International Experience with Liquid Biofuels

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					International Experience with Liquid Biofuels
Workshop on Renewable Energy and Energy Efficiency
Bangkok, 28 August 2006
Masami Kojima World Bank
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Increasing global interest in liquid biofuels
• Potential for reducing greenhouse gas emissions in transport (most difficult sector) • Energy security
Reduce reliance on imported oil Alternative suppliers

• Support to domestic farmers
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Ethanol and biodiesel producers
Ethanol
• • • • Brazil from sugarcane – sugar industry mostly unprotected US from maize – maize large recipient of subsidies China from mostly maize, some cassava and sugar cane Spain, France, and Sweden from sugar beets, wheat and barley

Biodiesel
• Germany, France, and Italy from rapeseed oil – rapeseed production subsidized – and in the future also from soybean oil • US from soybean oil – soybeans subsidized • Malaysia and Indonesia from palm oil in the future • India from jatropha on a small scale • Brazil from soybeans and other crops in the future • Argentina from soybeans in the future
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Liquid biofuel market to date
• Used as transportation fuels • Heavily protected, mostly domestic, limited trade (10%) with Brazil accounting for half of trade • Type of support
     Fuel tax and other fuel charge/fee reduction (universal) Mandatory blending or consumption requirements Price support and government purchasing policy Producer subsidies Large subsidies to feedstock growers in EU and USA – link to OECD agricultural policies  Import tariffs  Downstream subsidies (e.g., vehicles)
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Economics of ethanol production from sugarcane
0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 Opportunity cost of ethanol Gasoline equivalent cost of ethanol Premium gasoline

US$ per liter

Jan-00

Jan-01 Jul-01

Jan-02 Jul-02

Jan-03 Jul-03

Jan-04

Jan-05 Jul-05

Jan-06

Jul-00

Jul-04

Jul-06

*83% sugar and 17% molasses, and molasses priced at 30% of sugar

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Fuel excise tax reduction for ethanol
Country Germany* Sweden* Spain* France* Australia USA Tax reduction per liter €0.6545 (US$0.83) SKr4.62 (US$0.63) €0.42 (US$0.53) €0.37 (US$0.47) A$0.38143 (US$0.28) $0.135 federal, many states give additional tax incentives

*EU countries have principle of not overcompensating

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Fuel excise tax reduction for biodiesel
Country Germany* Sweden* France* Spain* Australia USA Tax reduction per liter €0.4704 (US$0.61) SKr3.12 (US$0.43) €0.33 (US$0.42) €0.29 (US$0.37) A$0.38143 (US$0.28) $0.26 or 0.13 federal

*EU countries have principle of not overcompensating
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Import tariffs
Ethanol classified as an agricultural commodity, biodiesel as industrial  much higher tariff rates on ethanol • India: 182% on undenatured ethanol, 30% on denatured ethanol • EU: €0.192 (US$0.24) per liter on undenatured ethanol, €0.102 ($0.13) per liter on denatured ethanol 100 developing countries enjoy duty-free access, but Brazil is not among them • USA: 2.5% + $0.1427 per liter
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Mandates
• Brazil: 20–25% ethanol in gasoline, 2% biodiesel by 2008, 5% by 2013 • USA: 7.5 billion gallons (28 billion liters) of renewable fuels in gasoline by 2012 (total gasoline consumption in 2005 – 140 billion gallons) MN 10% ethanol since 1997, 20% by 2013 HI 10% ethanol in 85% of gasoline sold • Germany: 2% next year • Argentina: 5% biofuels in gasoline and diesel by 2010 • Colombia: 10% ethanol in cities with >500,000 • India: 5% ethanol in 9 states and 4 UTs in Jan 2003, withdrawn in Oct 2004, re-started in Oct 2006 • Canada: Several provinces require 2.5%-10% ethanol in gasoline
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Can biofuels provide a solution to high oil prices?
• Biofuel production a small fraction of petroleum fuel production for the foreseeable future  biofuels will be price takers • Marginal demand and marginal supply set prices  1–2% global displacement might moderate oil price increases (but consider fuel economy penalties, and energy needed in feedstock production, biofuel manufacture, and additional transport to markets if any)
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Close link between biofuels and agriculture
• Feedstocks have alternative outlets
 Sweetner market for sugar and molasses  Food and animal feed for maize, wheat, cassava, soybeans, palm oil

