The Economic and Policy Challenges of Biofuels

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1 The Economic and Policy Challenges of Biofuels Madhu Khanna Department of Agricultural and Consumer Economics University of Illinois, Urbana-Champaign

2 Economic, Environmental and Policy Challenges Growing demands for food and fuel Concerns about climate change Competing demands for land for food, energy and carbon storage Optimal allocation of land across uses Designing policy regimes to create the appropriate incentives

3 Current U.S. Approach Reliance on food crop biofuels Land intensive Limited potential to reduce greenhouse gas emissions and sequester soil carbon Adverse implications for water quality Energy supply focused Emphasis on liquid fuels instead of biomass based electricity or heat Renewable fuels mandate, volumetric subsidy and import tariff for ethanol

4 Sustainable Bioenergy Competitive technologies to grow and convert advanced bioenergy crops to fuel: Crop residues, perennial grasses and sugarcane Reassessing the optimal mix of using bioenergy for electricity generation vs. liquid fuel production Policy incentives that create value for bioenergy crops that lower GHGs and enhance sequestration Tax credits inversely related to carbon footprint reduce water quality degradation Conservation payments Maintaining CRP but allowing harvestable perennial grasses mitigate the food vs. fuel competition Less land intensive Make cellulosic ethanol not only competitive with gasoline but with corn ethanol Need for coordination between energy policy, climate policy and conservation policy

5 Dedicated Energy Crops : Switchgrass and Miscanthus Adaptable to wide range of growing conditions High yielding perennials Low initial and annual input requirements Compatible with row crop production require conventional equipment; winter harvests

6 Economic Viability of Bioenergy Crops and Role for Biotechnology Requires that they compete with row crops for land Yield per hectare Costs of production Opportunity cost of land Depends on row crop prices, yields, costs And that they compete with fossil fuels/corn ethanol Energy content relative to fossil fuels/corn ethanol Cost of conversion to usable fuel Price of fuel Economic viability varies spatially and temporally Environmental impacts of bioenergy crops

7 Yield/Hectare Miscanthus Corn Soybeans Actual average yield of Miscanthus(t DM/ha) ( ) Simulated yield of Miscanthus (t DM/ha) Actual average yield of Switchgrass(t/ha) ( ) North (DeKalb) Central (Champaign) South (Dixon Spring) State Average

8 Alternative Sources for Ethanol Ethanol Gallons Per Acre Corn Corn Stover Corn+Corn Stover Switchgrass Miscanthus Acres Needed for 36 B Gallons of Ethanol 250 Millions Acres Corn Corn Stover Corn+Corn Stover Switchgrass Miscanthus

9 2 CO2 Emissions per Liter of Ethanol % 84% 1 53% 43% Kg CO2/L % 10% % Gasoline (equivalent to 1 liter of ethanol) -75% Corn Corn stover Switchgrass Miscanthus Kg CO2/Liter of ethanol including soil sequestration Kg CO2/Liter of ethanol excl. sequestration Coal (eq 1 ha Miscanthus) Carbon Emissions Kg CO2e/ha Corn Soybeans Switchgrass Miscanthus

10 Cost of Production of Biofuels from Alternative Feedstocks ($/gallon) Feedstock sources Cost of Production of Biofuels from Alternative Feedstocks ($/gallon) Feedstock cost Opportunity Cost of Land Non- Feedstock Cost Co-Product Credit Total cost Corn Corn Stover Soybean price is assumed to be $7/bu and corn price is $3.50/bu Miscanthus Switchgrass

11 Cost of Cellulosic Ethanol

12 Evaluation of Environmental Effects Life cycle analysis Standardized methods Consensus on the boundaries Life cycle carbon emissions vary spatially vary with prices of key energy inputs Include carbon sequestration by feedstocks which varies over time

13 Soil Carbon Sequestration Conservation tillage with corn and soybean: MT/ha/yr Perennial grasses 3 times higher MT/ha/yr Existing Soil Carbon Stocks Soil Carbon Accumulation Functions SOC (MT/ha) Years No Till Pasture Switchgrass Miscanthus

14 Cost of Ethanol Production Net of Carbon Emission Reduction Credit ($/Gallon of Gasoline Equivalent) corn 5 4 miscanthus $/g a llo n corn stover 0 $2/b Corn; $5/b Soy $2/b Corn; $5/b Soy; $10/T CO2 $2/b Corn; $5/b Soy; $50/T CO2 $3.50/b Corn; $7/b Soy; $10/T CO2 $3.50/b Corn; $7/b Soy; $50/T CO2 switchgrass

15 Areas for US-EC Collaborations Standardizing methods for Life Cycle Analysis Sharing of economic data and models Analyzing implications of the different policy paths being pursued in the US and EC and lessons they offer