What role for advanced biofuels in Canada? A Q&A of policy impacts and options

Transcription

1 What role for advanced biofuels in Canada? A Q&A of policy impacts and options Prepared

2 TABLE OF CONTENTS Table of Contents List of abbreviations... 3 Introduction... 4 Who are we?... 4 What is this document?... 5 Executive Summary... 7 Findings... 7 Recommendations... 8 Advanced Biofuels: Technology and Policy... 9 What are advanced biofuels?... 9 What are advanced biofuels in comparison to conventional biofuels?... 9 What are current commercial biofuels? What are the technologies to produce advanced biofuels What are Oleochemical processes? What are Thermochemical processes? What are Biochemical processes? What are Hybrid technologies? What is the current commercialization status of advanced biofuels? What are the specific technology challenges for advanced biofuel production? What are the challenges to producing advanced biofuels? What specific policies can promote advanced biofuels? Advanced Biofuels and Macro-Economic Impacts What are the constraints on a reliable feedstock supply? What size of subsidy is necessary? What are the inter-industry effects of biofuel production? What is the role of advanced biofuels in reducing GHG emissions? What are the take away messages from this project? Maximizing the Environmental Benefits of Advanced Biofuels in Canada What is the best mechanism for evaluating environmental, economic and social sustainability of advanced biofuels? What areas are covered by the Roundtable on Sustainable Biomaterials (RSB), as described through the Principles and Criteria of RSB? What is the best scientific methodology or tool to inform the RSB framework? How well does life cycle sustainability assessment (LCSA) inform each pillar of sustainability? How should LCSA evolve to better support the implementation of the RSB framework in Canada?. 23 Regulations for Oilseeds as Alternative Fuel Feedstocks What are oilseeds and how are they used in alternative fuels? What types of Canadian-grown oilseeds are currently used in alternative fuels? Do Canadian farmers produce enough oilseeds to supply food and alternative fuels?

3 Are there non-food oilseeds and other oil and fat-based sources for producing alternative fuels in Canada? What are the benefits of using oilseeds as feedstocks for alternative fuels? What are the environmental risks associated with the use of oilseeds for alternative fuels? How can they mitigated or avoided? How do Canadian regulations affect oilseed use in alternative fuels? Are there federal and/or provincial programs in place to support and promote the use of oilseeds for alternative fuels? What is the potential for international trade of Canadian-grown oilseeds and Canadian-produced alternative fuels? What are the attitudes of Canadian farmers towards alternative fuels? What are the opportunities to advance alternative fuels from Canadian oilseeds? Policy Approaches and Lessons for Biofuel Policy in Canada What Canadian national goals and priorities can biofuels contribute to? What policy support programs are currently being utilized to support biofuel production and consumption? What are renewable fuel mandates? What types of producer-based incentives are available? What types of research and development (R&D) programs are available? What are carbon-based mechanisms? Why is there industry uncertainty regarding continuing public policy support for biofuels? What is the future for biofuel policies in other jurisdictions, such as the US and the EU? What are some of the important lessons Canada can learn from other jurisdictions? REFERENCES

4 List of abbreviations AAFC Agriculture and Agri-Food Canada BCAP U.S. Biomass Crop Assistance Program BFN BiofuelNet Canada BRM Business Risk Management Programs CAD Canadian Dollar CAFOO Canadian Food Carbon Footprint Calculator CO carbon monoxide CO 2 carbon dioxide COP21 Paris Climate Conference CRFA Canadian Renewable Fuels Association DME dimethyl ether EPA Environmental Protection Agency EU European Union FAME fatty acid methyl esters FQD Fuel Quality Directive GF2 Growing Forward 2 GHG greenhouse gases HC hydrocarbons HDRD hydrogeneration-derived renewable diesel HEFA hydroprocessed esters & fatty acids HQP highly qualified personnel HTL hydrothermal liquefaction HVO hydrotreated vegetable oils ILUC indirect land use change LCA life cycle assessment LCC life cycle costing LCSA life cycle sustainability assessment LCFS low carbon fuel standard NAFTA North American Free Trade Agreement NGO non-governmental organization PPP public/private partnerships R&D research and development RED Renewable Energy Directive RFS Renewable Fuel Standard RFS2 U.S. Renewable Fuel Standard (second iteration) RICanada Renewable Industries Canada RINs Renewable Identification Numbers RSB Roundtable on Sustainable Biomaterials RSB C&I Framework Roundtable on Sustainable Biomaterials Criteria and Indicators Framework PM particulate matter S-LCA social life cycle assessment SAF sustainable aviation jet-fuel SO x sulfur oxides ULICEES Unified Livestock Industry & Crop Emissions Estimation System UNFCCC United Nations Framework Convention on Climate Change USDA United States Department of Agriculture 3