• Most cropland can be used to produce different agricultural commodities, so biofuels can affect crops other than biofuel feedstocks
 Link between sugar, maize, wheat, and soybean prices and production via sugar/soybeans in Brazil and maize/wheat/soybeans in the US
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Linking agricultural crop and oil prices
• “2005 was probably a turning point, as the world sugar market became linked inextricably to the world oil market.” – F.O. Licht • “Molasses and sugar have the highest correlations [with oil]. A comparison of the shares of the proportions of commodity production destined for biofuels suggests that there may be a threshold above which product prices become correlated with energy prices. At biofuel percentages above 10%, sugar, molasses and (since 2002) rapeseed oil seem to have their prices correlated with that of crude petroleum.” – LMC International  Impact on palm oil prices of Indonesia and Malaysia’s July 2006 announcement to commit 40% of palm oil 12 production to biodiesel

History of Brazilian ethanol
• E5 authorized in 1931, mandated in 1938 • Proálcool launched in 1975: price guarantees, price subsidies, public loans, and state-guaranteed private bank loans to processors and growers • Ethanol and gasoline prices liberalized in 1997-1999 • Sale of hydrous ethanol declined from 1989 to 2004 • Flex-fuel vehicles and high oil prices have boosted ethanol consumption • High sugar prices in 2006 led to ethanol being more expensive than gasoline • Continuing improvement in production efficiency, resulting in large cost reduction through the decades • By far the largest biofuel program and greatest potential for expansion in the world 13

Center-South of Brazil
• • • • Undisputed leader in sugarcane production Entirely rain-fed ( Australia, India) Plenty of land left ( many other countries) Mill/distillery complex (40/60 to 60/40) yields more favorable economics generally • Extensive R&D, more than 500 varieties of cane that are resistant to 40-odd diseases; typical distillery uses 15 varieties to match each micro-climate
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Brazil ethanol in 2006
• World sugar prices surge to 25-year high in February 2006 • Potential shortage of ethanol as millers turn to more profitable sugar • Government suspends 20% import tariff on ethanol in February • Cane harvest brought forward to March to address ethanol shortage • Government lowers blend mandate from 25% to 20% in March • Hydrous ethanol price > E20 on equivalent basis • Attractiveness of sugar prices over ethanol continues on and off through July, creating tight supply
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Experience with cassava in Brazil
• No equivalent of bagasse for power generation • Large-scale farming of cassava failed because of pests and diseases • Manual harvesting labor-intensive and time-consuming • No commercial production of ethanol from cassava today
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What would it take to blend 5% biofuels in gasoline and diesel worldwide by 2015?
• Study by LMC International in 2006 • 4 scenarios for ethanol, 3 for biodiesel • Food demand, crop yields, and crop quality assumed to grow at the same rate as since 1991 • Biofuel content in gasoline and diesel same in 2015 as in 2005, or 5% in 2015
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Additional land required for ethanol (million ha)
Only cane in Brazil CS Cane worldwide 50% cane/50% maize All carbohydrates
Base 5% 7.6 17.5 22 38 178 207 448 498  10 16 29 50

(maize, wheat, cassava, barley, sugarcane, sugar beets)
From “A Strategic Assessment of the Impact of Biofuel Demand for Agricultural Commodities,” LMC International (2006).
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Additional land required for biodiesel (million ha)
Only palm in Indonesia Palm oil worldwide Oilseeds worldwide
(rapeseed, soybean, palm, sunflower oil)

Base 5%  9.4 19.9 10.5 20 32 11.3 208 258 50

From “A Strategic Assessment of the Impact of Biofuel Demand for Agricultural Commodities,” LMC International (2006).

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Concluding remarks
• A larger world biofuel market could moderate oil price increases, but significant substitution of oil is unlikely for the foreseeable future. • Assessing commercial viability of biofuels needs to take several factors into account:
 Rapid expansion of biofuel market could adversely affect biofuel economics by
 linking feedstock prices to oil prices  decreasing byproduct prices (e.g., glycerine).

 Biofuel production is already beginning to affect price relationships among some products (rapeseed vs. sunflower, palm vs. soy bean oil).

• No country has been able to establish a large biofuel market without substantial subsidies. Subsidies to biofuels should be weighed against other priority needs. • Amount of land needed for significant displacement of petroleum fuel with biofuel poses a challenge (environmental where there is land available, physical limitation where land and labor have better 20 use).


				
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