Handbook of bioenergy economics and policy volume II modeling land use and greenhouse gas implications
Natural Resource Management and Policy Series Editors: David Zilberman · Renan Goetz · Alberto Garrido
Madhu Khanna David Zilberman Editors
Handbook of Bioenergy Economics and Policy: Volume II Modeling Land Use and Greenhouse Gas Implications
Natural Resource Management and Policy Volume 40
Series editors David Zilberman, California, USA Renan Goetz, Girona, Spain Alberto Garrido, Madrid, Spain
There is a growing awareness to the role that natural resources, such as water, land, forests and environmental amenities, play in our lives. There are many competing uses for natural resources, and society is challenged to manage them for improving social well-being. Furthermore, there may be dire consequences to natural resources mismanagement. Renewable resources, such as water, land and the environment are linked, and decisions made with regard to one may affect the others. Policy and management of natural resources now require interdisciplinary approaches including natural and social sciences to correctly address our society preferences. This series provides a collection of works containing most recent ﬁndings on economics, management and policy of renewable biological resources, such as water, land, crop protection, sustainable agriculture, technology, and environmental health. It incorporates modern thinking and techniques of economics and management. Books in this series will incorporate knowledge and models of natural phenomena with economics and managerial decision frameworks to assess alternative options for managing natural resources and environment.
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Madhu Khanna David Zilberman •
Handbook of Bioenergy Economics and Policy: Volume II Modeling Land Use and Greenhouse Gas Implications
Editors Madhu Khanna Department of Agricultural and Consumer Economics University of Illinois at Urbana-Champaign
Urbana, IL USA
David Zilberman Department of Agricultural and Resource Economics University of California at Berkeley Berkeley, CA USA
Robert H. Beach Agricultural, Resource & Energy Economics and Policy Program, RTI International, Research Triangle Park, NC, USA Géraldine Bocquého LEF, AgroParisTech, INRA, Nancy, France Rafael Silva Capaz Institute of Natural Resources, Federal University of Itajubá, Itajubá, Brazil Miguel Carriquiry Universidad de la República, Montevideo, Uruguay Xiaoguang Chen Research Institute of Economics and Management, Southwestern University of Economics and Finance, Chengdu, China Luciane Chiodi Bachion Agroicone, São Paulo, Brazil Maria Paula Vieira Cicogna Polytechnic School, University of São Paulo, São Paulo, Brazil Xiaoxue Du Department of Agricultural and Resource Economics, University of California at Berkeley, Berkeley, CA, USA Jennifer B. Dunn Energy Systems Division, Argonne National Laboratory, Argonne, IL, USA Alla A. Golub Department of Agricultural Economics, Center for Global Trade Analysis, Purdue University, West Lafayette, IN, USA Ben Gordon Department of Agricultural and Resource Economics, University of California at Berkeley, Berkeley, CA, USA Jeongwoo Han Energy Systems Division, Argonne National Laboratory, Argonne, IL, USA Leila Harfuch Agroicone, São Paulo, Brazil Thomas W. Hertel Department of Agricultural Economics, Center for Global Trade Analysis, Purdue University, West Lafayette, IN, USA
Gal Hochman Department of Agriculture, Food and Resource Economics, Rutgers University, New Brunswick, NJ, USA Mark Horridge Centre of Policy Studies, Victoria University, Melbourne, VIC, Australia Scott Kaplan Department of Agricultural and Resource Economics, University of California at Berkeley, Berkeley, CA, USA Madhu Khanna Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, Urbana, IL, USA Liang Lu Department of Agricultural and Resource Economics, University of California at Berkeley, Berkeley, CA, USA Bruce A. McCarl Department of Agricultural Economics, Texas A&M University, College Station, TX, USA Ruiqing Miao Department of Agricultural Economics and Rural Sociology, Auburn University, Auburn, AL, USA Márcia Azanha Ferraz Dias de Moraes (USP—ESALQ, Department of Economics, Administration and Sociology), University of São Paulo, São Paulo, Brazil Marcelo Melo Ramalho Moreira Agroicone, São Paulo, Brazil André Meloni Nassar Agroicone, São Paulo, Brazil Luiz Augusto Horta Nogueira Institute of Natural Resources, Federal University of Itajubá, Itajubá, Brazil Michael O’Hare Goldman School of Public Policy, University of California at Berkeley, Berkeley, CA, USA Richard J. Plevin Institute of Transportation Studies, University of California at Davis, Davis, CA, USA Deepak Rajagopal Institute of the Environment and Sustainability, University of California at Los Angeles, Los Angeles, CA, USA Luciano Rodrigues (USP—ESALQ, Department of Economics, Administration and Sociology) and Specialist with Extensive Experience on the Sugarcane Industry and Ethanol Market in Brazil, Applied Economics at the University of São Paulo, São Paulo, Brazil Steven K. Rose Electric Power Research Institute, Washington, DC, USA Joaquim Seabra UNICAMP, Campinas, São Paulo, Brazil Joaquim Bento de Souza Ferreira Filho Escola Superior de Agricultura “Luiz de Queiroz”, Universidade de São Paulo, São Paulo, Brazil