5 Introduction The following document was generously funded by a Knowledge Translation Fund (KTF) grant from BiofuelNet Canada. Who are we? We are academic researchers within the BiofuelNet research consortium. BiofuelNet (BFN) is an integrated community of academic researchers, industry partners, and government representatives who engage in collaborative initiatives to accelerate the development of sustainable advanced biofuels. Advanced biofuels are produced from non-food materials, such as algae, agricultural residues, forestry by-products, and municipal wastes. Using residues from forestry and farming systems reduces agricultural impacts and prevents conversion of natural habitats to farmland. Advanced biofuels can also be produced from energy crops grown on marginal lands that are unsuitable for food production. BFN s research is structured around themes of feedstock, conversion, utilization, and social, economic and environmental sustainability. BFN s structure involves 10 focused projects each containing multiple work packages. Our project within BiofuelNet focuses on domestic and international policy regimes. 4

6 By understanding the changing landscape of biofuel policies in other countries, our research group focuses on the variety of policy tools available for application in Canada. In light of the potential policy tools available, our research project examines the potential impacts of advanced biofuel policy on Canada s economy, particularly in terms of price impacts as land use competition rises. Our research project studies the environmental impacts of advanced biofuel policy by assessing the sustainability of biofuel development using life cycle analysis. The key objectives of our project are to: Address the issue of domestic and international policy uncertainty in sustainable biofuels governance; Evaluate the economic and environmental impact of biofuel policy across Canada, given variations in policy regimes, natural resources, and capacity; Consider policy mechanisms that can facilitate the use of energy crops in Canada, while minimizing environmental impacts; and Evaluate policy tools that can facilitate advanced drop-in fuels for specific applications, including aviation and marine use. What is this document? In a question-and-answer format, this document provides policy makers and other interested parties in Canada the latest research from BiofuelNet s (BFN) Domestic and International Policy project. A collaboration among the Highly Qualified Personnel (HQP) involved with this project, the document draws heavily on the Policy project s research to address the following question: what contribution can advanced biofuels make towards broader economic and environmental policy priorities? In addressing this question, this document aims to fill knowledge gaps in the Canadian advanced biofuels policy discussion and provide important lessons and policy options for the development of a Canadian advanced biofuel policy and assist the federal and provincial governments in meeting climate change and economic development goals. We encourage policy makers to contact the HQP who have contributed to this document with any questions or inquiries. The first section of this document, Advanced Biofuels: Technology and Policy presents research from the Aviation/Marine Drop-In Biofuels work package. Led by Professor Jack Saddler at the University of British Columbia, the objective of this work package is to assess and propose potential policies that could be used at a regional, national and international level to promote the development and deployment of advanced biofuels, specifically renewable aviation fuels (Biojet) with an emphasis on Canada. The second section of this document presents research on the macro-economic impacts of advanced biofuels. Led by Professor James Rude at the University of Alberta, the objective of this work package is to determine the economic implications of Canadian second generation biofuel production, given alternative forms of government support, alternative regulatory regimes, and different competitive environments with respect to trade in biofuel s feedstocks and the biofuels. The third section of this document presents research from the Assessing Sustainability work package. Led by Professor Warren 5

7 Mabee of Queens University, the objective of this work package is to develop a conceptual framework for the environmental evaluation of biofuels in Canada. Using existing life-cycle analysis analyses in Canada and around the world, it provides a simplified framework that can be utilized to assess the environmental impact of biofuels. The fourth section of this document presents research from the Environmental Policy Mechanisms work package, which is led by Professor Joann Whalen at McGill University. The objective of this work package is to develop and assess a representative set of environmental indicators/criteria that can be used to better determine and assess potential environmental impacts from purpose grown bioenergy crops. The fifth and final section presents research from the Policy Uncertainty work package. Led by Professor Grace Skogstad at the University of Toronto, this work package describes the drivers of policy uncertainty in some of the biofuel markets that are expected to have the most impact on Canadian biofuels, namely the U.S., the European Union (EU), and Brazil. If you have any questions or inquiries regarding BFN s Policy Project or regarding this document please contact the project leader, Professor Grace Skogstad (skogstad@chass.utoronto.ca), or the project manager, Julia Bognar (j.bognar@mail.utoronto.ca). If you have any questions regarding a specific section of this document, please contact the authors: Section 1 - Technology and Policy: Susan van Dyk (jsvandyk@mail.ubc.ca) Section 2 - Macro-Economic Impacts: James Rude (jrude@ualberta.ca) or Marty Luckert (marty.luckert@ualberta.ca) Section 3 - Maximizing Environmental Benefits: Massimo Collota (m.collotta@unibs.it) or Warren Mabee (mabeew@queensu.ca) Section 4 - Regulations and Trade: Mónica Soria Baledon (monica.soriabaledon@mail.mcgill.ca) Section 5 - Policy Lessons: Julia Bognar (j.bognar@mail.utoronto.ca) or Matthieu Mondou (matthieu.mondou@utoronto.ca) 6

