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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.

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Public Policy and the Economics of Biofuels

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  1. 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 Public Policy and the Economics of Biofuels

  2. 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.

  3. 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

  4. “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

  5. 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

  6. 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

  7. 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

  8. 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)

  9. Corn Usage(billion bushels) Source: USDA

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

  11. 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

  12. Data: NHTSA, USDOT, Summary of Fuel Economy Performance Report, March 2007

  13. Data: NHTSA, USDOT, Summary of Fuel Economy Performance Report, March 2007

  14. Data: NHTSA, USDOT, Summary of Fuel Economy Performance Report, March 2007

  15. 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

  16. 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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