Michael Traux Department of Agriculture, Food and Resource Economics, Rutgers University, New Brunswick, NJ, USA Michael Wang Energy Systems Division, Argonne National Laboratory, Argonne, IL, USA Xi Yang Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, Urbana, IL, USA Yuquan W. Zhang Agricultural, Resource & Energy Economics and Policy Program, RTI International, Research Triangle Park, NC, USA David Zilberman Department of Agricultural and Resource Economics, University of California at Berkeley, Berkeley, CA, USA
Bioenergy Economics and Policy in US and Brazil: Effects on Land Use and Greenhouse Gas Emissions Madhu Khanna and David Zilberman
1 Overview The biofuel industry has expanded since the start of the millennium. This expansion was due to the desire to reduce dependence on foreign oil, to mitigate greenhouse gas (GHG) emissions from the transportation sector and enhance rural economic development. Brazil emerged as an early leader in biofuel production, producing 3 billion gallons of sugarcane ethanol in 2000 followed by the US producing 1.6 billion gallons from corn ethanol. Production expanded in both countries in the following decade but much more signiﬁcantly in the US which overtook Brazil as the leading producer of ethanol in the world and shifted from an importer of biofuels from Brazil to becoming an exporter of biofuels to Brazil. US production rose to about 14 billion gallons in 2014 while production of sugarcane ethanol in Brazil increased to about half of that. There is a large body of literature that aims to address the economic, political and technological aspects of the biofuel sector. The ﬁrst volume of the Handbook of Bioenergy Economics and Policy broadly covered the major economic and policy issues associated with biofuel and bioenergy. This second volume focuses on three major issues.
First, what led to this over fourfold increase in total biofuel production in the two countries? What role did market forces versus policy incentives play in explaining these trends? Both the US and Brazil have had a mix of policy incentives to support biofuel production over the last two decades. In particular, both countries have relied on a biofuel mandate to accelerate blending of biofuels with gasoline beyond the levels that would have been supported by the market. Were supply-side factors, such as, limits to availability of land or feedstocks and high costs of production, or demand-side factors, such as, the technical feasibility of blending biofuels with gasoline responsible for the plateauing or even declining trend in biofuel production observed in recent years in these two countries? Did the interaction of biofuel policies with other policies create further incentives or barriers for the growth of the biofuels sector? Several chapters in this book address these issues. Second, as biofuel production from food crops in the two countries expanded, concerns about the increasing diversion of cropland to biofuel crop production and the conversion of noncropland to crop production have grown. These changes in land use have implications for both food prices and for GHG emissions as carbon stored in soils is released when land is converted to agricultural production. This has led to considerable skepticism about the potential for biofuels to lead to GHG savings relative to fossil fuels. Life cycle analysis has been used to assess the GHG impacts of biofuels. Life cycle analysis of the GHG emissions accounts for all emissions associated with the production of biofuel, including production of fertilizers and other inputs used to produce the feedstock, transport the feedstock to the bio-reﬁnery and conversion of the feedstock to biofuel at the reﬁnery. The direct life cycle emissions are expected to be relatively small with the next generation of biofuels produced from cellulosic biomass from crop and forest residues and dedicated energy crops. These feedstocks require fewer carbon intensive inputs in the process of production. Energy crops can also sequester a large amount of carbon in the soil and make the resulting biofuel a net sink for carbon rather than a source (Dwivedi et al. 2015; Hudiburg et al. 2016). In addition to these direct emissions, emissions can also be generated indirectly due to changes in land use caused by biofuel-induced changes in crop prices and changes in fossil fuel use caused by biofuel-induced changes in fuel prices. Estimating the extent to which the food price increases and land use changes are caused by biofuels and would not have occurred anyway is complicated since it relies on economic models to simulate effects with and without biofuels. The outcomes of economic models are dependent on their structure, parametric assumptions, and scenarios simulated (Khanna and Crago 2012). Various chapters in this book describe improved methods for modeling the transformation of land from one use to another. Third, the transition to second generation biofuel will require a shift toward new crops that are yet to be grown commercially. The nascent commercial scale production of cellulosic biofuels that emerged in 2014 has relied largely on crop residues for feedstock. Large scale production using energy crops has yet to occur due to high costs of production, large capital requirements, and riskiness of production. Dedicated energy crops differ from the annual crops used for biofuels because they are typically perennials with a lifespan of at least 10–15 years and a
