Economic and Land Use Implications of Biofuels: Role of Policy Madhu Khanna With Xiaoguang Chen and Haixiao Huang Department of Agricultural and Consumer Economics University of Illinois

Motivations Energy security and reducing dependence on foreign oil Concerns about climate change – Transportation sector accounts for about 30% of US GHG emissions Land Use and Economic Implications Depend on the mix of biofuels and feedstocks Feedstocks differ in their land intensity, land suitability, costs and GHG intensity – Affects land use patterns at regional level – Has implications for impact on food prices Biofuels displace fossil fuels and thus affect fuel prices Implications for social welfare in these sectors Does the choice of policy influence the land use and economic benefits of biofuels? Introduction

Not all biofuels are the same

High Costs of Cellulosic Biofuels: Need for Policy Support to Induce Production Cost of production in cents/MJ (2007 prices)

Alternative Low Carbon Policies to Promote Biofuels Renewable Fuels Standard (Technology Standard) – Volumetric mandate for blending specific types of biofuels with liquid fossil fuels Low Carbon Fuel Standard (Performance Standard) – Reducing the greenhouse gas intensity of transportation fuel to lie below a given standard Carbon Price – Would raise the price of fossil fuels more than the price of biofuels based on their GHG intensity

Energy Independence and Security Act, 2007 Annual Energy Outlook, 2011 Advanced biofuels: Reduce GHG intensity by 50% relative to gasoline Sugarcane Ethanol Cellulosic biofuels: Reduce GHG intensity by 60% relative to gasoline Cellulosic ethanol Biomass to Liquids Diesel 36 B gallons by 2022 At least 16 B gallons of cellulosic biofuels Max. cap of 15 B gallons of corn ethanol

Low Carbon Fuel Standard California has an LCFS to reduce the carbon intensity of fuels by 10% by 2020 relative to 2005 baseline Oregon, Washington state and several Northeast and Mid Atlantic states are proposing/analyzing state-wide/regional LCFS We analyze an LCFS target of 10% reduction ( ) VISION Model, ANL, 2010

Objectives of this Research Develop an integrated model of the food and fuel sectors to numerically compare the effects of the RFS, LCFS and carbon tax over in an open economy – Mix of biofuels and fuel consumption – Land use – Food and fuel prices – Social welfare – GHG emissions Consideration of an open economy allows for terms of trade effects of these policies – Unlike in a closed economy, in a large open economy, these policies have terms of trade effects that can offset at least a part of their efficiency costs

BEPAM Maximizes consumer and producer surplus in multiple agricultural and fuel sector markets subject to technology, production and land constraints Dynamic: Planning horizon from 2007 to 2035, in annual time steps – 10 year rolling horizon for landowners with age specific costs of perennials – Decisions based on lagged prices and land availability – Expectations updated based on realized market outcomes annually Fuel sector: Derived demand for gasoline and biofuels based on demand for vehicle kilometers travelled with 5 types of vehicles based on AEO (2010) – Substitutability between gasoline and biofuels determined by vehicle fleet – Price of gasoline and biofuels determined endogenously in open world markets – First and second generation biofuels (Lignocellulosic ethanol, BTL) – Feedstocks: corn, sugarcane, crop and forest residues, energy crops (switchgrass and miscanthus) – Location-specific life-cycle carbon intensity of fuels

Other Features of the Model Open agricultural sector with crop markets, livestock, biomass – Spatial heterogeneity in yields and returns to land (295 regions in US) – Econometrically estimated regional cropland acreage elasticities and own and cross-price acreage elasticities – Allow land allocations to various crops to be price responsive – Econometrically estimated trend rate of growth in crop yields and price responsiveness of yields – Idle cropland and cropland pasture can be converted to conventional crops and energy crops – Simulated yields of perennial grasses, Miscanthus and Switchgrass – Commodity prices, price of land and biomass determined endogenously.