8 Executive Summary Findings Advanced biofuels can contribute significantly to the de-carbonization of Canada s energy supply, particularly in the transportation, including aviation, sector. They can also help diversify the Canadian and global energy supply, and create opportunities for international trade in Canadian-grown feedstocks and fuels. The production of advanced biofuels has mixed economic effects. There are new jobs and profits for some feedstock producers, however, policies to promote advanced biofuels can cause oil and gas price increases. To contribute to carbon reduction goals, the environmental, economic and policy-related concerns of advanced biofuels must be addressed. Some feedstocks for advanced biofuels, such as for lignocellulosic ethanol, compete for scarce agricultural land. Intensified land use to produce feedstocks poses a risk to water and air quality. Advanced biofuels also have potential impacts on human and labour rights, rural and economic social development, land rights, and food security, especially in developing countries. The Canadian biofuels industry is constrained by its current production capacity. High costs and technological limitations associated with production hamper investment and prevent various advanced biofuels from reaching the commercial stage. Commercially available advanced biofuels are not cost-competitive with petroleum fuels. Policy uncertainty also contributes to investment aversion. Biofuel support programs in Canada have either expired or are set to expire post Without policy guarantees of a role for advanced biofuels in the global energy supply, the biofuel industry is reluctant to expand its current production levels. Canada also lacks a pan-canadian network of regulations and policies. Federal and provincial renewable fuel regulations have no equivalency agreements and thus have differing points of compliance, policies, scope, responsible authorities, and even enforcement procedures. 7

9 Recommendations 1. Biofuel support policies should include mandatory sustainability criteria to ensure that biofuels have tangible environmental benefits. 2. Sustainability criteria should include GHG performance requirements that increase over time and focus on efficient land use. 3. The development of sustainability criteria should be based on a lifecycle analysis done by scientific experts, subject to robust verification, and with opportunities for stakeholders to provide relevant data. 4. To the extent possible, a life cycle sustainability assessment (LCSA) should be used to assess the environmental, economic, and social impacts of advanced biofuels. 5. Mandatory compliance of sustainability criteria should be through third party certification, such as the Roundtable on Sustainable Biomaterials (RSB) for advanced bio-based products. 6. Carbon pricing mechanisms, such as national- and provincial-level carbon taxes and low carbon fuel standards, should be implemented in order to promote advanced biofuels. 7. Extending and increasing blend mandates should be used to guarantee a market for advanced biofuels. 6. Stable and long-term funding programs, such as grants, loans, or tax credits that promote and help to reduce the risks of investment, are important to bring advanced biofuels to market and to increase consumption. 7. The extensive subsidies for fossil fuels should be diminished in order to allow advanced biofuels to compete on a level playing field. 8

10 Advanced Biofuels: Technology and Policy Susan van Dyk University of British Columbia Forest Product Biotechnology/Bioenergy Group (FPB), Department of Wood Science Faculty of Forestry What are advanced biofuels? A: Advanced biofuels are not clearly defined. However, two main criteria are typically used to distinguish conventional (first generation) from advanced (second generation) biofuels: Feedstock advanced biofuels are produced from non-food feedstocks such as agricultural or forest residues. These feedstocks are sometimes called advanced feedstocks. GHG emissions reduction potential advanced biofuels reduce GHG emissions by at least 50% or more compared with gasoline or diesel. In a few instances, the stage of commercial development is also used as a criterion, with technologies at a pre-commercial stage of development considered advanced, but becoming conventional upon reaching commercial stage. What are advanced biofuels in comparison to conventional biofuels? How biofuels are defined may differ in different regions, with the European Union and the United States providing examples. Under US legislation, bioethanol from sugarcane in Brazil is considered an advanced biofuel because it reduces emissions by more than 50% (while ethanol from corn is considered conventional ). However, in the EU, where sugarcane can be considered a food crop, ethanol produced from sugarcane is considered a conventional biofuel, regardless of the potential for emission reductions. In the USA, some biodiesels and renewable diesels can be classified as advanced biofuels when they are shown to achieve greater than 50% emission reductions. In contrast, under the EU Renewable Energy Directive (RED), insofar as these biofuels are produced from vegetable oils, they are considered conventional biofuels. This nomenclature ignores the technology used to produce biofuels. As noted above, advanced biofuels are sometimes referred to as second generation biofuels, a term which generally refers to biofuels produced from lignocellulose material or non-crop feedstocks. In some cases, the advanced biofuel may be chemically identical to a conventional biofuel bioethanol from corn or from agricultural residues will be chemically identical--even though the one is a conventional and the other an advanced biofuel. Thus, there are many areas of ambiguity around advanced biofuels definitions. This ambiguity is particularly pertinent from a policy perspective as legislation increasingly tries to distinguish between conventional and advanced biofuels, in an effort to favor the latter. When developing policy for advanced biofuels, clear definitions would help immensely. 9

11 What are current commercial biofuels? A: Greater than 99% of the world s current biofuels consist of bioethanol and biodiesel (also called fatty acid methyl esters). The basic chemical structures of these fuels are shown below. Consequently, most biofuels are conventional biofuels produced from crops such as corn, wheat, palm oil, canola oil, etc. However, these biofuels contain high levels of molecular oxygen which limits their compatibility with existing infrastructure. Thus, blending is typically limited to low percentages, other than in a few regions such as Brazil or applications such as E85. In contrast, drop-in biofuels are defined as functionally equivalent to petroleum fuels and compatible with current infrastructure such as pipelines and vehicles. These fuels are hydrocarbons that contain almost no oxygen. CH 3 Ethanol Biodiesel (fatty acid methyl ester) What are the technologies to produce advanced biofuels A: There are several ways to produce drop-in biofuels including: oleochemical, thermochemical, biochemical and hybrid technologies. What are Oleochemical processes? Oleochemical processes use lipid feedstock from vegetable oil crops, algae, corn oil, used cooking oil, rendered tallow or tall oil (from Kraft pulping). Biodiesel is made from oils and fats, and is often called Fatty Acid Methyl Esters (FAME). Renewable diesel, also called hydrotreated vegetable oils (HVO) or HEFA are hydrocarbon drop-in biofuels that can be used at any blending percentage with petroleum diesel. A basic process diagram of the production of renewable diesel and other biofuels is shown below. Basic process diagram depicting production of biofuels through hydrotreatment of vegetable oils What are Thermochemical processes? 10

