Biofuels ECON 373 March 26,
Reference Bruce Gardner and Wallace Tyner. “Explorations in Biofuels Economics, Policy and History: Introduction to the Special Issue.“ Journal of Agricultural & Food Industrial Organization 5(1):1-8, Hill, J. E. Nelson, E. D. Tilman, S. Polasky, and D. Tiffany. “Environmental, Economic, and Energetic Costs and Benefits of Biodiesel and Ethanol Biofuels.” PNAS Vol.103, No. 30; , 2006 Jörn P. W. Scharlemann and William F. Laurance. "How Green Are Biofuels?“ Science Vol. 319 : 43-44,
What is biofuel? Energy sources derived from recently living organic material, as opposed to fossil fuels. Biomass energy Biofuel Biopower ethanol biodiesel 3
Topics relating to biofuels Demand for biofuels as related to fossil fuel markets Derived demand for feedstock, particularly agricultural commodities. Supply of feedstock including resource constraints on feedstock production, in land, water, and capital investment Environmental benefits and costs in the production and use of biofuels and associated feedstock. General equilibrium effect on other markets International trade Impact of biofuel on global poverty and hunger Evaluation of policy options for biofuel including biofuel and mandated use of biofuels. 4
Comparison of Ethanol and Biodiesel 5
Biofuel Net Energy Balance 6
Biofuel Life Cycle Environmental Effects 7
GMO Crops 8
Demand for Ethanol 2005: 14% of US corn harvest proceed to the ethanol production 2010: 40% Devoting all US corn and soybean production to ethanol and biodiesel would offset 12% and 6% of US gasoline and diesel demand 9
Subsidies on ethanol Ethanol subsidies link energy policy with agricultural policy. 51-cents-a-gallon subsidy: voted in Reduced to 45 cents in
Subsidies Alternatively to emission taxes, one could subsidize abatement Economists are in favor of market-based instruments like tax. Subsidy is negative tax Political feasibility: yes!! Firms love subsidies! But static inefficiency: ▫ Have to be financed through distorting taxes ▫ Hard to stop once started In case of subsidy on particular technology: dynamically inefficient: ▫ Does government know which technology is best? ▫ Hampers technology competition ▫ Excess entry 11
Subsidy = Tax? Tax: Subsidy: 12
How much would the firms abate under subsidy? marginal abatement costs = subsidy rate s 13
Effect of Subsidy Emission (tons/month) Marginal Abatement (MAC) Cost Total Abatement (TAC) Cost Total Subsidy at $120/Ton Total Subsidy Minus TAC
Effect of Tax Emissions (tons/month) Marginal Abatement Cost Total Abatement Cost Total Tax Bill At $120/ton Total Cost
Subsidies on Abatement Subsidy (a) $3 and (b) $5 per ton of abatement Table 3. Abatement and Marginal abatement cost schedule for two firms 16
Regression is everywhere Financial Time: Once more Over a Barrel. March 24,