Other Features of the Model Open agricultural sector with crop markets, livestock, biomass – Spatial heterogeneity in yields and returns to land (295 regions in US) – Econometrically estimated regional cropland acreage elasticities and own and cross-price acreage elasticities – Allow land allocations to various crops to be price responsive – Econometrically estimated trend rate of growth in crop yields and price responsiveness of yields – Idle cropland and cropland pasture can be converted to conventional crops and energy crops – Simulated yields of perennial grasses, Miscanthus and Switchgrass – Commodity prices, price of land and biomass determined endogenously.

Delivered Yield of Corn Stover (MT/Ha) Delivered Yield of Wheat Straw (MT/Ha) Delivered Yield of Switchgrass (MT/Ha) Delivered Yield of Miscanthus (MT/Ha) T/ha T/ha Crop Yields

CRP Land Idle Land excluding CRP Cropland PastureAll Marginal Land Marginal Land in 2007 Rainfed regions 11 M ha Nonrainfed regions 4 M ha Rainfed regions 9 M ha Nonrainfed regions 2 M ha Rainfed regions 1.5 M ha Nonrainfed regions 0.6 M ha Rainfed regions 22 M ha Nonrainfed regions 7 M ha

Policies differ in their incentives for mix and level of biofuels: Carbon tax Will raise the cost of gasoline more than the cost of biofuels for consumers – Lead to substitution of biofuels for gasoline to the extent that it is a cost-effective abatement strategy – Not induce advanced biofuels unless tax is very high – Raise the cost per kilometer travelled – Lower the demand for vehicle kilometers travelled – Lower domestic demand for gasoline and imports – Lower domestic GHG emissions

Renewable Fuels Standard RFS creates incentives to blend the least cost mix of biofuels given their energy content and requirements of the mandate. – No incentive to reduce gasoline consumption other than due to displacement by biofuels – Lowers consumer and producer price of gasoline – Raises producer price of biofuels – Lowers the consumer price of biofuels which equal the energy equivalent price of gasoline Reduction in gasoline consumption is likely to be less than the energy equivalent increase in biofuel consumption Impact on GHG emissions is ambiguous

A Low Carbon Fuel Standard Restricts the ratio of GHG emissions from all fuels to total fuel energy consumed that year to be below a specified level. Creates incentives to change the blend of fuels by increasing biofuel consumption and by lowering gasoline/diesel consumption – implicitly subsidizes a biofuel based on its carbon intensity relative to the standard; Penalizes fossil fuels based on carbon intensity relative to standard Encourages least cost way to reduce GHG intensity by inducing biofuels with low cost per unit of CO2 intensity reduced. Induces both displacement of fossil fuels and possible reduction in consumption – Likely to induce a different mix of biofuels than the RFS Impact on GHG emissions is ambiguous

Differential Effects of Alternative Policies Ambiguous effects depend on the elasticity of demand for food, elasticity of demand for miles and elasticity of supply of gasoline

Economic Benefits of Alternative Policies

Mix of Biofuels (B liters) Fossil Fuel Consumption (B liters) Vehicle Kilometers (B Km)

Land Use Under Alternative Policies in 2030 (M ha)

Percentage Change in Food and Fuel Prices: Gain in Terms of Trade for US

Change in Social Welfare ($B, ) MandateLCFSCarbon Tax % change in Social Welfare0.5%-1.3%0.4%-0.9%0.2%-0.7% Sensitivity of Welfare Effects to Alternative Assumptions

Direct and Indirect Effects of Biofuel Policies on GHG Emissions RFS LCFS

Conclusions The RFS and LCFS differ in the mix of fuels they induce with the LCFS requiring larger cellulosic biofuels (BTL diesel) but significantly less corn ethanol than the RFS. Both policies induce more biofuel production than a carbon tax The RFS increases crop prices and reduces fuel prices by more than the LCFS or carbon tax All three policies increase net social welfare (without considering external benefits) with the mandate having a larger effect than LCFS or the carbon tax The LCFS is likely to lead to larger GHG reduction than the RFS. Policies differ in the trade-offs they offer and a mix of policies is likely to be needed to achieve multiple objectives with biofuels