12 Thermochemical processes, such as gasification, pyrolysis or hydrothermal liquefaction (HTL) use the thermal conversion of biomass to fluid intermediates (gas or oil) which are then catalytically upgraded/hydroprocessed to hydrocarbon fuels, such as diesel or gasoline or to alcohols such as methanol or dimethyl ether (DME). Feedstocks can include woody or agricultural residues, bio-oils, lignin, municipal solid waste, etc. Basic process diagram depicting the two main thermochemical technology pathways to dropin biofuels (pyrolysis and gasification). What are Biochemical processes? Biochemical processes involve the biological conversion of biomass (sugars or cellulosic materials such as agricultural residues) to alcohols, such as ethanol, butanol, or hydrocarbon molecules, such as farnesene or fatty acids; Basic process diagram illustrating biochemical processes for biofuel production. Hybrid pathways (fermentation of syngas and alcohol-to-jet) is also shown as they incorporate biochemical elements. What are Hybrid technologies? 11

13 Hybrid technologies combine aspects of thermochemical/biochemical technologies such as fermentation of synthesis gas and catalytic reforming of sugars/carbohydrates which can produce alcohols or hydrocarbons. Also included in this category are alcohol-to-jet technologies which convert alcohols such as methanol, ethanol or butanol into hydrocarbon fuel molecules (diesel, jet or gasoline) What is the current commercialization status of advanced biofuels? A: Conventional corn ethanol and biodiesel technologies have been commercial for many years. The various stages of commercialization of other technologies for advanced biofuels are shown in the figure below. Although oleochemical technologies such as hydrotreated vegetable oils (HVO) are fully commercial, lignocellulosic derived ethanol is not yet fully commercial. While several plants, producing cellulosic ethanol from agricultural residues such as corn stover, wheat straw and sugar cane bagasse, have been built and commissioned at various locations around the world, none of these facilities is currently operating at full capacity. Similarly, although gasification and methanol production has been commercialized by Enerkem in Edmonton, using municipal solid waste as a feedstock, this facility has yet to reach full production capacity. Although several facilities for the upgrading of gasification synthesis gas through Fischer- Tropsch catalysis are under construction, this process is not yet at a commercial stage as this technology poses more technical difficulties than methanol synthesis. Although many of the companies developing pyrolysis and upgrading of bio-oil to biofuels are still at the demonstration stage, companies such as Ensyn have made a lot of progress using coprocessing in existing refineries to produce biofuels. Stages of commercialization of various biofuels technologies What are the specific technology challenges for advanced biofuel production? 12

14 A: As most technical challenges have been resolved and there is limited potential to further improve the technology. Thus, for oleochemical based technologies the biggest challenges are the cost, availability and sustainability of the feedstock. For example, virgin vegetable oils are more expensive than the diesel itself, which makes it challenging to produce a replacement diesel at a competitive price. Similarly, the sustainability of vegetable oils, which are also used for food purposes, is a significant obstacle. While new, non-food crops are being developed for this purpose, currently they are only available in limited quantities. Drop-in biofuels produced via gasification and Fischer-Tropsch, while established for coal and natural gas feedstocks, have not been commercialised for biomass feedstocks. Existing facilities based on coal and natural gas are very large and able to leverage economies of scale that are extremely challenging for a facility based on biomass. The reason for this is the low energy density of biomass which makes it uneconomical to transport over long distances. Another show stopper has been the challenges with cleanup of the synthesis gas. However, two facilities based on gasification and Fischer-Tropsch are currently under construction and will, hopefully, be able to demonstrate whether these challenges can be overcome at a commercial scale. Upgrading of pyrolysis oils has proven to be a significant technical challenge as bio-oils (biocrudes) contain up to 40% oxygen. Thus, they require extensive hydrotreatment using specialised and expensive catalysts, with catalyst fouling and reusability of catalysts still major obstacles. Hydrotreatment of bio-oils also requires large amounts of hydrogen, significantly lowering the GHG reduction potential of upgraded biofuels if the hydrogen is sourced from natural gas. Although biochemical routes to advanced biofuels can produce a high quality and pure product, low yields and productivity make these compounds very expensive to produce. Thus companies such as Amyris and Gevo preferentially direct these products into the biochemical, cosmetic and pharmaceutical industries where higher prices can be obtained. Until these markets are saturated, it is unlikely that this technology route will produce significant volumes of advanced biofuels. What are the challenges to producing advanced biofuels? A: Technology challenges have limited the availability of biofuels as most advanced technologies have not yet been fully commercialized. Although most are still at the research and development stage, some are at the pilot and demonstration stages. Typically, advanced biofuel facilities require high investment cost due to the complexity of the processing and the high temperatures and pressures that are used in many operations. Thus, policies or funding programs that de-risk the valley of death path to commercialization, such as grants and loan guarantees will be important if advanced biofuels are to be brought to market. Advanced biofuels are non-cost-competitive with petroleum fuels, partly due to the high cost of production in pioneer facilities and partly because the price of oil is currently low. It has been suggested that some advanced biofuels can be competitive with fossil fuels at $80 per barrel of oil, while at $100 per barrel advanced biofuels could be cheaper than fossil fuel equivalents. 13

