1. Can India Meet Biofuel Policy Targets? Implications for Food and Fuel Prices Madhu Khanna, Hayri Onal, Christine L. Crago, and Kiyoshi Mino University of Illinois at Urbana-Champaign Berkeley Bioeconomy Conference March 28, 2012 Berkeley, CA

2. Background Motivation for biofuels in India Fuel consumption  has 0.5% of world’s oil reserves, consumes 3.4% of oil production  Demand growing at 7.5% per year  Crude oil imports: 75% in 2008, 90% projected by 2025 (graph)graph Rural employment Lower GHG emissions

3. Background Ethanol Policy 20% blending by 2017 (5.7 billion liters) Price: 27 Rs/liter Feedstock : molasses and sugarcane  Limited to molasses to avoid food vs. fuel  Molasses : by-product of sugar production  alcohol  Direct production from sugarcane allowed recently

4. This paper Analyzes the cost-effective mix of feedstocks (molasses and sugarcane) to meet the 20% blend mandate in 2017  Food production and prices  Fuel prices  Alcohol production and price Examine the viability of meeting the mandate under current fuel pricing policy

5. Research Framework Develop a static, multi-market partial equilibrium model of the agricultural sector with major crops Objective: Maximize consumer and producer surplus in markets for crops, sugar and alcohol by choosing the optimal allocation of land and irrigation water  land availability  water availability and irrigation constraints  technology for ethanol production from molasses and sugarcane  technology for crop production: costs, yields, crop calendar  world market conditions: exports/imports

6. Numerical Simulation Model State level data on: acreage, yields, production costs, water availability, cropping patterns, land availability 15 of the most agriculturally productive states in IndiaIndia 8 primary agricultural commodities: wheat, rice, sorghum, corn, groundnut, rapeseed, cotton, soybean, + sugarcane Data obtained from Directorate of Economics and Statistics (India), FAOSTAT; FAPRI World Agricultural Outlook projections, INDIASTAT, Sugar Mills Assoc

7. Numerical Simulation Model 2006-08 market data for calibration 2017 projections based assumed growth in demand for crops, fuel, sugar and alcohol, and growth in yields and irrigation Model endogenously determines:  Commodity production and prices  Feedstock mix for ethanol production  Implicit cost of ethanol production  Land and water allocation for crops

8. Numerical Simulation Model Sugarcane Sugar Ethanol MolassesAlcohol Conversion parametersEfficiencyCost Sugarcane to sugar0.1 mt/mt4.2 Rs/kg Sugarcane to ethanol70 L/mt8.9 Rs/L Molasses to ethanol220 L/mt6.4 Rs/L Molasses to alcohol214 L/mt6.4 Rs/L Considering feedstock cost, direct conversion of sugarcane to ethanol is less costly

9. Model Validation: 2006-2008

10. Policy Scenarios Scenario 1: 20% Blend mandate, baseline conversion costs Scenario 2: 20% Blend mandate, 50% higher conversion cost of sugarcane to ethanol Scenario 3:  20% blend mandate  baseline conversion costs  government requires 50% of molasses be used for ethanol  price of molasses for ethanol set to 3,000 Rs/ton

11. Results I : 2017 Without the mandate:  sugarcane is planted on 4% of agricultural land  All molasses (14.5 M tons) are used in alcohol production  imports of alcohol are.5% of production Using all molasses produced in 2017 for ethanol production will only meet 57% of the mandate

12. Results II: Fuel and Feedstock Mix Scenario 1 Scenario 2 High CC Scenario 3 50/50 % Ethanol from Molasses 5.0%13.5%28.0% % Molasses for ethanol 9.5%24.9%50.0% % Cane for ethanol 20.2%18.5%15.4% Price of ethanol (Rs/liter) 27.832.725

13. Results II: Prices Scenario 1 Scenario 2 High CC Scenario 3 50/50 Rice Price 5.6%5.4%5.5% Wheat Price 1.4%1.3% Sugarcane Price 23.4%23.0%23.2% Molasses Price 36.6%68.3%121.3% Sugar Price 13.8%9.9%1.8% Alcohol Price 25.5%47.5%84.4%

14. Results IV: Production and Land Use Scenario 1 Scenario 2 High CC Scenario 3 50/50 Rice production -1.6% Wheat production -0.8% Sugarcane production 17.4%17.1%17.2% Sugar production -6.4%-4.6%-0.8% Alcohol production -15.2%-28.4%-50.4% Land under Rice -1.2%-1.1% Land under Wheat -1.3%-1.2%-1.3% Land under Sugarcane 15.0%14.7%14.8%

15. Results V: Marginal cost of ethanol ranges from 28-33 Rs/liter (no molasses subsidy) Given gasoline price of 28 Rs/liter, blenders would be willing to pay 19 Rs/liter for ethanol With fixed procurement price of 27 Rs/liter, there is no economic incentive for mills to produce or blenders to buy ethanol

16. Results VI Enforcing 27 Rs/liter procurement price will cost both ethanol producers and blenders  Cost can be passed on to consumers, raising blended fuel price by 10-15% Government can provide a subsidy to blenders  Subsidies will range from 9-14 Rs/liter, which will cost 51 to 81 billion Rs/year Government can fix the allocation of molasses and price of molasses for ethanol production (Scenario 3)  Sugar and alcohol industries subsidize ethanol industry

17. Limitations Government interventions, including minimum support prices and output levies are not considered Gasoline consumption is fixed in 2017

18. Summary and Conclusions A mix of molasses and sugarcane feedstocks is necessary to meet 20% blending mandate for ethanol Trade-offs  Crop production, prices and land use  small  1 M ha of additional land for sugarcane  Sugar  Alcohol  Fuel

19. Summary and Conclusions Meeting the mandate in 2017  Mills retro-fitted to enable direct conversion of sugarcane to ethanol  Government subsidies to blenders  Reduced profits for mills and blenders OR higher fuel prices Distributional effects

20. Thank you! Questions? Christine Lasco Crago Energy Biosciences Institute mlasco2@illinois.edu