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lag of 1–5 years between planting and harvestable yield. What type of incentives will be required to induce farmers to switch from an annual crop with well-developed markets and subsidized crop insurance to an energy crop with thin market demand that require a long-term commitment of land to recover investment value? The rich literature on technology adoption suggests that there are mechanisms that can induce farmers to make long-term investments in risky crops, including various types of contracts between farmers and feedstock reﬁners and government policies such as subsidies and crop insurance that can protect both farmers and the reﬁners. Furthermore, adoption of biofuel policy may be constrained by credit availability, which may call for other forms of intervention. There is paucity of research on adoption of second generation biofuels and mechanisms that will induce it and we aim to ﬁll this gap. The chapters in this book provide an economic framework to explore the issues discussed above in greater detail. The chapters are grouped into three sections. The ﬁrst section describes the market forces and policy incentives that have contributed to the development of the biofuel industry in the US and Brazil. Biofuels emerged as an infant industry whose high costs of production required high market prices or policy incentives that level the playing ﬁeld with their functionally equivalent fossil fuels. These chapters describe the type of biofuel policies pursued in US and Brazil, differences in the structure of the fossil fuel industry and the fossil fuel pricing policies and the differing role of the government in providing demand-side incentives for biofuel production in the two countries. It analyzes the implications of these different approaches for the outcomes over time in the two countries. The second section describes the methodological and conceptual issues involved in assessing the direct and indirect life cycle GHG emissions and land use change associated with biofuel production. Chapters in this section describe the life cycle approach to GHG accounting, the rationale for including GHG emissions due to direct and indirect land use change and the role of life cycle analysis in assessing compliance with biofuel policies in the US and the European Union (EU). It also discusses issues that arise in modeling land use change. Approaches ranging from stylized models to partial domestic models to global general equilibrium models are presented. These chapters describe the conceptual considerations that should be incorporated and empirical strategies utilized by modelers to represent the determinants of land use change due to biofuels, the mix of biofuels, and feedstocks likely to be produced under alternative policy scenarios and their global impacts on food and fuel prices. These chapters also assess the extent to which biofuel policies in the US and Brazil lead to land use change, the type of land use change likely to occur and its economic and environmental consequences. The last section includes chapters that discuss the issues related to developing a supply chain for cellulosic biofuel feedstocks, including the contractual arrangements needed to induce biomass production. It includes chapters that review the existing literature on contact design and incentives for technology adoption and discuss the factors likely to influence farmer willingness to produce bioenergy crops and the policies needed to overcome the barriers to do so.
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Like Volume 1 of the Handbook, this volume will be of value for academic audiences and policy analysts and for decision makers in industry and nongovernment organizations that are interested in understanding the economic impacts of biofuels and their implications for land use, GHG emissions, energy, and food prices. It will be a useful reference for scholars seeking a review of the current state of knowledge and a comparative understanding of the biofuel industry in the two leading producers of biofuels in the world, US and Brazil. The book provides comprehensive coverage of not only issues that have affected the development of the ﬁrst generation of biofuels but also challenges facing the development of the next generation of biofuels. This volume will also be of interest to practitioners and managers in industry and agriculture who seek to understand the conceptual and practical issues associated with implementation and use of bioenergy and economic and policy dimensions of a growing bioeconomy. Policy makers will ﬁnd useful insights on the economic consequences of various policy alternatives to support biofuel production. Scholars with an interest in renewable energy policy and its effects on agriculture, trade, economic development, resource economics, and public policy will appreciate the comparative analysis of US and Brazil biofuel policies. Similar to Volume 1, this book should also be attractive for educational purposes, for use as a textbook for courses and curricula associated with the emerging ﬁeld of bioenergy economics. As universities develop more specialized curriculum centered around bioenergy, this book could serve as a supplementary reading to familiarize students with applications of economic tools to analyze the economic and environmental implications of bioenergy development and policies.
