A Prospective Analysis of US-Brazil Biofuel Policies Héctor M. Núñez and Hayri Önal Madhu Khanna, Xiaoguang Chen, Haixiao Huang University of Illinois at Urbana-Champaign Energy Biosciences Institute CTBE-IEA Workshop, Campinas, Sept. 19-21, 2011 1
Introduction Biofuels use is becoming part of the solution to achieve energy security in many fossil-fuel importer countries including U.S. Reduction in greenhouse gas emissions may be an equally important benefit globally. Currently the world s largest biofuel producing countries are U.S. (~13 BGal) and Brazil (~7 BGal). 2
US Biofuels Production Targets 3
Policy Considerations U.S. - Renewable Fuel Standard (RFS) mandates blending 36 BGal of biofuels with oil-based transportation fuels by 2022 21 BGal must be advanced biofuels with at least 50% GHG emission reduction, of which at least 16 BGal must be cellulosic biofuels. Both cellulosic and sugarcane ethanol are eligible as advanced biofuels. Brazil - Blend gasoline with 20-25% ethanol 4
Economic and Structural Difficulties Surrounding Cellulosic Biofuels Cellulosic ethanol is almost twice as expensive as corn ethanol! Roughly $1.35 per lt versus $0.70 per liter (breakeven prices at $5.00 per bu of corn and $70 per ton of biomass; both will vary depending on the price of the respective feedstock) Without a cellulosic biofuel industry biomass production cannot take place; without biomass production cellulosic biofuel industry cannot take place (chicken-egg problem)! 5
Economic/Financial Incentives & Protection Instruments Tax credits for fuels: $0.45 per gallon for blending pure ethanol (regardless of the feedstock) with gasoline $1.01per gallon to cellulosic ethanol producers Subsidies to producers: 75% of the establishment cost of perennial energy crops will be paid by government (BCAP) Biomass producers will receive additional $ equal to the price they receive from refineries for their biomass (first two years) Tariff: $0.54 per gallon and 2.5% ad valorem tariff on imported biofuel 6
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Research Goals Analyze the implications of U.S. biofuel policies on commodity markets and land use, What if some or all of the policy incentives are removed? Can Brazil fill the demand? How? Land use implications for Brazil? 8
Where Will the New Land Come From? A substantial amount of land is currently being used for extensive beef-cattle production in Brazil (100 to 160 million ha). We explore the potential for adoption of improved beef-cattle systems by: Improving productivity of pasture lands Converting traditional livestock production facilities into feedlot systems. 9
Research Goals (Continued) Effect of this on food and fuel prices in U.S and Brazil Social welfare and GHG emissions impacts 10
Methodology We develop a spatial, multi-market, priceendogenous partial equilibrium model, regionally disaggregated both for Brazil and U.S. Crop, livestock and biofuel sectors are integrated in a unified framework. The model optimizes the total social surplus under resource constraints, policy restrictions, and technical constraints. 11
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Some Features of the U.S. Model Explicit demand functions for miles driven by conventional and flex-fuel vehicles Spatial disaggregation: 295 Crop Reporting Districts Crops: 11 temporal crops (corn, soybeans, wheat, barley, sorghum, cotton, oats, peanuts, sugar beets, sugarcane, and rice) Dedicated energy crops and crop residues as cellulosic biofuel feedstock 13
Some Features of the Brazil Model Explicit demand functions for km driven by conventional, flexfuel, and pure ethanol vehicles Spatial disaggregation: 137 mesoregions Crops: 9 temporal crops (sugarcane, soybeans, corn, wheat, sorghum, cassava, beans, cotton and rice) 3 pasture categories : planted in good condition, planted degraded, and native pastures Beef-cattle intensification alternatives The recently launched ethanol pipeline projects incorporated Expansion of sugarcane on pasture lands restricted to the recommendations made for individual Agro-Ecological Zones 14
Beef-Cattle Production Systems Modeled 15
Other Features of the Model Trade of agricultural commodities and biofuels with the rest of the world is included both in the U.S. and Brazil components. Explicit consideration is given to China s increasing demand for both agricultural commodities and biofuels. 16