15 However, high specification fuels such as aviation biofuels are costly to produce and will unlikely be cost-competitive with fossil jet fuels for some time. Thus, policy incentives will be needed to support the development of such fuels as it will be the only significant means to decarbonize the aviation industry. It is worth noting that fossil fuels are still extensively subsidized and, unless such subsidies are removed, advanced biofuels cannot compete on a level playing field. Feedstocks for advanced biofuel production are costly and supply chains are still being established: A wide range of different feedstocks can be used to produce advanced biofuels. Relevant feedstock considerations include cost, availability, quality and supply chain logistics for delivery of feedstock to the biorefinery. Although used cooking oil is an example of a feedstock that does not compete with food, it may be of poor quality and need extensive pretreatment. It is also only available in limited quantities and a supply chain for collection of used cooking oil from small fast food outlets needs to be further established. Although used cooking oil can be considered a waste, it has become a commodity with a high market price (>USD400 per tonne). Similarly, although municipal solid waste is a cheap feedstock that can be sourced at a negative cost (due to tipping fees), the quality of this feedstock is poor and it is not available in sufficient quantities for significant advanced biofuel production. While gasification and methanol production (such as used by Enerkem) is quite forgiving of the high levels of contaminants in municipal solid waste, the production of drop-in biofuels from this feedstock is expected to be far more difficult. Currently, feedstock costs are considered one of the biggest expenses in the production of biofuels. It is estimated to contribute between 40-70% of final fuel cost. Thus, establishing effective supply chains for feedstocks will be crucial if we are to reduce biofuel costs. Effective policy support will also play a role in mobilizing efficient supply chains and supporting biomass producers. For the case of cellulosic ethanol, collection of agricultural residues, baling and storage as well as quality of the material and material handling has been one of the key challenges in limiting its commercialization. Effective supply chains should also be established for currently unutilized forest residues. It should be emphasized that different bioenergy applications may compete for the same biomass feedstocks. Thus, policy will likely need to play a role in preferentially allocating feedstock to advanced biofuel production. This might be required for biojet/ aviation, where biofuels present the only option for significant decarbonization. In contrast, renewable electricity can be generated from virtually all renewable pathways such as wind, solar, hydro, etc. What specific policies can promote advanced biofuels? A: Most countries that support biofuels have a mandate for blending of conventional biofuels into petroleum or diesel fuels. In the same way, a specific mandate for advanced biofuels could be implemented. As, initially, advanced biofuels are likely to be more costly than conventional biofuels, specific mandate will be essential to help establish and promote the production of advanced biofuels. Currently, the USA has the most extensive policy support for advanced biofuels, with advanced biofuels defined based on GHG emission reduction potential and different incentives available for certain biofuels such as cellulosic ethanol or biomass-based diesel. Low carbon fuel 14

16 standards, such as California and British Columbia s, can potentially play an important role in the promotion of advanced biofuels. Regardless of the specific policies used to promote advanced biofuels, it is important that stable and long-term policy support are established to promote investment in the technologies that can deliver these fuels. Pioneer facilities are expected to cost at least 50% more than wellestablished (nth) facilities and significant cost improvements could take decades to achieve with policy support essential to support a developing industry. According to the International Energy Agency, 9.4 million barrels per day of biofuels (oil equivalents) will be required by 2040 in order to achieve climate commitments of keeping temperatures from rising less than 2 o C by This will require significant investment into biofuels which will only happen with the right policy support. 15