2 Market and Policy Incentives for Biofuel Production in the US and Brazil Chapter “US Biofuel Policies and Markets” by Hochman, Traux, and Zilberman discusses the suite of biofuel policies established in the US, including the biofuel mandate, the tax credit, and the import tariff to enable the infant biofuel industry to develop. They compare the implications of these policies for food and fuel prices and the costs of these policies to consumers, producers, and the government. This chapter also describes the various indirect effects that biofuel production generate in the food and fuel markets because they affect food and fuel prices. These include, among others, the positive and negative indirect effects of biofuels, including the land use change effect, the fuel rebound effect, and a balance of trade effect. The chapter concludes by discussing the demand-side challenges to expanding ethanol production due to the blend wall in the US. Chapters “The Sugarcane Industry and the Use of Fuel Ethanol in Brazil: History, Challenges and Opportunities,” “Incentives and Barriers for Liquid
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Biofuels in Brazil,” and “Prospects for Biofuel Production in Brazil: Role of Market and Policy Uncertainties” trace the development of the biofuel industry in Brazil. Chapter “The Sugarcane Industry and the Use of Fuel Ethanol in Brazil: History, Challenges, and Opportunities” by Moraes, Rodriguez, and Kaplan describes the early stages of the development of the biofuel sector in Brazil and the institutional factors that helped Brazil support not only increased production of ethanol but also develop the infrastructure needed for its supply to consumers and the purchase of flex-fuel cars that would enable its consumption by consumers. The military regime in Brazil together with the state owned oil company Petrobras enabled the development of an integrated supply chain for biofuels that included production by mills, distribution, and transportation as well as price incentives for biofuels and ethanol-operated cars that made biofuels appealing to fuel consumers in the 1980s. The chapter also discusses the post-deregulation period in the 1990s, the design of a new institutional feedstock pricing arrangement between sugarcane growers and mills to ensure fair remuneration to each group and the growth in demand for flex-fuel cars which facilitated market-based incentives for production and consumption of ethanol. Brazil has been able to establish a biofuel industry that sells ethanol in two forms: anhydrous ethanol which is pre-blended with gasoline (to form gasohol) and 100% ethanol (hydrous ethanol) that fuel consumers can blend as they choose depending on its price competitiveness with the pre-blended fuel whose price depends in part on the price of gasoline. The government has regulated the domestic price of ethanol to prevent it from fluctuating with the international price of oil in order to limit inflationary pressures in Brazil. In recent years, the domestic price of gasoline has remained below the international price. This together with the lowering of the federal tax on gasoline has adversely affected the competitiveness of sugarcane ethanol. In Chapter “Incentives and Barriers for Liquid Biofuels in Brazil,” Nogueira and Capaz focus on the post-2005 period of development of the sugarcane ethanol industry and describe the adverse effect of government interventions in the gasoline market on the ethanol industry. In contrast, support through mandates and other ﬁnancial incentives provided by the government for development of the biodiesel industry to beneﬁt small farmers in less developed rural areas has led to exponential growth of the biodiesel industry. The chapter explains the contrast between biodiesel versus ethanol markets and the policy toward gasoline versus diesel markets. In Chapter “Prospects for Biofuel Production in Brazil: Role of Market and Policy Uncertainties” Cicogna, Khanna, and Zilberman discuss the role of market and policy uncertainties in limiting incentives for investment in sugarcane ethanol production in Brazil. Fuel taxes and tax credit for ethanol have played an important role in improving the competitiveness of hydrous ethanol. Ethanol production costs have been increasing over time while the tax on gasohol has been declining. Fluctuations in these taxes and in the mandated blend rate have also added to
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uncertainty about future demand for ethanol and limited incentives for investment. This policy uncertainty has been accompanied by market uncertainties about the price of ethanol, due to the absence of futures markets for ethanol. This chapter discusses various options for mitigating market uncertainties, including mechanisms for storage of ethanol, diversifying the revenue stream by producing co-generated electricity and cellulosic biofuels as co-products with sugarcane. It concludes by discussing the prospects for cellulosic biofuel production in Brazil.
