Scott Swinton Presentation June 28th

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

2

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