17 Advanced Biofuels and Macro-Economic Impacts Professor James Rude, Professor Marty Luckert, and Hawley Campbell University of Alberta Department of Agricultural, Life, and Environmental Sciences Although the promotion of biofuels has been an objective of developed countries over the last three decades, it is only over the last decade that the sector has been aggressively promoted with government policies in North America. Objectives for government intervention have ranged from finding secure supplies of energy alternatives to fossil fuels, reduction of greenhouse gases (GHGs), and more broadly to promote economic development. First-generation biofuels, especially ethanol, have been criticized for displacing food production and escalating commodity prices, while only making modest contributions to GHG reductions. Second-generation biofuels, produced using lignocellulosic feedstocks from woody biomass such as trees, grasses, and agricultural residues, have been advocated on the basis that they should be more effective in reducing GHGs and do not compete with food supplies. However, success for secondgeneration biofuels would depend on: reliable sources of feedstock, government incentives to induce production, cross-sectoral spin-off benefits (employment, economic diversification, and rural development), and significant contributions to GHG reductions. This note examines whether these keys for success are present in the development of second-generation ethanol production from dedicated short-rotation tree crops as a source of cellulosic feedstock. The analysis, which underlies this note, is based on an economy wide model which links the agricultural sector to the rest of the economy and accounts for feedback effects throughout the economy. This particular approach is attractive for studying cross-sector effects because it accounts for competition for land across alternative uses in an explicit fashion, and is able to capture the economic impacts across the entire economy. This work builds on an established model with adaptations to account for second-generation ethanol production. Our model results focus on hybrid poplar as a potential cellulosic feedstock in Canada. But many or our results are generalizable beyond this case and we present our findings within the context of other studies. What are the constraints on a reliable feedstock supply? A: Given concerns that first-generation biofuels displace food production, the focus has shifted to cellulosic biomass as a feedstock because it cannot readily be used for food or feed. There are two primary sources of cellulosic biomass: residues from agriculture and forestry, and dedicated energy crops. Residues from forestry and agriculture are typically available at low densities across large regions, making transportation costs high. Dedicated energy crops, such as fast growing grasses and trees (like hybrid poplar), have the advantage of growing at high volumes and high densities. Additionally, as a dedicated perennial use, these feedstocks offer additional environmental benefits as a carbon sink. The idea is that dedicated biomass feedstocks would be grown on private lands that are marginal to other productive uses. However, the experience has been that significant government incentives are required, including 16

18 subsidies for the establishment and maintenance of new dedicated biomass cropping systems, and also payments for the collection and harvest of existing biomass resources (crop and forest residues) that currently have no market. The U.S. Biomass Crop Assistance Program (BCAP) was introduced as part of the 2008 Farm Bill to complement other incentive programs including the Renewable Fuel Standard, and to encourage dedicated biomass cropping systems on marginal land. To date the BCAP has a very low uptake rate for dedicated biomass plantings of 49,000 acres. Furthermore, only 4-7% of all contracted land is marginal land, and the remainder is taken from crop land. Our analysis considers a scenario where we double current Canadian ethanol production, for an additional 1.8 billion liters of production. We consider two alternative methods of doubling current production: sourcing grain feedstocks and sourcing cellulosic feedstocks from hybrid popular. The conventional biofuel route requires 628,000 hectares of crop land; while the biomass alternative requires 867,000 hectares of land. The additional land necessary for hybrid poplar feedstock production reflects the fact that land is tied up for longer growing periods to produce a harvestable tree (i.e. 20 years) versus annual crop production. Approximately 570,000 hectares of this additional land is drawn from marginal land, and the remaining 297,000 hectares must come from existing crop land. However the 297,000 additional hectares are less than half of the extra crop land (628,000 hectares) needed to grow the incremental 1.8 billion liters of first generation ethanol. While at first blush there would appear to be a limitless supply of marginal land in the Boral regions of Canada, the actual available land mass is a thin border of land between the treed and cropped zones of western Canada. For instance, in Alberta we calculate only approximately 1.5 million hectares of this marginal land and assume a conservative amount (0.5 million hectares) of additional marginal land in other provinces. Using over 40% of that marginal land for biofuels (in the case of Alberta) would have significant impacts on agricultural activities, such as cattle, that currently use that land, as will be discussed below. There are a number of economic obstacles to converting land to bioenergy crops which include: costs of production for hybrid poplar ($90 /tonne); opportunity costs of not growing alternative crops; a risk premium associated with uncertainty of investments in growing feedstocks and production facilities in a developing industry. There are also potential government policy obstacles that influence feedstock supply. For example, current provincial policies largely prevent the growing of dedicated energy crops on public lands, and there is uncertainty regarding the future of biofuel subsidy programs. All of these considerations result in a land supply function that is not very responsive to higher biofuel returns. So finding sources of reliable feedstock poses a significant challenge to second generation ethanol production. What size of subsidy is necessary? A: Given the significant challenges to procuring cellulosic feedstock to facilitate an emerging industry, some form of government incentives would likely be necessary to promote second generation production. The potential gamut of support includes incentives to attract land for biomass production, investment incentives to build refineries, incentives to increase the share of ethanol in gasoline blends, support for distribution infrastructure, and encouragement of second generation consumption. Early federal and provincial programs included excise tax exemptions and investment incentives for ethanol plants. Later, direct supports were introduced to increase ethanol capacity and loans, contingent on market conditions. Perhaps the most significant development, however, was the 2008 announcement of new mandates for renewable fuel 17