3 Land Use and Greenhouse Gas Effects of Biofuel Production in the US and Brazil Chapter “Biofuel Life-Cycle Analysis” reviews the methodology for life cycle analysis of biofuels and its application for different biofuel pathways and the issues associated with estimating direct and indirect land use change emissions due to biofuels. Dunn, Han, Seabra, and Wang discuss various methodological choices, such as the techniques for handling biofuel co-products, and range of estimates for the GHG intensities of ethanol from corn, sugarcane, stover, switchgrass, and miscanthus. They also describe how life cycle analysis is used to determine compliance with regulations in various countries and how estimates of the carbon intensities of a biofuel differ across countries, feedstocks and with the inclusion of land use change emissions. They show the extent to which estimates of land use change emissions, in particular, vary considerably across studies. Assessing the indirect land use effects of biofuels necessitates reliance on economic models that make a number of assumptions about the behavior of agents, market structure and elasticities of supply, demand and transformation of land from one use to another. General equilibrium models, in particular, rely on the assumption that the elasticities are constant over time and across large regions within a single agro-ecological zone. In Chapter “Effect of Biofuel on Agricultural Supply and Land Use,” Zilberman, Rajagopal, and Kaplan question the assumptions that the elasticity of land use change with respect to agricultural prices is constant over time. The authors develop a stylized dynamic model framework to show that the responsiveness of land allocation between agricultural and environmental uses varies depending on changes in demand for agricultural and environmental goods, environmental regulations, and the evolution of the relationships between output, land use, and variable input use over time. Moreover, the observed land use changes and the observed changes in cropland rents in the US in recent years indicate that cropland acreage at the extensive margin is fairly inelastic (Barr et al. 2011). Relatively large changes in land rents in recent years have been accompanied by very small changes in aggregate crop acreage. Although this
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before and after biofuels comparison of land use change is different from the analysis of with and without biofuels at a point in time done by general equilibrium models, it does suggest a divergence between the observed phenomenon and the simulated behavior. This calls into question the data and modeling assumptions being made by the large scale static CGE and multi-market models such as those by Searchinger et al. (2008). Golub, Hertel, and Rose demonstrate this in Chapter “Global Land Use Impacts of U.S. Ethanol: Revised Analysis Using GDyn-BIO Framework,” by developing a dynamic computational general equilibrium (CGE) version of the GTAP model and using it to compare the land use effects of a 15 billion gallon mandate with those from a static CGE model. They examine the extent to which use of a dynamic model leads to a decline in land use effect of biofuels it allows for increased possibilities for intensiﬁcation of production in the agricultural and forestry sectors, growth in crop yields over time and changes in demand and supply elasticities over time. In Chapter “Land Use and Greenhouse Gas Implications of Biofuels: Role of Technology and Policy,” Chen and Khanna use a dynamic partial equilibrium model, BEPAM (Biofuel and Environmental Policy Analysis Model) which is an integrated model of the agricultural and transportation sectors to compare the land use and GHG effects of the RFS with those of the RFS combined with alternative biofuel policies, such as a volumetric tax credit, an LCFS and a carbon tax. They model the potential to produce both ﬁrst generation biofuels, advanced biofuels, and cellulosic biofuels from a wide range of feedstocks. Their analysis compares the implications of two indirect effects of biofuel policies on GHG emissions—the indirect land use effect and the fuel market rebound effect. They use the spatially explicit nature of the BEPAM structure to show the spatial pattern of production of feedstocks for cellulosic biofuels and how it varies with the policy incentives provided. Their analysis provides another estimate of the extent to which total land use can be expected to respond to changes in crop prices. It also shows how the effectiveness of using land to mitigate GHG emissions varies across the policies considered. In Chapter “Modeling Bioenergy, Land Use, and GHG Mitigation with FASOMGHG: Implications of Storage Costs and Carbon Policy,” Beach, Zhang, and McCarl use the dynamic partial equilibrium model FASOMGHG to examine the optimal mix of feedstocks to meet the RFS while taking into account the differential need for storage of biomass for different feedstocks. They analyze the extent to which energy crops have a smaller need for storage because they have a longer harvest window as compared to an annual biomass crop like corn stover. The inclusion of storage costs in the model affects the economic incentives to produce energy crops instead of crop residues. Similar to Chen and Khanna in the previous chapter, they also examine the effect of the addition of a carbon price to the RFS on the mix of feedstocks and the extent to which it shifts the mix toward low carbon energy crops instead of crop residues.
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In Chapters “Empirical Findings from Agricultural Expansion and Land Use Change in Brazil” and “Land Use Change, Ethanol Production Expansion and Food Security in Brazil” we turn our attention to land use changes in Brazil due to sugarcane ethanol production. Harfuch, Bachion, Moreira, Nassar, and Carriquiry present an updated version of the partial equilibrium BLUM (Brazil Land Use Model) model that more accurately models land use change at the intensive and extensive margins. Instead of keeping the land supply elasticity as a constant, the authors present a modiﬁed structure of the model in which the land supply elasticity varies with the extent to which current agricultural land use diverges from that in base period. This implies that as land is increasingly converted to agriculture, further changes in land use become more inelastic. Changes in land use at the extensive margin (between agriculture and forestry) in the model occur in response to changes in the weighted average return to agriculture. The revised model relies on observed land use transition data to determine the weights to be attached to different activities so that activities directly responsible for deforestation are assigned a higher weight. The improved model also increases the ease of pasture intensiﬁcation. They discuss the implications of these changes for the effect of increased production of sugarcane ethanol for land use change and show how it affects the indirect land use change related GHG intensity of sugarcane ethanol in Brazil. In Chapter “Lessons from the ILUC Phenomenon,” O’Hare and Plevin discuss the conceptual challenges posed by indirect land use change for GHG emissions accounting for biofuels and its implications for policy. They note that the indirect effects of biofuels depend on the policy used to promote biofuels and that these effects are uncertain and model dependent. The authors also point out that models are simpliﬁcations of the global economy and discuss the need to make policy choices while recognizing the uncertainties that will remain in estimating the exact magnitude of the indirect land use change effect. An important consideration that is often overlooked in estimating this magnitude is the timing of the different emissions over the life cycle of the biofuel. The indirect land use change effect occurs at the onset of the conversion of noncropland to crop production while other emissions associated with the production of biofuel crops and the savings due to displacement of fossil fuels are annual effects that occur over time in the future. The chapter discusses various options for incorporating the effect of this difference in timing of emissions on the climate system in accounting for the GHG effect of biofuels.
