The Full Cost of Biofuels
Stephen Polasky
University of Minnesota
The Energy Problem
• How will society meet
growing energy
demands in a costeffective and
sustainable manner?
• Fossil-fuels currently
supply ~80% of world
energy demand.
The Problems of Addiction to
Fossil-Fuels
• Climate change: carbon emissions from fossilfuels
• Other environmental impacts (SOx, NOx,
particulates…)
• Energy security: large fraction of oil comes from
the Middle East
• Supply availability: finite stock
– Declining oil production in the US since the 1970s
• But even with finite supplies, we have more than
enough coal to do serious long-lasting
environmental damage
The Energy Problem
• “Sustainable carbon-neutral energy is the
most important scientific challenge we
face today”
– Steven Chu, Director Lawrence Berkeley
National Laboratory (9 Feb 2007 Science)
Desperately Seeking Alternatives
• To be an attractive alternative, an energy
source must be:
• Producible in large quantities
• Environmentally benign
• Cost-competitive
Evaluating Alternative Energy
Sources
• Many alternative energy sources are being proposed.
Which of these should the private sector or government
invest in developing?
• Energy policy: what alternative energy sources should
be subsidized? Taxed?
• Economics has much to contribute to addressing these
questions
– Benefit-cost analysis
– Externalities
• Integrated analysis: important information contributed by
engineers, agronomists, ecologists, environmental
scientists and others
• Economics provides the framework for addressing the
large policy and management questions facing society
Full Cost Accounting
• Full cost accounting is an attempt to do a
complete accounting of all of the consequences
of an activity (benefit-cost analysis)
• Two important steps:
– Step 1: Biophysical accounting (“life-cycle analysis”) track all inputs into the process and all outputs from
the process including unintended outputs (e.g.,
pollution)
– Step 2: Conversion to a common metric (“valuation”)
– price all of the inputs and outputs to establish the
full costs
Full Cost Accounting
• Full cost = direct (private) costs + external
costs
• Evidence on direct costs: information on
production and market prices (for energy
sources that are in current production)
• Evidence on external cost: information is
not readily available for most external
costs
Direct Costs/Benefits
• Direct (private) costs: costs paid by firms
to produce, transport and store energy
• Market prices of energy reflect direct costs
(and in the case of gasoline - scarcity rent)
• If direct costs were the sum total of the
costs of energy use, market prices would
provide a correct signal of full costs
– market forces could be used to guide society
toward the most efficient energy alternatives
External Costs/Benefits
(Environmental)
• Environmental costs of energy use typically are
not paid by energy producers and consumers:
“external costs”
• Environmental external costs include:
– the human health and welfare impacts caused by
residual air, water, and solid waste emissions
– the impacts of climate change tied to emissions of
greenhouse gases
– ecological changes from changes in land use and
nutrient cycles
Other External Costs/Benefits
• Other potentially important external effects
of energy alternatives:
– National security: “energy security” – premium
for domestic supplies
– Rural development and other income
distribution effects
• Here the focus will be on environmental
externalities not national security or
income distribution
External Costs/Benefits
• External costs and benefits are not
reflected in market prices
• There is typically no clear signal of the
external costs and benefits, and hence
there is no clear signal of net benefits of
alternatives
• Need for a complete accounting of costs
and benefits to be able to compare
alternatives
Step 1: Issues in Quantifying
Environmental Effects
• Some environmental effects are relatively easily
quantified (e.g., smokestack emissions)
• Other environmental effects are more difficult to
quantify
– Measurement issues (e.g., non-point sources such as
nitrogen runoff from farm fields)
– Fate and transport of emissions
– Ultimate impacts may depend upon effect on
ecosystem function and complex interactions
• Questions about how far into the chain of events
to trace effects (establishing boundaries of the
study)
Step 2: Issues in the Valuation of
External Costs
• Non-market valuation techniques can be used to
estimate the value of environmental
improvements (or deterioration)
– Use of behavioral data to uncover willingness-to-pay
for environmental improvement (hedonics, travel cost)
– Surveys that ask willingness-to-pay for environmental
improvements
– Replacement cost
• Some environmental “prices” are difficult to
estimate and/or controversial
– What is the dollar value of lowering mortality risk?
– What is the dollar value of conserving species?
Step 2: Issues in the Valuation of
External Costs
• The difficult and subjective nature of non-market
valuation may lead some to forego step 2
• Alternative is to report categories of
environmental effects (e.g., most life-cycle
assessments)
• At the end of the day, however, when decisions
about alternative energy sources need to be
made there will be some assessment of the
relative importance of different categories of
environmental effects versus direct costs
The Many Names of Complete
Accounting
• Life-cycle assessment: focus on the
accounting of inputs and outputs through
the entire life-cycle of a product
• Material flow analysis
• Benefit-cost analysis: focus on accounting
for all consequences of policy in terms of a
common metric
• Green accounting (Green GDP)
Biofuels as an Alternative Energy
Source
• Biofuels: producing energy from renewable biomass
• Examples:
–
–
–
–
Corn-grain ethanol
Sugar-cane ethanol
Cellulosic ethanol – switchgrass, wood chips, prairie grass…
Electricity production from biomass
• Potential advantages:
– Renewable
– Domestic supply
• Major questions:
– Amount of supply (?)
– Environmentally friendly (?)
– Cost-competitive – both direct cost and external cost (?)
Are Biofuels an Answer to the Energy Problem?
Analysis of Alternative Biofuels
• “First generation” biofuels: food-based biofuels
that are currently commercially available:
– Corn-grain ethanol
– Soy Biodiesel
• “Second generation” biofuels: cellulosic biofuels
of the future
– Switchgrass
– Prairie biomass
– Woody biomass
Analysis of First Generation
Biofuels
• Hill, Nelson, Tilman, Polasky and Tiffany. 2006.