19 mixtures that require renewable fuel production to be greater than or equal to specified shares of total gasoline and diesel sales. Between 2006 and today Canadian ethanol production has increased from approximately 0.3 to 1.8 billion litres. The biofuel boom corresponds to a period with a number of government backed low-interest loans and grants for capital expansion, commercialization, and volumebased subsidies to biofuel producers. The beginning of this period also corresponds to a surge in crude oil prices. The investment incentives and strong crude oil prices stimulated the construction of biofuel refining plants, but it was the blending mandates that ensured expanded production by creating a legislated market for ethanol and thereby providing assurances for future ethanol demand. But requirements by governments which alter production decisions can be costly. Conceptually these mandates can be thought of as a tax on gasoline which encourages the substitution of biofuels in vehicle fuel blends. By providing a guaranteed market to ethanol producers, these mandates constitute an indirect ethanol subsidy. Within this context, a relevant question is whether, and to what extent, the incentive effects of this gasoline tax pass upwards through the supply chain to attract land for biomass feedstock production. Our analysis considers a doubling of biofuel production wherein the minimum blend of ethanol within gasoline is increased from 5% to 10%. Mechanically, the model is solved by forcing ethanol production to double and asking what tax on gasoline (an implicit subsidy) is required to support this production. The model keeps adjusting until there are sufficient incentive so that the required increase in ethanol production occurs. When the increased blending mandate is fulfilled with conventional first generation ethanol the required subsidy is $0.63/litre. When the increased blending mandate is met through cellulosic ethanol from hybrid poplar feedstock, a much larger subsidy is required: $0.27/litre as a direct production subsidy plus $0.87 as an implicit or blending subsidy. The much higher subsidy rate for cellulosic ethanol accounts for the additional incentives required to attract land for biomass production. After having stimulated the recent rapid growth in ethanol production, first generation production subsidies are expiring, as the targets for meeting the current blending mandates are reached. If the desire is to change the direction of the ethanol industry towards cellulosic ethanol, then new types of subsidies be needed to replace the current cohort. These subsidies might include new incentives for plant construction and commercialization. But given the increased costs associated with second generation production, the previous level of support is not likely to lead to sufficient productive capacity to satisfy the increased demand associated with any increase in mandates. Along these lines, biofuel industry stakeholders have called for exemptions for cellulosic ethanol from federal and provincial fuel taxes. Whatever route is chosen, the substantial subsidy support required for this sector should be justified by addressing broader objectives than just the development of the biofuels sector. What are the inter-industry effects of biofuel production? A: Our model can address some of the broader issues of economic development that are sometimes sought in terms of justifying biofuel expansion. In general, the modelling results indicate that if biofuel mandates were doubled, inter-industry impacts are negligible beyond the primary agriculture and forestry sectors with little or no induced consumption effects driving the rest of the economy. 18

20 Justifications for first generation biofuels policies included support for agriculture and rural development. Since ethanol, and most biodiesel, is made from agricultural crops, there is a solid link between farmers and the biofuel industry. Increased biofuel production therefore would increase demand for agricultural production. However, Canada is a price taker in international grain markets, so increased domestic consumption of grains for biofuels would only serve to reduce exports. This redistribution of sales among domestic and export markets does not strengthen farm income. Instead, the livestock sector would be negatively, affected as feed grains would be drawn away as feedstock for biofuel production. Moreover, even relatively small changes in the feed grain supply disposition could change Canada from being a net exporter to being a net importer. This change could increase costs for famers who would now be reliant on imported feed grains. One of the primary arguments for supporting cellulosic ethanol is that a biomass feedstock can alleviate some of the cropland pressures that first-generation feedstocks have caused. When we consider doubling ethanol production with second versus first generation feedstocks, more wheat and oilseed acreage is taken away for first generation production than with cellulosic ethanol. Grain based ethanol production requires higher quality land, unlike cellulosic feedstock which can use lower quality marginal land. However, although hybrid poplar can be grown on marginal lands, the total land required to support a 100% increase in ethanol production is greater than that required by grains to produce the same amount. Our analysis shows that that when ethanol production is doubled, Canadian milling wheat production declines by 1% when the feedstock is hybrid poplar, versus a 3% decline if the feedstock is first generation grains. Likewise, oilseed production declines by 2.0%, versus a 2.4% decline when the increased ethanol is sourced from biomass versus grain. While the grains sector faces a smaller contraction with cellulosic ethanol production, the livestock sector faces a larger contraction: a 1.5% decline versus 0.5% if the ethanol is sourced from grains. This increased contraction occurs because a significant amount of the marginal land that goes into hybrid poplar production comes from grazing lands. Furthermore, when ethanol is produced from grains, a by-product, distiller s dried grains (DDG), is also produced which can substitute for animal feed; cellulosic ethanol production does not co-produce any edible animal feeds. The goal of increasing economic opportunities for rural communities is typically defined by governments in vague terms. In agricultural communities, increases in farm income seldom translate into rural development (that depends on broader issues such infrastructure and the attractiveness of living in the community). However, with the contraction of pulp markets, the potential to use forest biomass for cellulosic ethanol production may represent an induced benefit of second generation ethanol production. What is the role of advanced biofuels in reducing GHG emissions? A: One of the key rationales for promoting biofuels is that they help reduce a negative externality that is generated from carbon emissions associated with burning fossil fuels. While first generation biofuels only provided reductions, relative to fossil fuels, of roughly 20%, advanced biofuels (including cellulosic ethanol from hybrid poplar) are defined as biofuels that achieve at least a 50% GHG emission reduction. 19