4 Feedstocks for Cellulosic Biofuels: Production Risks and Risk Management Large scale and sustainable production of cellulosic biofuels will require a dedicated feedstock. These feedstocks present new crop choices and/or production systems for farmers with uncertainties about yields, costs and returns. Studies analyzing the costs of producing dedicated energy crops and cellulosic biofuels
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typically assume that crop yields are known with certainty, that farmers are risk neutral, have low discount rates and do not have any credit constraints; the ﬁxed costs of establishing energy crops can therefore be amortized over the lifespan of the crop. Macro-models implicitly assume that biomass will be sold on the spot market and its price will fluctuate with demand and supply. In practice, farmers are likely to require long-term contracts and an assurance of demand before they will be willing to convert land from an annual crop to an energy crop. Khanna, Zilberman, and Miao discuss the various factors likely to influence the adoption of energy crop feedstocks for biofuels in the chapter “Innovation in Agriculture: Incentives for Adoption and Supply Chain Development for Energy Crops”. Using miscanthus and switchgrass as examples of promising energy crops they describe the key biophysical features of these crops such as yield and lifespan as well as the farm and farmer characteristics that are likely to affect the economics of the energy crop adoption decision. Heterogeneity in these features across spatial locations and across farmers can be expected to lead to spatial variability in the pattern of energy crop production across the rain-fed US. In the chapter “Effects of Liquidity Constraints, Risk and Related Time Effects on the Adoption of Perennial Energy Crops” Bocqueho delves deeper into the role of liquidity constraints, risk aversion and time preferences on the incentives to adopt an energy crop. She examines the empirical evidence on the effects of these factors on technology adoption and presents a model to analyze the effects of liquidity constraints on a farmer’s adoption decision. She describes survey evidence on the perceptions of risk of producing energy crops by farmers in France. The chapter also discusses other factors such as the irreversibility of the adoption decision, intertemporal fluctuations in income and reduced flexibility of changing the allocation of land that has been planted under a perennial crops as other barriers to energy crop production. In the Chapter “Contracting in the Biofuel Sector” Du et al. address the issue of contracting for the production of biomass feedstocks. Biomass production from perennial energy crops imposes a number of risks for farmers because markets for it are thin, costs of transporting them long distance are high and a 10 to 15 year lifespan requires long term commitment of land to it to recover the initial investment. There is a large literature examining the incentives for farmers to enter into marketing or production contracts due to risk aversion, transactions costs and thin markets. This chapter reviews this existing literature and then discusses the design of contracts for biomass feedstocks.
5 Summary The corn and sugarcane ethanol industries have grown rapidly in recent decades and reached a high degree of maturity in both the US and Brazil. Policy has played a critical role in both countries in enabling the infant industry to develop. However, production levels of both types of ethanol have stalled recently in both the US and
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Brazil although for different reasons. Although Brazil has lagged behind the US in the volume of biofuel production, it has achieved much greater penetration of ethanol in its fuel mix because it was able to simultaneously develop the infrastructure to distribute 100% ethanol and induce a shift in the vehicle fleet to include an increasing share of flex-fuel vehicles. In contrast, in the US, biofuel consumption has hit a blend wall because of inadequate ability to distribute or consume higher blends. Brazil, on the other hand, has provided inadequate incentives for new investments in biofuel production because government policies have reduced the competitiveness of biofuels relative to gasoline. The ﬁrst section of the book describes the policy incentives as well as the market and policy barriers for increased biofuel production in the US and Brazil. Expansion of biofuel has raised concerns about the GHG savings they can lead to and their adverse implications for land use and food prices. Models estimating indirect land use changes due to biofuels rely on a number of parametric assumptions and their outcomes are dependent on model structure. Chapters in Sect. 2 of the book presents the improvements made in existing models to enable them to have a more flexible structure that better captures the evolution in the responsiveness of land supply to prices over time. This section of the book also includes chapters that take a prospective look at the land use and GHG implications of the cellulosic biofuel mandate in the US. The last section of the book examines the factors that will influence farm-level decisions about producing dedicated energy crops for cellulosic biofuels. It describes the effects of risks and uncertainties associated with perennial energy crop production and the role of liquidity constraints in creating disincentives for energy crop production. These chapters highlight the need for developing contractual arrangements between farmers and the reﬁnery to develop the supply chain needed to support cellulosic biofuel production. The chapters in this book will familiarize readers with the latest conceptual analysis and developments in numerical models to assess the land use and GHG implications of biofuels. They describe the suite of biofuel policies implemented in the US and Brazil and describe the intended and unintended effects these policies have had on the development of the biofuel industry in these two countries. Finally, the chapters in this book discuss the economic issues that will affect farm-level production of energy crops and the development of a supply chain for the next generation of biofuels.
