Renewable Fuel Standard Potential Economic and Environmental Effects of U.S. Biofuel Policy (2011) / Chapter Skim
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4 The Economics and Economic Effects of Biofuel Production
4 The Economics and Economic Effects of Biofuel Production
Pages 105-180
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From page 105... ...
To make biofuels competitive in the energy market, the federal government supports biofuels through the RFS2 mandate and additional policy instruments discussed in Chapter 1. Tax credits and a tariff influence government revenue and expenditures.
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From page 106... ...
, is a function of the price of ethanol, the conversion yield (gallons per dry ton of biomass) the 1 TheBioBreak model was originally developed as a research tool to estimate the biorefinery's long-run, breakeven price for sufficient biomass feedstock to supply a commercial-scale biorefinery and the biomass supplier's long-run, breakeven price for supplying sufficient feedstock to operate such a biorefinery at capacity.
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From page 107... ...
. BioBreak also calculates the minimum value that a biomass feedstock producer would be willing to accept for a dry ton of biomass delivered to the biorefinery.
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From page 108... ...
Poil. Beyond direct ethanol sales, the ethanol processor also receives revenues from tax credits (T)
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From page 109... ...
Biofuel Production Incentives and Tax Credits (T) To account for potential tax credits for cellulosic ethanol producers, the tax credit (T)
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(for example, tax credits and production subsidies)
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From page 111... ...
Biomass yield is variable in the near and distant future due to technological advancements and environmental uncertainties. For simulation, the mean yield of corn stover was approximately 2 dry tons per acre.
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, resulting in 2 dry tons per acre of alfalfa for biomass feedstock during the second year. Biomass Supplier Government Incentives (G)
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, and forest residues. BioBreak derives a point estimate of WTA, WTP, and the price gap for a biorefinery with a fixed capacity and a local feedstock supply area.
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From page 114... ...
BioBreak derives the price gap between the biomass producer's supply cost and the processor's derived demand for biomass delivered to the biorefinery. Table 4-1 provides the biofuel processor's WTP, biomass supplier's WTA, and the price gap given the parameter assumptions and no policy incentives (for example, no blender's tax credit or supplier payment)
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From page 115... ...
The price gap that would need to be closed to sustain a feedstock market ranges between $49 per dry ton for wheat straw to $106 per dry ton for switchgrass grown on high-quality land in the Midwest. Figure 4-2 provides a graphical depiction of the price gap for all 13 feedstock-rotation combinations (see also Box 4-3)
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From page 116... ...
The 2008 farm bill provides a $1.01 per gallon tax credit to cellulosic biofuel blenders. Fig ure 4-5 displays the price gap when the blender's credit is included.
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From page 117... ...
From each draw, WTA, WTP, and the price gap were calculated for each feedstock. The results presented so far have been the mean values over all 10,000 calculations.
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From page 118... ...
35 with Blender's Credit 30 Figure 4-4.eps R01935 25 20 15 10 5 0 0 0 0 0 0 Biomass Type FIGURE 4-5 Gap between supplier WTA and processor WTP with blender's credit only projected by BioBreak model. NOTE: WTA – WTP under the assumptions of $111 per barrel of oil and a biomass to fuel conversion efficiency of 70 gallons per dry ton.
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From page 119... ...
relies on the University of Tennessee's POLYSYS modeling system to estimate the marginal cost for supplying biomass to range from $40-$60 and average about $50 per dry ton of harvested biomass at the farm gate. BioBreak costs for wheat straw to the farm gate average about $40 per dry ton, corn stover about $55-$60 per dry ton, and switchgrass in the Appalachian and South Central Regions about $65 per dry ton without land opportunity costs included and $80 with land opportunity costs.
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From page 120... ...
(See Table 1-1 in Chapter 1.) The study was based on a consistent biorefinery size of 2,205 dry tons per day of corn stover.
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All other price scenarios require either subsidies for the biofuel industry or additional taxes on petroleum products to narrow the price gap between petroleum fuels and biofuel. Without
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From page 122... ...
