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Introduction to the Economics of Liquid Biofuels & Crop Production Sco$ M.  Swinton   Michigan  State  University   Bioenergy  Ins7tute,  June  28,  2010  


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Where we are headed !   Energy in  the  US  economy     (and  why  oil  ma$ers)  

!   How food  and  fuel  markets  are  linked   !   Where  cellulosic  ethanol  fits  in     (Will  farmers  grow  cellulosic  biofuel  crops?)  

!   What could  change  the  economic  picture  

www.glbrc.org


Transportation uses Âź of US energy, almost all from oil


Energy distribution !   Fixed point  energy  demand  (buildings,   immobile  equipment)  

  Electricity –  mostly  coal-­‐powered  in  USA     Nuclear  &  hydro  are  important  niches  

!   Transporta7on energy  demand     Liquid  fuel  (planes,  cars)     95%  petroleum  products  


Why do most cars run on gasoline, not ethanol? !   Gasoline is  cheaper       (if  oil  price  below  $60-­‐70  per  barrel)  

!   Ethanol role     Fuel  addi7ve  to  improve  combus7on  (oxygenate)     Subs7tute  fuel  for  gasoline  (up  to  10%  in  vehicles   that  not  flex-­‐fuel)     US  ethanol  almost  100%  from  corn  grain,  so  corn   ethanol  supply  depends  on  food  prices  too  


Links between markets from petroleum to grain to cropland Oil prices ↑

Substitute fuel prices ↑ (ethanol & biodiesel)

Biofuel crop prices ↑ & production ↑ (corn, soy, switchgrass)

Intensification: More input use on same land

Extensification: more land in biofuel crops


Crude oil market links to ethanol links to corn grain market $/Gallon

Ability to Pay for Corn Grain (with current subsidy)

Willingness to Pay for Ethanol

4.00

3.00

2.00

1.00

Source: Babcock et al, 2008 $9

8

7

6

5

4

3

$/Bushel of Corn

2

1

0

20

40

60

80

100

$/Barrel of Oil

120

$140


Key policies affecting the ethanol market !   Cost of  US  ethanol  produc7on  is  lowered  by:     Federal  tax  credit  ($0.45/gal)  +  state  credits  

!   Cost of  imported  sugarcane  ethanol  raised   by:    

  Tariff on  imports  ($0.54/gal)  

!   Mandated blending  of  ethanol  into  na7onal   liquid  fuel  supply  (EISA  2007)  


Renewable Fuel Standard (current U.S. law) (Energy Independence and Security Act of 2007) 40

35

Biodiesel General  Advanced  

Biofuel Volume  (billion  gallons)  

30

25

Cellulosic Advanced   Conven@onal   Previous  RFS  

Advanced

20

15

10

5

0

Year

Slide from Chris Somerville


Status of ethanol market !   Corn ethanol  growing  steadily,  despite   compe77on  with  feed  &  food  uses  

!   Cellulosic ethanol  has  much  higher  cost  of  

produc7on to  convert  ligno-­‐cellulose  to  sugars   &  alcohol     EISA  creates  mandated  market     But  EPA  relaxed  mandate  for  2010  due  to  supply   constraints  


Where would we produce 16 bil gal of cellulosic ethanol? !   Crop land     At  what  price  would  farmers  switch  from  corn  to  a   cellulosic  crop?  Break-­‐even  price  must  cover:   •  1)  Costs  of  produc7on   •  2)  Profits  that  would  have  been  earned  from   corn.  

!   Non-­‐crop land     Value  of  fuel  crop  needs  to  beat  alterna7ve  


Break-even biomass price per ton for switching away from corn (corn grain @$3.50/bu) Breakeven biomass prices near $100/ton for switchgrass, grass & poplar. Best bet: Miscanthus if cheap rhizomes ($52/ton).

James et al (2010) Agronomy Journal


Bottom line: No cellulosic crop beats corn at current prices & yields !   For cellulosic  biomass   crops  to  become   a$rac7ve:  

  Higher yields  &  prices   over  $60/ton  for   switchgrass,  mixed   grasses  or  poplar  

!   Non-­‐crop lands?     Study  underway  using   GIS  tools  


Future drivers of biofuel economics !   Markets   Oil  supply:  New  discoveries,  war/risks,  OPEC     Oil  demand:  new  technology,  popula7on,  incomes     Electrical  demand  (big  if  more  electric  cars)  

!   Technological change     Liquid  fuel  processing  breakthroughs  (ethanol,  biodiesel)     Electric  ba$ery  life7me  &  power  storage  

!   And …  policy  


Biofuel policy: Future possibilities !   Energy independence  policy     Subsidies  &  mandates  to  favor  biofuels  

!   Environmental policy     Climate  change  policy   •  Cap  and  trade  policy  (like  Waxman-­‐Markey  bill)  would   create  market  for  carbon  sequestra7on  by  farmers  &   foresters  

  Other environmental  benefits  of  more  sustainable   crop  systems  will  need  policy  support   •  Biodiversity   •  Water  quality  


Future of liquid biofuel economics bears close watching

Scott Swinton Presentation June 28th  
Scott Swinton Presentation June 28th  

Bioenergy Institute

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