References Barr, K. J., B. A. Babcock, M. A. Carriquiry, A. M. Nassar, and L. Harfuch. 2011. Agricultural Land Elasticities in the United States and Brazil. Applied Economic Perspectives and Policy 33 (3):449−462. Dwivedi, P., W. Wang, T. Hudiburg, D. Jaiswal, W. Parton, S. Long, E. DeLucia, and M. Khanna. 2015. Cost of Abating Greenhouse Gas Emissions with Cellulosic Ethanol. Environmental Science and Technology 49(4):2512−2522.
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Hudiburg, T.W., W. Wang, M. Khanna, S. P. Long, P. Dwivedi, W. J. Parton, M. Hartmann, and E.H. DeLucia. 2016. Forthcoming. Impacts of a 32 Billion Gallon Bioenergy Landscape on Land and Fossil Fuel use in the US. Nature Energy 1, 15005. doi:10.1038/nenergy.2015.5. Khanna, M and C.L. Crago. 2012. Measuring Indirect Land Use Change with Biofuels: Implications for Policy. Annual Review of Resource Economics 4:161−26. doi:10.1146/ annurev-resource-110811-114523. Searchinger, T., R. Heimlich, R.A. Houghton, F. Dong, A. Elodeid, J. Fabiosa, S. Tokgoz, D. Hayes, and T.-H. Yu. 2008. Use of U.S. Croplands for Biofuels Increases Greenhouse Gases Through Emissions from Land-Use Change. Science 319(5867):1238–1240.
Market and Policy Incentives for Biofuel Production in the US and Brazil
US Biofuel Policies and Markets Gal Hochman, Michael Traux and David Zilberman
Abstract The United States has established various policies to support a transition to biofuels from fossil fuels as part of its strategy to achieve energy security and independence. These policies include mandates, tax credits, and import tariffs aimed at developing the nascent biofuel industry. To compare the impact of various energy sources requires a comprehensive understanding of both direct and indirect effects. This chapter discusses some of the indirect effects, including land use change, fuel rebound effect, and balance of trade effect. It ﬁnds that due to the ubiquity of energy, indirect effects impact numerous markets and that an already noncompetitive energy market that is capital intensive exacerbates the challenge of introducing biofuels. While ﬁrst-generation biofuels contributed to rural development and reduced dependency on imported fuel sources, they have failed to reduce GHG emissions signiﬁcantly. Introduction of advanced biofuels is challenged by the blend wall in the US and high costs, there is much opportunity for them to contribute signiﬁcantly to energy security but also reducing GHG emissions.