An increase of $25 per dry ton in the price of biomass increases the annual subsidies required by $5 billion to $10 billion per year. Figure 4-6 shows a graphical breakdown of the production costs.
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From page 123... ...
If all biomass for cellulosic biofuels is produced from dedicated energy crops, the amount of land needed would be at the high end of the estimate. The use of corn stover, wheat straw, other crop residues, and forest residues would reduce the amount of acres needed.
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From page 130... ...
food marketing system implies that changes in agricultural commodity prices and changes in retail food product prices do not correlate on a 1:1 basis. Much of the confusion in that debate, and the wide range of estimated effects of ethanol production on "food prices" during that period, was due to these uses of imprecise terminology.
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From page 131... ...
biofuel production accounted for about 10% of the rise in IMF global agricultural commodity price index. Lipsky (2008)
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From page 132... ...
In the case of corn, for example, if the range of a 20 to 40 percent price increase for corn is used with a marketing margin of 95 percent, then the retail price of grocery food products containing corn would 12 This section is based on the recent economic literature as of 2011 on the effect of ethanol production on agricultural commodity prices and retail food prices during 2007-2009. Much of the analysis conducted at that time suggested that the price effects of increased ethanol production were larger than the subsequent analysis.
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From page 133... ...
Similarly, using the 20 to 40 percent increase in agricultural commodity prices for wheat and soybean would yield a retail food price increase of 2.0 to 4.0 percent for wheat-based retail food products and 3.2 to 6.4 percent for soybean-based retail food products. Other researchers have come to similar conclusions using different assumptions about agricultural commodity price increases or food product marketing margins or by using different estimation methods (Jensen and Babcock, 2007; Leibtag, 2008; Perrin, 2008; Trostle, 2008; CBO, 2009)
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From page 134... ...
Second, the effects on agricultural (farm-level) commodity prices and consumer retail food prices need to be defined clearly in examining the price effects on expanded biofuel production under RFS2.
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. Effect of Short-Term Price Spikes on Livestock Producers As has been discussed, biofuels are only one of many factors influencing commodity prices.
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From page 136... ...
These factors make the demand for corn-grain ethanol production more inelastic and may increase the sensitivity of corn prices to supply side shocks, such as those due to weather or disease, by as much as 50 percent (Hertel and Beckman, 2010)
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From page 137... ...
However, as of 2010, DDGS was priced more closely with corn than oilseed meals. Effect of Cellulosic Biofuels The extent to which cellulosic and other second-generation biofuels raise the cost of feedstuffs fed to animals depends greatly on the mix of feedstocks used.
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From page 140... ...
If a commercial woody biomass refinery is built, it would require 1,000-2,000 dry tons of biomass per day to operate efficiently. The competition for resources created by a biorefinery entering the woody biomass market would have profound effects on the local price for woody feedstock.
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From page 141... ...
Therefore, though current wood biofuel prices are low compared to pulpwood and sawtimber prices, improving technologies for cellulosic biofuels could raise prices for wood inputs. The restrictive definition of woody biomass eligible for RFS2 was discussed in Chapters 1 and 2.
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From page 143... ...
, because of higher prices for timber, the United States would have to import additional wood to make up the difference. The model projects that industrial roundwood imports rise 10-fold to meet the timber shortage in the United States caused by the cellulosic biofuel standard.
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From page 146... ...
Given the price gap between WTA and WTP for cellulosic biomass, it seems even less likely that farmers would be willing to expand crop-planted area to grow dedicated bioenergy crops. (See also section "Social Barriers" in Chapter 6.)
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From page 147... ...
the consumption mandate requiring the use of biofuels as an input in the production of transportation fuels, (b) the federal tax credit for biofuels used in the production of transportation fuels, and (c)
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From page 148... ...
= price of biofuel with tax credit; Q* = quantity of biofuel with tax credit; RFS = mandate quantity; PRFS = price with tax credit and RFS2 mandate.
