Transcript Document

US and Global Energy
Prospects, Biofuels, Climate
Change, and Future Policy
Alternatives
Wally Tyner
Chris Hurt
George Horwich
Increased Fuel Economy
• The 2007 Senate Energy Bill requires a 4
percent increase in fuel economy each year
starting in 2010.
• By 2020, we would be saving 1.3 million barrels
of oil per day or 20 billion gallons of gasoline per
year.
• This measure also would result is considerable
GHG emissions reductions
• The House Energy bill does not contain a CAFÉ
provision.
CFL Lighting for Your Home
• CFL bulbs Use only 25% of the
energy of incandescent bulbs
• If every American home replaced just one light
bulb with an ENERGY STAR qualified bulb, we
would save enough energy to light more than
3 million homes for a year, more than $600
million in annual energy costs, and prevent
greenhouse gases equivalent to the emissions
of more than 800,000 cars.
• Energy savings calculator – Google Energy Star
Market Failures and
Policy Pathways
• Both energy security and GHG emissions are
examples of situations when markets alone
cannot deliver an optimal solution.
• Economists call these externalities, and suggest
using taxes, subsidies, or some form of
regulation to correct the market failure
• In the U.S., we do not generally use of taxes in
this situation, so I will focus on subsidies and
renewable fuel standards
Energy Security
• U.S. imports over 60% of our oil, and half of our
imports come from sources that many consider
to be unreliable, unstable, or unfriendly
• Recent estimates put the cost to our nation of
our high dependence on oil at around $3/gal. of
liquid fuels
• Consumers do not pay this security cost at the
pump
Global Warming
• The U.S. now recognizes that global warming is
real and is caused by human intervention
• Renewable fuels may lead to a reduction in
greenhouse gas (GHG) emissions
• Cellulosic based fuels especially contribute to
reduced greenhouse gas emissions
• These emissions reductions cannot be captured
in a pure market system
Demand and Supply Side Options
• On the demand side, the major options are a fuel or
carbon tax and stronger fuel economy standards
– In the State of the Union message, President Bush proposed
a small increase in CAFÉ standards
• On the supply side, government support of domestic
alternatives to oil can take many forms
– The President proposed alternative fuel mandates
• The key is risk reduction for private investments
Purdue University is an equal access/equal opportunity institution.
Policy History
for Ethanol in the US
• The US has subsidized ethanol since 1978 with
a subsidy ranging between 40 and 60 cents per
gallon.
• The current federal subsidy is 51 cents per
gallon, and there are some state subsidies as
well.
• The price of crude oil ranged between $10 and
$30/bbl. between 1982 and 2003
• With these crude prices, the ethanol subsidy did
not put undue pressure on corn prices.
Jan-06
Jan-04
Jan-02
Jan-00
Jan-98
Jan-96
Jan-94
Jan-92
Jan-90
Jan-88
Jan-86
Jan-84
Jan-82
Jan-80
Jan-78
$/bbl.
Crude Oil Price History
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Mil. gal./yr.
Ethanol Production
10000
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Policy Alternatives
•
•
•
•
Stay the course with current policy
Reduce the fixed subsidy
Variable subsidy
Two part subsidy designed to include energy
security and GHG emission reductions
• Special incentives for cellulose ethanol
• Alternative fuel standard
• Combination of alternative fuel standard and
variable subsidy
Alternative Fuel Standard
• In his State of the Union message, the President
proposed a 35 billion gallon alternative fuel standard by
2017. The Senate passed 36 bil. By 2022:
– Current production is about 5.5 billion
– Seven fold increase in 10-15 years
• The administration estimates this would replace 15% of
projected 2017 gasoline consumption
• With a binding mandate in place, it would no longer be
necessary to subsidize alternative fuels
Difference Between a Fuel
Standard and a Subsidy
• The fundamental difference between a fuel standard
and a subsidy is who pays:
– With a subsidy, the taxpayers pay the tax credits received
by fuel blenders – it is part of the government budget
– With a fuel standard, consumers see changes in prices at
the pump depending on what the alternative fuel costs
relative to gasoline from crude oil
• If we wanted to capture the higher GHG impacts of
cellulose ethanol, the standard would need to be
partitioned with cellulose receiving a higher proportion
Fuel Cost Change from a Fuel Standard
60.00%
50.00%
Fuel Cost % Change
40.00%
30.00%
20.00%
10.00%
0.00%
20
30
40
50
60
70
80
90
-10.00%
Crude Oil ($/bbl.)
