Summary of US National Academies Research Council (NRC) report “Renewable Fuels Standard: Potential Economic and Environmental Effects of U.S. Biofuel Policy”

Posted Wednesday, 2 November 2011, 00:00

This report by the National Academies National Research Council (NRC) evaluates the potential for the United States to fulfil the amended Renewable Fuels Standard (RFS2) over the next decade as well as possible economic and environmental impacts of fulfilling the RFS2.

The RFS2 mandates that 36 billion gallons of domestic biofuels be produced annually by the year 2022 (p. 75). The RFS2 defines four eligible categories of biofuels: “renewable fuels” (i.e. conventional ethanol from food crops), biodiesel, cellulosic ethanol, and advanced fuels (p. 21). Sixteen billion gallons of the total mandate must be met with cellulosic ethanol (p. 3).

In summary, the report argues that conventional ethanol component of the RFS2 will be met by 2022 but the cellulosic and advanced components will not without additional policy support or technological breakthroughs. It also notes that given the level of emissions from corn and energy crop based ethanol production,

“RFS2 may be an ineffective policy for reducing global GHG emissions”

Potential to fulfil the RFS2

In theory, there could be enough biomass available to meet the 2022 target; the NRC states, “potential harvestable biomass feedstock is unlikely to be the limiting factor in meeting RFS2” (p. 110). There is little doubt of the capacity of the corn ethanol and biodiesel industries to meet their individual mandates (p. 75); thus, this section largely focuses on the availability of feedstocks for cellulosic and advanced biofuels. The NRC reviewed various model estimates, which generally predict a sufficient supply of biomass. UC Davis’ National Biorefinery Siting Model (NBSM) has estimated that a sufficient amount of biomass, 500 million tons (conventional as well as cellulosic and waste), would be available, including crop and forestry residues, dedicated energy crops, municipal wastes, and conventional crop-based feedstocks (p. 90). This model has also predicted that the RFS2 could be met with a biofuel price of $2.90 gge-1 (per gallon gasoline equivalent); however, this estimate is lower than others reviewed in the literature and does not account for the opportunity cost of cropland for other uses (p. 93; this topic is discussed more in the following section). Using the model FASOM, the U.S. Environmental Protection Agency (EPA) has predicted that enough feedstock would be available to meet the requirement of 16 billion gallons of cellulosic ethanol, mainly relying on corn stover, woody biomass, and sugarcane bagasse (p. 98). A 2010 United States Department of Agriculture (USDA) report estimated that the RFS2 could be met using 27 million acres of cropland (6.5% of all current US cropland), but did not provide estimates of the different types and amounts of biomass that would be needed. The US Biomass Research and Development Board (BRDB) used the POLYSIS model framework to estimate that a total of 191-240 million tons of cellulosic feedstock would be available by 2022, a sufficient amount of produce 20 billion gallons of cellulosic ethanol.

Although several models have predicted the physical availability of a sufficient amount of conventional and cellulosic ethanol feedstock by 2022, there remain several uncertainties regarding market supply of cellulosic feedstocks: competition for feedstocks with the electricity sector (which is also required to use some renewables in most states), competition with the livestock sector (using agricultural residues as animal bedding), the possibility of diseases and pests reducing yields, uncertainty in the prediction of future yield increases, and social barriers (farmers may not be willing to grow certain feedstocks; p. 109). Additionally, the economic viability of a sufficient supply of cellulosic material at a price affordable to biofuel producers is highly uncertain; this topic is discussed in the following section.

The economic viability of meeting RFS2

As of January 2011, the capacity of existing corn grain ethanol facilities was 14.1 billion gallons yr-1 and is estimated to be 15 billion gallons yr-1 by 2012 (p. 75). Thus, production capacity is almost guaranteed to meet the RFS2 target for conventional ethanol by 2022. Similarly, existing biodiesel facilities are expected to meet the biodiesel target within the next few years (p. 75). Thus, the remainder of this section focuses on the viability of cellulosic and advanced ethanol.