Environmental, economic, and energetic costs
and benefits of biodiesel and ethanol biofuels.
Proceedings of the National Academy of
Sciences 103: 11206-11210.
• Comparison of
– Corn-grain ethanol v. gasoline
– Soy biodiesel v. diesel
• Criterion:
– Energy supply
– Environmental impact
– Cost
Energy Supply
Note: total US gasoline consumption is nearly 150 billion gallons per year.
Ethanol Production and Announced
Goal for Future Production
Are Biofuels Net Energy Sources?
• Controversy over whether biofuels are a
net energy source or a sink
• Net Energy Balance (NEB): energy output
– energy inputs
• Positive NEB means that biofuel is a
source: more useful energy output than
the energy input to create it
Are Biofuels Net Energy Sources?
• Lifecycle assessment of all energy inputs
– Energy to grow crops (fertilizer, farm equipment…)
– Energy to convert crops to biofuel
– Energy for transportation (crop to production facility,
and fuel from production facility to end user)
• Assessment of all energy outputs
– Energy content of the fuel itself
– Co-products
Net Energy Balance Ethanol and
Gasoline
How Much Do Biofuels Supply?
• Corn grain ethanol (2005):
– 14.3% of the US corn harvest was used to
produce 1.48x1010 L of ethanol annually
– Energetically equivalent to 1.72% of US
gasoline use
• Soy biodiesel (2005)
– 1.5% of the US soybean harvest produced
2.56x108 L of biodiesel annually
– 0.09% of US diesel use
But How Much Could They Supply?
• Devoting all US corn and soybean
production to biodiesel and ethanol would
generate:
– 13% of US gasoline consumption
– 6% of US diesel consumption
• In terms of net energy gain:
– 2.4% of US gasoline consumption
– 2.9% of US diesel consumption
Ethanol Supply: Effect on Corn
Supply and on Gasoline Supply
Ethanol Demand and Corn Prices
• Large increase in demand for corn for
ethanol production
– Production capacity over 5 billion gallons
– Projected to increase to over 9 billion gallons
with current plants under construction
• Corn prices in January 2007 topped
$4/bushel ($3.50/bushel in summer 2007)
Food vs. Fuel: Impact on Corn Prices
From:
MSNBC
Website
Biofuels and the Environment
Environmental Consequences
• At first glance, we might think that biofuels
are environmentally friendly
• Is this correct?
• It depends on how biofuels are produced
Environmental Consequences per
Unit Energy
Greenhouse Gas Emissions per
Unit Energy
Environmental Consequences per
Unit Energy
• All else equal, an NEB > 1 should mean
lower CO2 emissions (replace fossil fuel
use)
• But: increased N20 and methane
emissions from crop production
• Lifecycle greenhouse gas emissions
– Ethanol: 88% of gasoline
– Soy biodiesel: 59% of diesel
Economics of Biofuels
Are Biofuels Cost Competitive?
• In 2005, neither biofuel was cost-competitive
with petroleum
• Ethanol:
– Estimated ethanol production cost in 2005 was $0.46
per gasoline energy equivalent L
– Wholesale gasoline prices averaged $0.44/L in 2005
• Soy biodiesel
– Estimated soybean biodiesel production cost in 2005
was $0.55 per diesel EEL,
– Diesel wholesale prices averaged $0.46/L in 2005
Are Biofuels Cost Competitive?
• Competitiveness of corn-grain ethanol
depends upon
– Price of gasoline (crude oil price)
– Price of corn
– Price of natural gas or other energy feedstock
used in ethanol refinery
– Also on transportation and marketing
infrastructure
Are Biofuels Profitable?
• Though not cost competitive, biofuels can be
profitable given subsidies
• Federal government provides subsidies of
– $0.20 per EEL for ethanol
– $0.29 per EEL for biodiesel
• Demand, especially for ethanol, generated by
laws or regulations mandating blending of a
biofuel with petroleum
• Ethanol and biodiesel producers also benefit
from federal corn and soybean subsidies
– Corn prices are approximately half of ethanol
production’s operating costs
Summary
• Corn grain ethanol and soy biodiesel can make up only a small
portion of fuel supply
• These sources are not generally cost-competitive or profitable
without subsidies
• Policy: should tax environmentally harmful energy sources
– Real aversion in the US to the “T” word
– Given this, there is a potential case for subsidizing environmentally
friendly biofuels
• Subsidy for corn grain ethanol does not appear justified
• Could be a case for a subsidy for other biofuels if they can be shown
to be environmentally less harmful than fossil-fuel alternatives
• In summary: should look to other energy sources
– 2nd generation biomass (switchgrass, woody biomass, prairie gras…)
– Wind, solar…
Final Thoughts
• Don’t forget the demand side: energy use
and conservation
• Getting the prices right – create incentives
on both supply and demand sides for
sustainable energy supply
Final Thoughts
• “Agriculturalists are the de facto managers
of the most productive lands on Earth.
Sustainable agriculture will require that
society appropriately rewards ranchers,
farmers and other agriculturalists for the
production of both food and ecosystem
services.” (Tilman et al. Nature 2003)
Acknowledgements
• Initiative for Renewable Energy and the Environment (IREE)
• National Science Foundation
• Howard Hughes Medical Institute
• Bush Foundation
• Jason Hill, David Tilman, Erik Nelson, Doug Tiffany, Clarence
Lehman
• Kyla Bauer, Diego Bonta, John Carmody, Leah Dornfeld, Vernon
Eidman, Joe Fargione, Darrell Gerber, Kshama Harpankar,
Frank Kulacki, Jennifer Kuzma, Eric Larson, Dan Petrolia,
Sangwon Suh, Robert Willams