Keywords Balance of trade Beneﬁt and costs Greenhouse gases Policy Risk
of corn seemed to be a promising way to achieve energy security and independence from fossil fuels (Lapan and Moschini 2009). It was believed that with improving technology in both biofuel production, and agricultural techniques, producing ethanol would become competitive with imported petroleum, allowing the market to help develop the infant industry. After years of stagnant development for ethanol fuels (the 1980s and 1990s), the United State government developed policies aimed at promoting the use and production of ethanol to compete with gasoline. The government established a biofuel mandate in 2005, which required a minimum amount of ethanol to be blended with transportation fuel (the Energy Policy Act of 20051). It also implemented the now repealed tax credit, and import tariff, which together were supposed to protect the domestic industry by making foreign ethanol more expensive and less competitive with the domestically produced corn ethanol. Although these policies were intended to beneﬁt the domestic energy sector and provide a variety of competitive fuel sources for consumers, the infant industry led to unintended consequences as it developed. While the biofuel industry has matured, the adverse effects of its growth are causing policy makers to reconsider if the beneﬁts outweigh the side effects (Hochman and Zilberman 2016, and references therein). Land use and rising food prices have caused the most concerns for policy makers, with food prices increasing 2.7% annually2 since the implementation of these policies. The amount of available land for agriculture transitioned to producing ethanol crops affects the cost of other staple crops now no longer being produced at the same levels (Hertel et al. 2010; Chen et al. 2012a; Roberts and Schlenker 2013). Although initially not a direct goal of the enacted policies, greenhouse gas (GHG) emissions were explicitly introduced into the regulation in May 2009 (Renewable Fuel Standard—RFS2) and were expected to contribute to the development of low carbon fuel sources. Research into GHG emissions from burning ethanol has shown mixed results against the supposed beneﬁts of ethanol fuels (Hochman and Zilberman 2016), with some research showing that ethanol fuel worsen the problem of GHGs in the atmosphere (Hertel et al. 2010). Although the environmental beneﬁts of current crop-based biofuels are much more limited than initially thought and the cost of producing advanced biofuels much higher than many hoped, biofuels did affect the U.S. balance of trade and contributed to its reduction in recent years (Hochman and Zilberman 2016). The rest of the chapter begins by describing the biofuel industry (Sect. 2). This is followed by a discussion of biofuel policies in the U.S. (Sect. 3) and a summary of the policy instruments used (Sect. 4). The U.S. biofuel policy has affected commodity markets and international trade that are discussed in Sect. 5. We conclude with Sect. 6.
The Energy Policy Act of 2005 is available at http://energy.gov/sites/prod/ﬁles/2013/10/f3/epact_ 2005.pdf. 2 See USDA Food Price Outlook website, available at http://www.ers.usda.gov/data-products/foodprice-outlook/ (viewed: January 21, 2016).
US Biofuel Policies and Markets
2 Biofuel Production Biofuels are seen as an energy source that could help reduce the United States reliance on fossil fuels, and the amount of GHGs emitted into the atmosphere. The many advantages of biofuels include lower GHG emissions intensity, domestic availability, renewability, higher combustion efﬁciency, lower sulfur, and aromatic content and biodegradability (Hertel et al. 2010). The disadvantages of biofuels include lower energy efﬁciency and its contribution to air pollution (Brown 2008). However, because the perception was that the beneﬁts outweigh the costs and because of the high cost of production of biofuels relative to fossil-based fuels, governments instituted policies that promoted the industry’s growth. The most efﬁcient country (in terms of fuel yields per unit land) in the world at producing ethanol is Brazil, using sugarcane as a source of ethanol (Demirbas 2009). The majority of this sugar cane is grown in Mato Grosso, Sao Paulo, and Parana, along with other eastern-coastal states within the country (see Fig. 1). There are many different reasons believed to be responsible for Brazil’s success with ethanol production. Sugarcane itself is a more efﬁcient crop than other sources, with it being seven times more efﬁcient than corn in terms of fuel yield per unit land (Crago et al. 2010). Brazilian sugarcane ethanol has a production cost that is, on average, 24% lower than United States corn ethanol, mainly because it is possible to produce 45% more ethanol per unit of land from the sugarcane plant than from corn (Crago et al. 2010). In addition, the tropical weather of Brazil provides a more suitable climate for sugarcane (Crago et al. 2010). The Untied States is the second most efﬁcient country at producing biofuel, relying heavily on corn ethanol (Hochman and Zilberman 2016). The majority of corn comes from the “corn belt” region, which is composed of Iowa, Illinois, Indiana, Southern Michigan, Western Ohio, Eastern Nebraska, Eastern Kansas, Southern Minnesota, and Northern Missouri. This region is the most suitable for corn production in the United States because of the vast, flat ﬁelds naturally available in the Great Plains (Miller et al. 2009). Figure 3 depicts the top four U.S. corn ethanol producing states in 2013. These regions are the most productive in terms of corn production, mainly because of the naturally nutrient rich soil, and the long growing season (Miller et al. 2009) (Fig. 2). Corn is used as a primary source of feed for livestock production. Corn also uses more land per unit of ethanol compared to sugarcane (Bundy 2007). While sugarcane has an energy balance of 8.3–10.2, corn only has a balance of 1.3–1.6 (Bundy 2007), meaning higher energy input is required to produce the same amount of energy for corn when compared to sugarcane. This also means the productivity of the land is higher in Brazil than in the United States. In Brazil, there is roughly 355 million hectares (Mha) of land available for agricultural production, with 3.6 Mha dedicated for ethanol production in 2006 (Bundy 2007). In the United