$61 alternative
$47 alternative
$83 alternative
$102 alternative
100
Thanks very much!
Questions and Comments
For more information:
http://www.ces.purdue.edu/bioenergy
http://www.agecon.purdue.edu/papers/
Stay with Current Policy
• Staying with the current fixed 51 cent per gallon
subsidy would likely result in markets keeping the
corn price high and stimulating investment in
ethanol until the corn price chokes off profitability
• There would be some food cost increases due to
higher corn prices
• Global impacts are very important and quite
difficult to estimate
Breakeven Corn and Crude Prices with
Ethanol Priced on Energy and Premium Bases
Plus $0.25 Ethanol Subsidy
100.00
90.00
Crude ($/bbl)
80.00
70.00
Price premium for
octane/oxygen
Energy basis
60.00
50.00
With 0.25 fixed subsidy
and price premium
40.00
30.00
20.00
10.00
0.00
1.5 1.75
2
2.25 2.5 2.75
3
3.25 3.5 3.75
Corn ($/bu)
4
4.25 4.5 4.75
5
Variable Subsidy
• The energy security externality can be handled through
either a fixed or variable subsidy.
• A subsidy that varies with the price of crude oil would be
a means of reducing the cost of the government subsidy
while still providing a safety net if crude oil prices fall
significantly
• The variable subsidy has two parameters:
– Crude price at which it begins ($60)
– Increase in the subsidy for each $1 crude falls below
that price (2.5 cents/$)
Breakeven Corn and Crude Prices with
Ethanol Priced on Energy and Premium Bases
plus Variable Ethanol Subsidy
100.00
90.00
Energy basis
Crude ($/bbl)
80.00
Price premium for
octane/oxygen
70.00
60.00
50.00
40.00
With price premium and
variable subsidy ($60/0.025)
30.00
20.00
10.00
0.00
1.5 1.75
2
2.25 2.5 2.75
3
3.25 3.5 3.75
Corn ($/bu)
4
4.25 4.5 4.75
5
Two-Part Subsidy
• To handle both the energy security and global
warming issues, we could have a subsidy that
incorporated both
• According to Hill and Tilman, corn ethanol
reduces GHG 12.4%, soy biodiesel 40.5%, and
cellulose ethanol as much as 275%, depending
on production conditions.
Two-Part Subsidy
• Biodiesel contains 1.5 times the energy of
ethanol, so it would receive an energy security
credit 1.5 times ethanol based on imported oil
displaced.
• The next chart illustrates how such a two part
subsidy might work with components for each
fuel for energy security and GHG reductions
Two Part Bioenergy Subsidy
1.2
1
$/gal.
0.8
0.6
0.4
0.2
0
Corn Eth
Biodiesel
National security
GHG Emission red.
Cell Eth
Cellulose Ethanol Incentives
• One of the issues with our current system is that
investors will continue to prefer corn ethanol over
cellulose because cellulose is riskier
• We may need to consider other options for cellulose
ethanol at the beginning to stimulate investment:
– Investment guarantees or purchase contracts (reverse
auction)
– Tax credits to ethanol producers for each ton of cellulose
used to produce ethanol or other liquid fuel
Combination of Fuel Standard
and Variable Subsidy
• An iron-clad fuel standard may be difficult to
legislate, yet potential investors need some
assurance the standard will hold
• The fuel standard combined with a variable
subsidy might be a viable option
Cost of A Fuel Standard with a
Variable Subsidy
30.00%
25.00%
Fuel Cost % Change
20.00%
Variable subsidy would begin
if crude oil fell below $45
15.00%
10.00%
5.00%
0.00%
-5.00%
20
30
40
50
60
-10.00%
Crude Oil ($/bbl.)
$60 alternative
70
80
90
Policy Impacts
• The current subsidy can lead to very high corn prices –
beneficial to corn farmers but not to livestock producers or
consumers
• With this year’s ethanol production at 8 bil. gal., the subsidy
will cost $4 bil., but CBO estimated in January that
commodity payments will fall $4 bil. in 2007
• The variable subsidy, two-part subsidy, targeted cellulosic
subsidies, or alternative fuel mandates are options
• Various combinations of these options could be evaluated
Summing Up
• Today’s high oil prices are largely demand driven
• Global recession could lead to significant oil price drops
• Investments in alternative energy sources are risky in
the face of future potential price falls without policy
measures that insure against major price drops
• If we want to reduce dependence on foreign oil, we
must develop policy pathways that will lead us towards
greater reliance on alternative energy
• The policy choices we make will be critical