1. Office of the Chief Economist Office of Energy Policy and New Uses Summary Remarks Economics and Policy Session Biofuels for Aviation Summit Moderator: Harry S. Baumes, Ph. D. Associate Director Office of Energy Policy and New Uses September 2, 2009

2. Office of the Chief Economist Office of Energy Policy and New Uses Carbon and Greenhouse Gases Brent Gloy, Ph. D. –Associate Professor, Cornell University Zia Haq –Senior Analyst, Dept. of Energy Sustainability and Greenhouse Gases William Meyers, Ph. D. –Professor, University of Missouri –Co-Director of FAPRI-MU Neilsen Conklin, Ph.D. –President, Farm Foundation Gregory Graff, P.h. D. – Assistant Professor, Colorado State University Food versus Fuel and Greenhouse Gases Joe Outlaw, Ph. D. –Professor, Texas A&M University Wally Tyner, Ph. D. –Professor,Purdue University F. Larry Leistritz, P.h. D. –Distinguished Professor, North Dakota State University

3. Office of the Chief Economist Office of Energy Policy and New Uses Questions Carbon and Greenhouse Gases Will current legislation on controlling carbon/greenhouse gases be effective? How will it impact the biofuels industry? What are the economic factors determining land use and how are they changing? Sustainability What are the non technical factors to be considered in deciding between oil, starch or cellulose based systems for aviation fuels production? What kinds of production, delivery and processing systems are sustainable? How do economists define sustainability? Food versus Fuel What are the food/fuel issues for aviation biofuel production? What government policies (federal and state) can accelerate biofuel for aviation production and combat food/fuel issues? How can the Air Force contribute to developments in technology, organization and policy that would accelerate aviation biofuels development?

4. Office of the Chief Economist Office of Energy Policy and New Uses Carbon and Greenhouse Gases Contrast Past Growth Biofuels with Second Generations Feedstocks/Biofuels (alternative fuels) –Producers of Feedstocks and Biofuels must make profit or be incentivized to produce –First Generation Fuels and Feedstocks Economics supported growth: cheap corn and high energy costs Proven Technology – knew how to make ethanol and biodiesel on commercial scale Policy Supported Growth – EPACT 2005 and EISA 2007 Financial Sector willing to provide capital for investment –Second Generation Cellulosic Economic environment not as favorable: lower energy cost and higher commodity prices, fluctuating commodity prices, financial crisis and recession Technology is not proven, not tested on commercial scale Policy is uncertain or wavering, GHG emissions and climate concerns Financial sector not willing to provide capital in the current environment

5. Office of the Chief Economist Office of Energy Policy and New Uses Carbon and Greenhouse Gases –Too narrow scope there are at least 7 GHG, reducing one may create problems with others –Formally we are trying to incorporate externalities that were not or may not have been considered in the decision making process –Identify both environmental costs and benefits to produce feedstocks and biofuels, and markets are either thin or do not exist for these externalities Life Cycle Analysis, Indirect Land Use, and GHG –LCA results sensitive to assumptions and methodology Technology Change –Affects feedstock production, conversion and economics of market –Disemenation and adoption cultural practices, conversion, supply chain and end use markets

6. Office of the Chief Economist Office of Energy Policy and New Uses Sustainability Economists Like to Allocate Resources to Alternative Uses –Market efficient allocation system – markets can (given sufficient time) determine feedstocks and alternative fuels (regional differences likely). Make a product for a “cost” and sell that product for a “price” –Environmental goods and services – not well defined and markets not well developed or non-existent –Need to internalize all benefits/costs to make investment decision –Manage Risk – role for government in these enviromental goods and services markets? Questions to consider with regard to sustainability – RISK MGMT –What is it we want to sustain? –How long do we want to sustain it? –With what level of certainty do we want to sustain it?

7. Office of the Chief Economist Office of Energy Policy and New Uses Sustainability Integrated Systems Approach Required –Renewable Energy, Climate and Sustainability all spoken in the same sentence – need to consider jointly or simultaneously –Regionally – different or multiple feedstocks perhaps mulitple alternative fuels (demand or end use considerations)

8. Office of the Chief Economist Office of Energy Policy and New Uses Food versus Fuel Hot Spot or Hot Topic – There will be others –Land – used to produce biomass that can be used for transportation fuel production. EISA places constraints on that production: land that can be used and meeting GHG threshholds. –Land use – need to understand international adjustment –Third general feedstock/fuel: Algae – needs water could be a “hot spot” issue –Food versus fuel issues not well understood by most. USDA invested resources to try and address consumers concerns and lack of understanding

9. Office of the Chief Economist Office of Energy Policy and New Uses Food versus Fuel Competition for land –Traditional use for crop production and transportation fuels production –NEW USES: Biomass required for heat and power and land being used to create carbon offsets –Second and third generation fuels expected to have low food price impact Policies need to accelerate biofuels for aviation industry –Technology – government can help by funding research and development –Market Prices are volatile – policy can be used to stabilize prices or reduce fluctuations –Government policy supporting or impacting industry – uncertainty needs to be minimized

10. Office of the Chief Economist Office of Energy Policy and New Uses Conclusions Outreach and Education –Consumers need to understand the complexities of food (commodities), biofuels production, land use and economy interactions Air Force might consider –Funding a second generation facility to supply jet biofuel –Vertical integration approach – feedstock production to end use by air force and commercial aviation industry –New models in approach: partnerships with private sector, local municipalities/farmers/companies

11. Office of the Chief Economist Office of Energy Policy and New Uses THANK YOU! Contact Information: Harry S. Baumes hbaumes@oce.usda.gov 202-401-0497