function of the amount of land available, the productivity of that land, the growth and yield of the species planted, and the costs associated with all of these factors. It is important to note that, although many previous studies on the potential of afforestation to contribute to Canada's Kyoto commitment have assessed the physical availability of suitable land, few have assessed its economic availability. These and other factors will be discussed herein Availability of Land The physical availability is fairly easy to estimate given government statistics on land and agriculture. However, the choice of statistics makes a considerable difference in the final results, as is clear from the following two examples. 20

32 One method of estimating physical availability is to determine how much of the agricultural land is not being actively managed for agricultural production. Agricultural statistics from a 1996 Alberta census (Government of Alberta, 2001) show a total farm area of approximately 52 million acres (21 million hectares) and an average farm size of 881 acres (357 hectares). The latest farm production figures available from the Alberta Government (2001) show that 21.6 million acres of agriculture crops will be harvested in 2001 (including 3.2 million acres in summerfallow). In Alberta, about 45% of farmland (based on the average farm size) is used for cattle farming and therefore does not produce crops (Table 6). Assuming cattle farms are not included in the measurement of crop acreage, and an average farm size of 881 acres for both crop and cattle operations, the current area of cropland not in managed crop production would be 7 million acres (= 52 million acres x (1-45%) million acres), or 2.8 million hectares. 5 That 2.8 million hectares could be considered as potentially available and suitable for afforestation. Additional land may be available if some of the area occupied by cattle farms could accommodate trees, and if some of the current crop acreage is only marginally productive for agriculture and would be better suited to tree growth. Table 6. Percentage of Farms by Type. Government of Alberta (2001). Farm Type % of farms Cattle (Beef) 45.2 Grain and Oilseed (except wheat) 18.9 Wheat 9.6 Miscellaneous Specialty 8.8 Field Crop (except grain and oilseed) 7.0 Other Types 10.5 Total % of farms = 45% of farm area assuming equal farm size (881 acres). Separate averages for the size of crop and cattle operations would improve the accuracy of the estimate. 21

33 Another method, using Statistics Canada data, was used by van Kooten et al. (1999a), estimating that 7.25 million hectares of marginal agricultural land are physically suitable for planting trees in the boreal Peace River region of north-eastern British Columbia and northwestern Alberta. However, the range in estimates of land availability is not the primary concern, because it is the cost of land that restricts the potential scale of afforestation, not its physical availability Cost of Land There may be several million acres of land that would be suitable for afforestation, but the area available ultimately depends upon the landowner: what is the value of that land; how much would they have to be paid to plant trees on it? Very few studies have addressed this aspect of land availability in the economics of afforestation. Therefore, as part of the research for this paper and related projects, a survey of landowners in western Canada (Suchanek et al., 2001) was conducted to determine their willingness to accept tree planting and the significance of a variety of factors upon their decisions. It is unrealistic to assume simply that substitution will occur if the value of tree production is greater than the value of the current agricultural regime, as there are many factors other than crop value that affect land rent or the landowners' willingness to accept afforestation (Jepma et al., 1996). Factors range from relatively quantifiable values such as efficiencies of scale and transaction costs, to non-market values such as visual quality (aesthetics) and resistance to change. Thus, in addition to personal and farm-business data, the Suchanek et al. survey elicited detailed information about a farmer's attitudes and preferences regarding climate change, tree planting contracts, type of planting, species, and many others (see Suchanek et al., 2001). 22

34 A selection of trends obtained directly from the survey results are interesting as they reflect the opinions of the respondents with respect to afforestation. The majority of landowners surveyed are aware of the climate change issue and most of the respondents agreed that some investments are needed to reduce greenhouse gas emissions (Figure 1). Most respondents felt that planting trees would yield benefits to their farm (Figure 2), such as prevention of soil erosion, providing shade, making use of idle land, and diversifying production. Most respondents also indicated that they would voluntarily plant trees if it did not have a negative effect on their eligibility for government agriculture programs or tax benefits. no strongly disagree neutral agree strongly agree opinion/don't disagree know Figure 1. Survey response to statement: Canada needs to invest in reducing emissions of greenhouse gases. 23

35 no opinion/don't strongly disagree disagree neutral agree strongly agree know Figure 2. Survey response to statement: Planting trees will yield benefits to my farm (e.g., reduce wind, improve water quality). The landowners' acceptance of different types of plantations was another consideration, as the type of plantation used can have significant impacts on biomass yield, carbon sequestration rates, and financial costs. Types of plantations include block, shelterbelt, strip planting, and planting individual trees. Block planting would generally be the least expensive option per tree and would yield the highest volume and carbon sequestration levels per hectare. The planting and harvesting of individual trees would be the most expensive per tree and would yield lower volumes per hectare. The cost of planting and harvesting shelterbelts, on a cost-pertree basis, is less than individual trees but more than block planting. When adequate compensation was offered for planting trees, the survey respondents did not indicate any preference regarding the type of plantation except a slightly greater preference for shelterbelts (Figure 3). However, for those respondents who would voluntary plant trees, their preference was for shelterbelts (Figure 4). This implies that they would require more compensation for block planting, which would take up more of their land. 24

36 Figure 3. Survey response to question: What type of tree planting program would you participate in today if you were adequately compensated for land and production losses? Respondents can chose multiple programs. 69% shelterbelt individual experimental block forest alley cropping Christmas trees planting planting trees Figure 4. Survey response to question for those respondents who would voluntarily plant trees on their land if it did not have a negative effect on their eligibility for government agricultural programs or any tax benefits: What type of planting would you engage in? Those respondents who chose not to plant, even when offered adequate compensation, did so primarily because of their resistance to change (Figure 5). When those who said that they would plant trees if adequately compensated were asked what they would do with the trees at the end of the contract period, their response shows an appreciation for the economic value of the 25