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					      Public Policy and the
     Economics of Biofuels
                           Jayson K. Harper

                  Professor of agricultural economics
        Department of Agricultural Economics and Rural Sociology
                The Pennsylvania State University, USA

Penn State is committed to affirmative action, equal opportunity, and the diversity of
                                   its workforce
Role of Renewable Energy in the U.S. Energy Supply, 2005




                            Source: Energy Information Administration, US DOE, July 2007




 Important Note:

 If all of the U.S. corn and soybean crop used for fuel,
 it would replace 12% of diesel and 6% of gasoline needs.
Current White House Policy Stance
• Key Steps to Energy Security
  – Increase diversity of energy in transportation
     • Expand alternative fuel sources (35 billion gallons by 2017,
       15% of fuel needs)
  – Increase production and reduce consumption to slow
    growth of oil prices
     • Volatile prices hurt consumers
     • Adjust CAFE standards “intelligently” to save up to 5% by
       2017
  – Increase ability to manage risks
     • Double strategic petroleum reserve
     • Iran and Venezuela emboldened by high prices
     • Terrorists view global oil infrastructure as attractive target
        “Twenty in Ten” Plan
• Reduce gasoline consumption by 20% in
  10 years
  – 15% through alternatives and 5% by
    increased efficiency
  – Reduce oil consumption by 2 million barrels
    per day in 2017 (-10%)
  – Increase alternative fuel use from 3% today to
    15% in 2017
  – Potentially stop growth of CO2 from
    automobiles
 American Jobs Creations Act of 2004
• created tax incentives for biodiesel fuels and extended
  the tax credit for fuel ethanol
• established the Volumetric Ethanol Excise Tax Credit
  (VEETC), which provides ethanol blenders/retailers with
  $.51 per gallon of 190-proof ethanol blended or $.0051
  per percentage point of ethanol blended
• established a $1.00 per gallon credit for agri-biodiesel
  and $.50 per gallon for waste-grease biodiesel
   – “agri-biodiesel” means first-use vegetable oils or animal fats
• incentive is available until the end of 2010
           Energy Policy Act of 2005
• created various tax incentives for hybrid vehicle
  purchases, energy efficiency investments for new or
  existing buildings (home and business), and biodiesel/
  alternative fuels production.
• established 10¢/gal. credit for small agri-biodiesel or
  ethanol producers
   – Credit applies up to 15 million gallons for producers with
     production capacity of 60 million gallons or less
   – Incentive is available until the end of 2008
• Also established a 30% tax credit for the cost of building
  alternative fuel refueling facilities (minimum E85 or B20)
   – Incentive is available until the end of 2010
What determines the profitability of
         a biofuel plant?
   •   Price of gasoline and diesel
   •   Price of grains and oilseeds
   •   Value of of co-products
   •   Transportation cost
How does the Cost of Producing Ethanol
 Change with Increasing Input Costs?
• For medium-sized ethanol plants, corn makes
  up around 35-40% of the cost of producing a
  gallon of ethanol.
• The price of boiler fuel (natural gas, coal, corn
  stover, DDGS) has an impact
   – Natural gas fired plants:15-20% of total cost
   – Location of plants near cheaper energy sources (like
     coal)
   – Potential development of two-tier ethanol price
     structure (coal-based ethanol selling at a discount to
     lower carbon emission plants)
Corn Usage
(billion bushels)




                    Source: USDA
       Food and Industrial Corn Use
                      (million bushels)

Crop    HFCS   Sucrose   Starch     Fuel   Liquor       Cereal
Year
2004     520    222        279     1,323    133           189

2005     529    229        275     1,603    135           190

2006     510    240        275     2,150    136           190


2007     515    243        280     3,300    136           193


                                                    Source: USDA
  What about the demand side?
Increasing fuel economy is seen by many as the best tool
   we have for cutting dependence on oil…


Corporate Average Fuel Economy (CAFE)
• First enacted in 1975 after first oil
  embargo
• Stagnant since 1985
• “Twenty in Ten Plan” suggests only a 5%
  increase in ten years
            CAFE Standards for Passenger Cars and
                   Light Trucks, 1978-2007

      30

      25

      20
MPG




      15

      10

      5

      0
           1978

                  1980

                         1982

                                1984

                                        1986

                                               1988

                                                        1990

                                                               1992

                                                                        1994

                                                                               1996

                                                                                      1998

                                                                                             2000

                                                                                                    2002

                                                                                                           2004

                                                                                                                  2006
                                                         Model Year

                                                      Cars            Light trucks

                                       Data: NHTSA, USDOT, Summary of Fuel Economy Performance Report, March 2007
               Sales Volume of Passenger Cars and Light
                          Trucks, 1979-2006

          18
          16
          14
          12
million




          10
          8
          6
          4
          2
          0
               1979

                      1981

                             1983

                                    1985

                                            1987

                                                   1989

                                                           1991

                                                                   1993

                                                                          1995

                                                                                   1997

                                                                                          1999

                                                                                                 2001

                                                                                                        2003

                                                                                                               2005
                                                          Model Year

                                           Total fleet            Cars           Light trucks

                                            Data: NHTSA, USDOT, Summary of Fuel Economy Performance Report, March 2007
                  Fleet Average Fuel Economy, 1978-2007


      33
      31
      29
      27
MPG




      25
      23
      21
      19
      17
      15
           1978

                   1980

                          1982

                                 1984

                                        1986

                                               1988

                                                       1990

                                                              1992

                                                                     1994

                                                                            1996

                                                                                   1998

                                                                                          2000

                                                                                                 2002

                                                                                                        2004

                                                                                                               2006
                                                        Model Year

                                         Total fleet           Cars          Light trucks

                                          Data: NHTSA, USDOT, Summary of Fuel Economy Performance Report, March 2007
      Risks facing the Biofuel Industry
• Demand risk
   – Oxygenate market
     (replacement for MTBE)
   – Displacement blending
     (90/10)
   – E85 market
• Supply risk
   – Dependence on weather
   – Dependence on the
     railroad industry
   – Location of plants
       • Near to supply of
         feedstock
       • Near to final consumer
       • Market for co-products,
         CO2 and distillers grains
      Risks facing the Biofuel Industry
• Political risk
   – Large expansion in industry after 2004 American Job creation Act and
     2005 Energy Policy Act
       •   Blenders tax credit of $0.51/gal. of ethanol
       •   Blender credit of $1.00/gal. for agri-biodiesel
       •   Small agri-biodiesel producer credit of $0.10/gallon
       •   Tariff on imported ethanol of $0.53/gal.
   – Sunset provisions in acts (2008 and 2010)
       • Is renewal guaranteed?
       • Alternative use for tax credits
• Obsolescence risk
   – Technology change for current process
       • Competition in commodity production implies rapid adoption of processes
         that low cost and/or increase output
   – Development of commercial scale cellulosic processes
       • New feedstocks
• Environmental risk
   – Does production of ethanol lead to improvements in air quality?
   – Local water supply concerns

				
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posted:10/4/2011
language:English
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