21 The cost effectiveness of biofuels as a method of reducing GHG emissions has recently been questioned. But it is not just the technology behind the production of biofuels that influence these costs. Rather, it is also the policies that stimulate biofuel production that greatly influence the cost efficacy of biofuels in reducing carbon emissions. For example, both historic renewable fuels standards and emerging carbon taxes will affect the adoption of biofuels. The question is whether a carbon tax would improve the economics of biofuels. A carbon tax would have negative economy-wide impacts on the costs of production, especially for fossil fuel producing and energy- and carbon-intensive manufacturing industries. These effects, in turn, would reduce the total demand for all fuels. Since ethanol is blended with other fossil fuels, its demand could decrease as well. On the other hand, the carbon tax could cause incentives for higher percentages of ethanol, with lower GHG emissions, to be blended with gasoline. In the short run, this increase would likely be limited at approximately 10% by the blend wall of most current vehicles, though over time, an increase in flex-fuel vehicles would likely emerge allowing higher biofuel percentages. Note, however, that the carbon tax would have to be implemented such that the ethanol, in a gasoline blend, is recognized as being a less polluting fuel. If, however, the carbon tax was applied as a flat rate across both components of the fuel, then ethanol producers would be at a disadvantage given that production costs exceed those of gasoline. A carbon tax could also lead to a further increase in ethanol utilization if all or part of the revenue from the carbon tax is used to subsidize biofuels. The subsidy would trigger further substitution between fossil fuels and advanced biofuels. With the implementation of a carbon tax, the net impact, therefore, is an empirical question regarding whether the economy-wide depressed use of all fuels, is greater or less than substitutions of biofuels for fossils fuels. Our model considers a $30 per tonne revenue-neutral carbon tax that is applied equally across all fuel components and broadly across the economy. Our results indicate a negligible increase in ethanol utilization after the carbon tax is implemented. However, similar modelling approaches indicate that, if instead of compensating taxpayers, 10% of the carbon tax is re-invested as an ethanol production subsidy, then ethanol utilization would increase by almost 7%. What are the take away messages from this project? 1. Though second generation ethanol does not compete directly with food, dedicated cellulosic energy crops would still compete for scarce agricultural land. In Canada, doubling current production with second generation ethanol from dedicated energy crops is estimated to displace production on 297,000 hectares of cropland, and 570,000 hectares of grazing land. 2. The implicit subsidy that would be required to double biofuel production would be costly, whether that production were to come from first or second generation biofuels. Our estimates are implicit costs of $0.63/litre for biofuel expansion using first generation technology and $1.14/litre for biofuel expansion using second generation technology 3. Inter-industry effects of doubling biofuel production would be largely confined to agriculture and forestry sectors. For biofuel expansion with first generation technologies, wheat production is estimated to decline by 3% and oilseed production would decline by 2.4%. For biofuel expansion with second generation technologies, wheat production is estimated to decline by 1% and oilseed production would decline by 2.0%. 20

22 4. Carbon taxes have the potential to create incentives to increase the use of ethanol, but results indicate that this increase is only likely to be significant if part of the taxes are invested in subsidizing ethanol. 21

23 Maximizing the Environmental Benefits of Advanced Biofuels in Canada Professor Warren Mabee & Massimo Collotta, Post-Doctoral Fellow Queens University Department of Geography and Planning What is the best mechanism for evaluating environmental, economic and social sustainability of advanced biofuels? A: A comprehensive mechanism, specifically designed for advanced bio-based products, is the set of Principles and Criteria developed by the Roundtable on Sustainable Biomaterials (RSB). The RSB is an independent, global multi-stakeholder coalition with the goal of promoting the sustainability of biomaterials. The Principles and Criteria for Sustainable Biofuels Production published by the RSB define a set of principles related to various environmental, economic and social criteria, and provide a list of criteria which can be used to evaluate these principles and assess the sustainability of global biofuel production. Moreover, all of these principles and criteria are in agreement with the sustainability requirements laid out in the EU Renewable Energy Directive (RED). What areas are covered by the Roundtable on Sustainable Biomaterials (RSB), as described through the Principles and Criteria of RSB? The 12 principles and related criteria in the RSB framework essentially cover the three main pillars of sustainability: environmental, social, and economic. For environmental impacts, the criteria used are greenhouse gas emissions (GHG); soil, water, air and ecosystem preservation; land use; and, the impact of the use of technology on the environment and people. Criteria describing the social impact of biofuels focus on legality; planning; monitoring and continuous improvement; human and labour rights; rural and social development; local food security; and, land rights. Finally, economic criteria include planning; monitoring; and continuous improvement factors, and the implementation of a business plan. There is a significant amount of overlap among the different principles and criteria because sustainability is not easily packaged in separate silos. The framework introduced by the RSB lays out the requirements necessary to certify sustainable operations along the entire supply chain of biofuel production. This means that the framework provides guidance on the production and harvesting of feedstock, as well as on the production, use and transport of biofuel. What is the best scientific methodology or tool to inform the RSB framework? The approach most often used to assess the impacts of biofuel systems is life cycle sustainability assessment (LCSA). A LCSA methodology which by definition covers all aspects of biofuel production is seen to be the best way to understand the environmental, economic and social impacts in relationship to the RSB framework. LCSA is essentially an umbrella for a variety of 22