Biomass will not likely be available at a sufficiently low price to meet the cellulosic requirement of RFS2 in 2022 with the current policy outlook: “without policy intervention, no [cellulosic or advanced] feedstock market is feasible in economic terms” (p. 125). The price for which farmers will be willing to sell cellulosic feedstocks will be higher than the price biofuel producers will be willing to pay (p. 115). The NRC used the Biofuel Breakeven model (BioBreak) to assess costs and feasibility of local and regional cellulosic biofuel markets (p. 116). BioBreak calculates the biofuel producer’s willingness to pay (WTP) and the farmer’s willingness to accept (WTA) for cellulosic ethanol, allowing both parties to break even, as well as the price gap between the WTP and WTA (p. 116). BioBreak is rare among models predicting the economics of cellulosic biofuel production in that it includes the opportunity cost of farmland used to produce feedstocks, and thus typically (and appropriately) yields a higher price gap than most models (but lower than DOE’s 2011 Billion Ton Study 2; p. 130).

The NRC evaluated 7 feedstocks: corn stover, alfalfa, switchgrass, Miscanthus, wheat straw, short-rotation woody crops (SRWC), forest residue, as well as rotations among some of the crops (p. 122). Depending on feedstock and region and assuming an oil price of $111 barrel-1 and no policy incentives, WTAs range from $75 to $133 dry ton-1 with switchgrass and Miscanthus being generally more expensive than other feedstocks (p. 124), while WTPs range from $24-27 dry ton-1 (p. 125). Thus, there is a very large price gap of $49-106 dry ton-1 (p. 126) – this is likely an underestimate anyway as farmers would likely want to maintain an additional profit margin. A Monte Carlo sensitivity analysis suggests that these results are fairly certain (p. 129).

The above results assume no policy incentives. Inclusion of both the Bioenergy Program for Advanced Biofuels and the Biomass Crop Assistance Program (both part of the 2008 Farm Bill) would result in economic viability of all the above feedstocks (p. 128). However, these policies are only active through the end of 2012 (p. 177) and given the current political climate it is not certain they will be continued. All the above feedstocks could also become economically viable were oil prices to rise to $191 barrel-1 by 2022 (p. 126), though such prices currently seem unlikely. The price gap is also sensitive to the conversion rate of biomass to ethanol, which was set constant at 70 gallon ton-1 in the above analysis (p. 126). Expansion of certain technologies such as high-yield pyrolysis could increase the WTP and thus decrease the price gap (p. 133).

Lastly, “as of 2011, a functioning market for cellulosic biofuels does not exist” (p. 116), reducing the likelihood that 16 billion gallons of cellulosic ethanol could be produced yearly by 2022 (p. 3). The BioBreak model assumes that the biofuels projects are fully equity financed. But “none of these projects has yet to be demonstrated commercially, implying that they are high-risk investments,” which “usually require higher returns or leveraging of capital to reduce the risk” (p. 134). Policy uncertainty in the current political environment is also contributing to the lack of investment (p. 3). Thus, the capacity of producing cellulosic biofuels is unlikely to meet the RFS2 mandate absent major technological innovation or a change in policy incentives.

Although the NRC does not make policy recommendations in this report, the authors offer a number of policy alternatives for consideration. The bottom line is that cellulosic and advanced biofuels must be subsidized to be economically viable: “without [biofuel subsidies and oil taxes], the biofuels industry would not expand to meet RFS2 requirements” (p. 132). Some of the NRC’s suggestions involve removing some or all of the VEETC (as this is a redundant policy) to free up funds to subsidize more sustainable biofuels. Alternatives include eliminating all subsidies and using the funds for research and development to make the biofuel production process more cost competitive, eliminating subsidies and imposing taxes on petroleum-based fuels, and creating a carbon price (p. 182).

The economic impacts of meeting RFS2

According to NAS, the production of sufficient biofuels to meet RFS2 is likely to have a small impact on food and land prices. The recent expansion of the U.S. ethanol industry “was not the only cause of the agricultural commodity price increase in 2007-2009 and is not likely to be a major factor determining price movements” (p. 146).