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From page 149... ...
Tax Credit for Blended Biofuels A second policy tool to support biofuels is the tax credit provided to blenders for using biofuels. As discussed in Chapter 1, tax credits exist to encourage the blending of corngrain ethanol, biodiesel, and cellulosic biofuel into transportation fuel.
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From page 150... ...
= market price of ethanol with tax credit; Qm = quantity of ethanol without tax credit; Q* = quantity of ethanol with tax credit.
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From page 151... ...
An import tariff on ethanol (considered in isolation from the consumption mandate and the tax credit) normally causes a decrease in the quantity of ethanol imports.
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From page 152... ...
In this case, the welfare effects of a combined policy would be the same as indicated above, but the magnitude of these changes would be larger for a combined policy than for a mandate policy alone. In addition to the welfare effects noted above, a combined policy would also result in a loss of federal fuel tax revenue equal to the quantity of gasoline consumption displaced by biofuel multiplied by the level of the tax credit.
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From page 154... ...
Agricultural Commodity Programs An increase in biofuel production encouraged by the RFS2 mandate can indirectly produce savings in federal payment programs that support agricultural commodities; however, the circumstances under which such savings are realized is rather specific and limited. Under the Food, Conservation, and Energy Act of 2008, commodity support programs consist of a direct payment program, a countercyclical payment program, and a marketing assistance loan or equivalent loan deficiency program.22 To determine the effect of RFS2 on the budget cost of these programs, each program is considered.
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From page 155... ...
also suggest that market prices of these three agricultural commodities would exceed effective target prices during the period, again supporting a conclusion that expanded biofuel production would likely result in no change in the budget cost of commodity programs.24 Conservation Programs The Conservation Reserve Program (CRP) -- a conservation program in which farmers sign contracts with the federal government to take land out of crop production for a period of time for which they receive payment -- is the largest federal conservation program directed at agricultural land.
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From page 156... ...
Nutrition and Income Transfer Programs As noted earlier (see "Food Prices") , assessment of any change in food prices resulting from expanded biofuel production would have to consider the effect on agricultural commodity prices and the transmission of that commodity price effect through the food system to the retail level.
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From page 157... ...
Therefore, the effect of expanded biofuel production on agricultural commodity production and on retail food prices could be small. Federal Fuel Tax Revenue Another effect of expanded biofuel production on the federal budget is through the federal tax credits for biofuels blended with motor fuel.
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From page 158... ...
If that duty is removed, the tariff revenue generated after that duty is removed would again be zero because the remaining 2.5 percent general tariff is near zero while the quantity imported would likely increase. Analysis of the effect of removing the $0.54 duty on corn-grain ethanol after the Renewable Fuel Standard under the Energy Policy Act of 2005 went into effect but before RFS2 under EISA was enacted suggests that more ethanol would be imported (USITC, 2009)
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From page 159... ...
Subsidies to reduce the capital investment cost of constructing cellulosic biofuel refineries are typically provided in the form of tax credits, grants, loans, or loan guarantees that provide a rate of interest below that which investors could obtain from alternative financing sources (Table 4-6)
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From page 160... ...
biomass and sucrose-derived ethanol demonstration projects. Conversion Assistance for Cellulosic Biomass, Waste-Derived Ethanol, $100 to $400 million during Approved Renewable Fuels (EPAct, Section 1512)
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From page 161... ...
. Renewable Fuel Production Research and Development Grants (EPAct, $25 million annually for Section 1511(d)
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From page 162... ...
Given an assumed refinery yield of 70 gallons per dry ton of biomass, fulfilling the RFS2 mandate of 16 billion gallons of ethanol-equivalent cellulosic biofuel in the year 2022 would require 229 million dry tons of biomass. Under the current rules of the BCAP program, payments can only be 27 Economists have found, for example, that the long-run benefits from improvements in agricultural productiv ity primarily accrue to consumers of food products in the form of lower prices, not to farm producers or food processors (Ruttan, 1982)
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From page 163... ...