Agro-Ecological Zoning for Sugarcane on Pasture Lands 17
EMPIRICAL RESULTS (2022 projections under different policy scenarios) 18
Model Validation- Agricultural Sector (Base Year 2007) US Brazil Crop Item Unit Actual Model Actual Model Area M Acre - M Ha 93.3 91.6 14.0 12.1 Corn Production M Tons 355.5 349.3 52.6 55.9 Consumption M Tons 185.7 188.4 52.2 54.2 Price US$/ton 165.1 158.5 150.2 207.3 Ethanol production B Liters 24.7 29.0 Area M Acre - M Ha 64.7 72.3 20.5 22.3 Soybean Production M Tons 73.3 81.3 57.7 62.8 Consumption M Tons 2.5 2.6 3.0 2.8 Price US$/ton 370.2 340.6 222.9 299.1 Area M Acre - M Ha 0.8 0.8 6.9 7.3 Sugarcane Production M Tons 26.8 28.2 543.4 565.4 Ethanol production B Liters 22.6 24.3 Sugar production M Tons 31.0 36.2 19
Spatial Distribution of Biomass Supply 1000 MT 0 1-243 244-531 532-938 939-1661 1662-3219 3220-7446 1000 MT 0 1-243 244-531 532-938 939-1661 1662-3219 3220-7446 Crop Residues Perennial Crops 1000 MT 0 1-36 37-60 61-86 87-132 133-235 236-421 1000 MT 0 1-243 244-531 532-938 939-1661 1662-3219 3220-7446 Forest Residues Total biomass 20
Base Run Land Allocation for Sugarcane in Brazil Actual Model Simulated 21
U.S. Biofuel Consumption 22
Land Use 23
Agricultural Production 24
Intensification Rates % finishing cattle under intensive systems: BAU: 6.2% RFS+Subsidies+Tariff: 6.3% RFS+Tariff: 1.2% RFS only: 13.7% 25
Effects on Commodity Prices 26
Effects on Social Welfare & GHG Emissions 27
Changes in Cropland in Brazil (relative to the 2007 base run) New Cropland (M ha) BAU RFS+S+T RFS+T RFS Corn 1.32 0.26 Cotton 0.85 0.89 0.79 0.87 Soybean 2.58 3.04 3.05 2.53 Sugarcane 3.41 3.59 5.78 9.04 TOTAL New cropland 7.20 7.85 11.24 12.95 Pasture Intensification 4.91 4.93 0.88 10.41 28
Changes in Pasture Lands in Brazil (Mil.Ha, relative to the 2007 base run) BAU RFS+S+T RFS+T RFS Planted -0.18-0.16-0.52-3.06 Native -1.52-1.80-4.73-5.02 Degraded -1.09-1.44-2.25-1.33 Total Pasture -2.79-3.40-7.50-9.40 29
Cropland & Intensified Pasture Lands in Brazil (2022) BAU RFS + Subsidies + Tariff Int. Pasture New Cropland RFS + Tariff RFS only 30 30
Sugarcane Areas without Pipelines BAU RFS + Subsidies + Tariff RFS + Tariff RFS only 31 31
Sugarcane Areas With Pipelines BAU RFS + Subsidies + Tariff RFS + Tariff RFS only 32 32
Cropland Expansion and Intensified Pasture Lands with Pipelines BAU RFS + Subsidies + Tariff Int. Pasture. New Cropland RFS + Tariff RFS 33 33
Changes in Cropland Use in Brazil with Pipelines (relative to the 2007 base run) New Cropland BAU RFS+S+T RFS+T RFS Cassava 0.37 0.36 0.33 0.36 Corn 0.79 0.87 Cotton 0.84 0.90 1.32 0.00 Beans 0.00 0.00 0.28 Soybean 2.59 3.05 3.32 2.88 Sugarcane 3.34 3.60 6.16 9.50 TOTAL New cropland 7.13 7.91 11.92 13.89 Pasture Intensification 4.80 4.95 0.88 9.74 34
Conclusions Under the BAU or RFS only scenarios, U.S. would reduce the domestic ethanol production substantially. Implementing the RFS and maintaining the current subsidy policies would decrease the aggregate welfare in both U.S. and Brazil. Under the RFS only scenario, intensifying the current livestock systems in Brazil would release a substantial amount of land for sugarcane production; mainly in the upper Cerrado, Sao Paulo, Minas Gerais, and Goiás. Livestock intensification through adoption of improved grass varieties and feeding practices in the finishing stage would increase the biofuel production potential in Brazil without deforestation and savannah conversion, which ultimately implies reduced GHG emissions. 35
Future Research Directions Analyze other renewable fuel policies in US, in particular Renewable Portfolio Standard (e.g. RPS, LCFS), Incorporate policy instruments in Brazil: green sugarcane harvest; reservation (set aside) lands; water use; gas pricing, Incorporate economic & social factors in Brazil affecting /restricting pasture land intensification, add dairy cattle, Incorporate cellulosic biofuel technology adopted to sugarcane in Brazil (conversion of biomass residues and bagasse to cellulosic ethanol), Incorporate EU/India/China biofuel blending mandates Improve the Brazil data base for costs, yields, carbon emissions/sequestration, etc., based on the most recent information in collaboration with Brazilian researchers/teams. 36
THANK YOU! Contact : h-onal@illinois.edu 37