It is true that prices of grain and oilseed crops, food, animal feed, and wood products have all increased coinciding with the recent expansion of the biofuels market (p. 135). Cropland and harvested acres peaked in 1981, decreased slowly until 2006, and have increased since then (p. 136). Crop commodity prices have skyrocketed since 2007, although not all studies reviewed in this report find that these price increases are strongly linked to biofuel production (p. 137). Indeed, corn consumption has been increasing for decades, well before the start of the corn ethanol industry (p. 138). This is at least partly because the share of corn in animal feed has increased (p. 138).

This report attempts to quantify the impact biofuel production has had on food prices over the last few years. A major problem in comparing previous studies has been confusion over terminology: “commodity price” refers to the farm gate price of agricultural products while “retail food prices” refers to the price at the grocery store; many studies and media reports have referred to both indiscriminately as “food prices” (p. 142). In a review of studies, estimates of the effect of biofuels on agricultural commodity prices have been quite variable, from 2.5-100%, with a middle range of estimates falling between 20% and 40% (p. 144). The impact on US retail food prices is much smaller, as agricultural commodity prices are generally responsible for only 5% of US retail food prices (i.e. the cost of processing food is far greater than the price of ingredients), while the impact on an American individual’s actual food budget [or Consumer Purchasing Index (CPI)] is even smaller, as “cereals and products” comprise only 4.5% of the average individual’s food budget (p. 145). To illustrate, if biofuels are responsible for 20-40% of recent agricultural commodity price increases, they had a 2-4% impact on retail food prices and a 0.045-0.090% impact on the Food-Consumed-At-Home CPI (p. 146). Thus, the NRC concludes that recent biofuel production has only had a very small impact on U.S. household food budgets. International agricultural commodity and retail food prices have risen more sharply than in the U.S., but this has likely been largely affected by droughts and other disruptions (p. 141). Reduced exports from the U.S. have not been a major issue; in fact, corn exports have increased as a result of a weaker dollar in the last few years (p. 159).

NAS reports that biofuel production has likely affected prices of animal feed, although its impact may be small. Agricultural commodity prices have a larger influence on feed prices than they do on retail food prices, but again it is not clear to what extent U.S. biofuel policy specifically contributed to recent feed price increases (p. 146). Citing a study by Iowa State University, NAS suggests, “only around 8 percent of the increase in livestock feed prices between 2005 and 2009 can be attributed to [US biofuel policies]” (p. 147). It appears that availability has not been an issue: the amount of corn in feed has remained flat in recent years, and if corn co-products are included, the amount of corn in feed has increased (p. 147).

In addition to affecting corn prices, biofuels may have an effect on motor fuel prices. The report notes that according to model predictions by the USDA’s Economic Research Service, meeting RFS2 in 2022 would lower the price of and gasoline (p. 158). This analysis assumes that the price of ethanol will be relatively low ($2.12 per gallon, c.f. estimate of viability at $2.90 gge-1 by UC Davis’ NBSM as reviewed above), so it is not clear that biofuels would actually cause motor fuel prices to drop with the current outlook on biofuel production potentials.

Environmental effects

This section discusses the impacts of biofuel production on greenhouse gas emissions, air and water quality, soil quality, and biodiversity.

Regarding greenhouse gas emissions, the NRC states that while biofuels produced from wastes and residues likely have greenhouse gas (GHG) savings relative to petroleum-based fuels, ethanol from conventional and dedicated energy crops may not, and thus, “RFS2 may be an ineffective policy for reducing global GHG emissions” (p. 5).

Factors that directly affect the GHG balance of biofuels include: choice of feedstock (p. 205), the relationship between the feedstock and site properties such as soil type and climate (p. 205), fertilizer use (p. 205), the use of crop rotations (p. 206), tillage methods (p. 206) and whether or not crop residues are harvested (p. 208). Soil carbon is a major factor in the GHG balance of agricultural production; studies have shown that production of switchgrass, forest residues, and SRWC can sequester soil carbon (depending on the land used for cultivation; p. 208) while conventional crop production almost always results in a loss of soil carbon.