Role of the RFS Renewable Biomass Definition While the Energy Policy Act of 2005 and EISA provide a great deal of the impetus for the push toward rapid biofuels development, in particular such as cellulosic biofuel, in other ways EISA was intentionally written to minimize negative greenhouse-gas emissions (for the definition in RFS2, see Chapter 1)
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From page 164... ...
Given that biological carbon sequestration is currently a goal primarily because it can assist with climate-change mitigation, concern exists that woody biofuels development could decrease overall carbon sequestration and impede efforts at mitigating climate change, thus putting mitigation through advanced biofuel development on a collision with mitigation through biological sequestration (see section "Interaction of Biofuel Policy with Possible Carbon Policies")
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From page 165... ...
On the other hand, to the extent that cellulosic biofuel market can reduce the rate of loss of America's farms and forests to industry and suburban sprawl, they may generate positive effects on water supplies, habitats, and viewscapes. Therefore, insofar as biofuel development alters water quality, it has the potential to affect highly valued resources, including aquatic habitats, drinking water sources, and recreationally valuable water bodies (Wilson and Carpenter, 1999)
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From page 166... ...
economy: energy security, GHG emissions reduction, and rural development. However, because biofuels are not cost-competitive with fossil fuels, supporting their development and commercialization has direct costs, such as the tax credits, and possible indirect costs, such as the repercussions of any upward pressure on food prices.
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From page 167... ...
The payment could be in the form of a blender's tax credit, or it could be paid directly to the producer, provided that the product is not subsequently exported.30 This approach has the potential to reduce government spending on biofuel subsidies and diminish any upward pressure on agricultural commodity prices that could be caused by competition with biofuels when oil prices are high. However, like the other options discussed here, it is not tied directly to policy objectives such as reduction of GHG emissions.
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From page 168... ...
BioBreak extends the breakeven analysis by using GREET31 1.8d GHG emissions savings from cellulosic ethanol relative to conventional gasoline along with the price gap to derive a minimum carbon credit or carbon price necessary to sustain a feedstock-specific cellulosic ethanol market. This carbon price can be thought of as either a carbon tax credit provided to the ethanol producer (or feedstock supplier)
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From page 170... ...
is available by 2020, the carbon price would decrease to range between $54 to $68 per tonne CO2eq assuming a fuel economy of 44.3 mpgge for fuel cell vehicles and a conversion yield of 80 gallons per dry ton of feedstock. 34 Those model projections must be interpreted in the context of recent changes in land-use patterns in the United States.
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From page 174... ...
The recent EPA study on RFS2 suggests that the area of land used for dedicated bioenergy crops, such as switchgrass, increase, while forestland and rangeland decline. The combination of these results suggests that carbon offsets would compete with cellulosic biofuel production for the same land; thus, environmental policies that encourage carbon offsets could raise the costs of producing cellulosic biofuel feedstocks.
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From page 175... ...
The greater use of DDGS in animal feed to some extent has muted the unfavorable effects on the livestock industry. If policies that were in place at the time this report was written are continued, it is extremely likely that meeting RFS2 will increase the federal budget, particularly in terms of subsidies spent on grants, loans, and loan guarantees to encourage cellulosic biofuel production and in terms of tax revenue forgone by the tax credits for blending biofuel with fossil fuels.
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2010. The impact of state government subsidies and tax credits in an emerging indus try: Ethanol production 1980-2007.
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From page 177... ...
Renewable Fuels Policy and Food Prices before the Senate Committee on Energy and Natural Resources, June 12. Goodwin, P., J
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From page 178... ...
2010. Supply of cellulosic biofuel feedstocks and regional produc tion patterns.
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From page 179... ...
2008. Global Agricultural Supply and Demand: Factors Contributing to the Recent Increase in Food Commodity Prices.
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From page 180... ...
2008. High and rising food prices: Why are they rising, who is affected, how are they affected, and what should be done?
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