Land use change can lead to further carbon emissions. Although RFS2 discourages direct land conversion to cultivate biofuel feedstocks, indirect land use change (iLUC) may occur when biofuel feedstock production encroaches upon cropland previously used to grow food, raising food prices and incentivizing conversion of natural land to cropland elsewhere (p. 5). Although the extent to which this occurs is a very large source of uncertainty, land use changes “can have profound effects on GHG emissions” and “cannot be ignored” (p. 215). As an example of iLUC, one study showed that the CRP program has a 20% slippage rate (i.e. for every 5 acres enrolled in the program, 1 acre somewhere else is converted to cropland; p. 209). This report reviewed several studies modelling biofuel-driven iLUC. Searchinger et al. (2008) predicted large iLUC emissions from U.S. corn ethanol production that would more than offset any GHG benefits from using the biofuel as opposed to gasoline (p. 211), while Tyner et al. (2010; p. 212) and Hertel et al. (2010; p. 215) predicted smaller, but still substantial, iLUC emissions resulting from U.S. corn ethanol.

In the actual conversion of biomass to fuels, the main factors affecting the carbon intensity of the process are the type of energy used to power the facility and heat the biomass (e.g. using natural gas is less carbon intensive than using electricity produced from coal), and whether or not the DDGS is dried before entering the livestock market (p. 215). EPA’s impact assessment for RFS2 reported that corn grain ethanol has a 21% GHG savings compared to gasoline, allowing it to qualify for RFS2 from 2008-2022. However, this number reflects EPA’s prediction of corn grain ethanol production in 2022 and assumes that the ethanol plants are powered using biomass as a heat source. The NRC states that “according to EPA’s own estimates, corn-grain ethanol produced in 2011, which is almost exclusively made in biorefineries using natural gas as a heat source, is a higher emitter of GHG than gasoline. Nevertheless, corn-grain ethanol produced at the time this report was written still qualified for RFS2 based upon EPA’s industry-weighted average of projected 2022 industry” (p. 221).

There is not yet a consensus within the scientific community on whether biodiesel from oilseeds has a lower carbon intensity than fossil fuels (p. 222). Biofuels produced from agricultural and forestry residues and from mixed solid waste have been consistently shown to have a lower carbon intensity than gasoline (p. 222). Dedicated energy crops such as switchgrass may have a lower or higher carbon intensity than gasoline depending on how they are grown (e.g. if they are grown on previously unproductive land, if fertilizer is used, etc.; p. 223).

This report also discusses biofuel production’s impacts on air and water quality. Although production and use of some biofuels may emit less GHG than conventional fuel, they actually sometimes results in greater emissions of conventional pollutants (p. 226). Biofuels release carbon monoxide, sulfure dioxide, nitrogen oxide, particulate matter, ozone, precursors to ozone, acetaldehyde, benzene, 1,3-butadiene, and formaldehyde. Most of these emissions occur during the combustion of biofuels, although some are released during the processing/refining steps (p. 224). Some studies have shown that corn-grain ethanol results in equal or higher human death costs than gasoline, while cellulosic ethanol results in equal or lower death costs (p. 227).

The potential effects of biofuel feedstock production on water quality is highly variable. Some feedstock types may improve water quality while others may result in a high discharge of sediment and nutrients (p. 271). These effects are highly dependent on agricultural methodology (e.g. tillage methods, fertilizer use, etc.). Water usage is another concern: consumptive water use is higher for corn ethanol production (15 to 1,500 gallons water gge-1) than for petroleum-based fuels (1.9 to 6.6 gallons water gge-1), even when the corn is not irrigated. Estimates of water use for the production of cellulosic biofuel feedstocks in the range of those for corn ethanol (2.9 to 1,300 gallons water gge-1; p. 271).

Effects on biodiversity depend highly on the feedstock grown and the location (p. 271). For instance, “monocultures, as in the case of growing corn continuously, threaten biodiversity” (p. 253), while one study found that “partial harvest of switchgrass fields in Wisconsin could enhance grassland bird diversity” (p. 255). One concern is that herbaceous perennial crops (such as switchgrass) that are selectively bred or genetically modified could become invasive species in natural habitats (p. 256).

 

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