Transcript Diapositive 1 - University of Guelph

Biofuels :
At the Crossroads of Agricultural and Energy Policies
Bruno Larue
Canada Research Chair in International Agri-food Trade and director of CREATE
Growing Our Future
Institute for the Advanced Study of Food and Agricultural Policy
Ottawa, April 5, 2012
SPAANetwork
Structure and Performance of Agriculture and Agri-products
industry Network
A popular conception of biofuels
Biofuels: A bit of chemistry
Biofuels, like ethanol and biodiesel, are designed fuels derived from biological
carbon fixation.
Ethanol is produced from the fermentation of carbohydrates produced by the
sugar found in plants like corn and sugarcane.
Ethanol can be used as an alternative car fuel, like the E85 used in Brazil, or as a
gasoline supplement, like the E10, which is common in North America.
Ethanol by-products, dry and wet distillers grains, are fed to livestock.
The ratio of energy produced by sugar cane-based ethanol over the energy
needed to produce it varies between 8.3 and 10.2. For corn-based ethanol, the
ratio varies between 1.3 and 1.6.
Biofuels: a bit of history

Ethanol has been with us for a surprisingly long time. The Ford model T could run
on gasoline or ethanol and Henry Ford was reportedly an ethanol advocate.

The first use of sugarcane ethanol as a fuel in Brazil goes back to the 1920s. A 50%
mandatory blend was imposed in 1943 as a response to threatened oil supplies
during WWII.

Until the early 1970s, oil was cheap and ethanol was not competitive.
Environmental issues were not in public policy discussions.
Ethanol Production (1975-2010),
in millions of gallons
25,000
20,000
World
15,000
US
10,000
Brazil
EU
5,000
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
0
The events that changed the views on ethanol
The two oil shocks (1973 and 1979) made oil importing countries aware of the
dangers of oil dependancy and willing to subsidize the production of alternative
fuels.
Brazil embarked on its « Programa nacional do alcool » in 1975 and a blending
mandate varying between 10% and 22% was used between 1976 and 1992.
Cars running on E100/neat ethanol were first commercialized in Brazil in 1979.
Brazil imposed a mandatory blend of 22% anhydrous ethanol in 1993. The mandated
blend has varied between 20% and 25% afterward.
First Flex Fuel cars sold in 2003.
Brazilian ethanol: a case illustrating the
infant industry argument?

Price subsidies for ethanol producers

Low interest loans to encourage investment

Subsidized ethanol retail prices below gas prices

Private and public investments in R&D

By 2004, technological advances and economies of scale made
ethanol competitive with gasoline (Goldemberg, 2008).

In 2007, Brazil exported about 20% of its production, but it has been
importing from the United States recently.
Costs of production
Buildings
Equipment
Labor
Insurance, taxes
and other costs
Feedstock
Other operation
costs
Total production
cost
Sale
of
byproducts
Government
subsidies
Net production
cost
(€/1000 liters)
USA corn
Germany wheat
Brazil sugarcane
0.82
5.30
1.40
1.02
Germany
sugarbeet
0.82
5.30
1.40
1.02
0.39
3.40
2.83
0.61
20.93
11.31
27.75
18.68
35.10
15.93
9.80
2.32
39.47
54.97
59.57
14.48
6.71
6.80
7.20
48.17
52.37
0.21
1.15
0.52
0.48
7.93
24.83
Source: Goldemberg (2008)
14.48
Recent changes in the United States

The US$0.54/gallon tax on ethanol imports and the US$0.45/gallon tax credit on
blending have been terminated at the very end of 2011, saving an estimated US$6
billion/year to US taxpayers (Babcock, Barr and Carriquiry, 2010).

The 2005 Energy Policy Act required that 7.5 billion gallons of renewable fuel be
used by 2012.

The 2007 Energy Independence and Security Act imposed an annual limit of 36
billion gallons for 2022, of which 44% must be advanced renewable fuel.

Ethanol as a fraction of gasoline use went from 1% in 2000 to a bit less than 10% in
2010.

Production is concentrated in the Midwest (Iowa, Nebraska, Minnesota, Illinois and
Indiana).

As recently as 2009, the US was a net importer of ethanol, but it exported 940
million gallons more than it imported in 2011, from an estimated production of
13900 million gallons.
Ethanol production in Canada

Canada produced 462 million gallons of ethanol in 2011.

This makes it the fifth largest producing nation in the world, behind the US, Brazil,
the EU and China.

As of December 2010, Canada mandated that ethanol account for 5% of gasoline
use.

Grier, Mussell and Rajcan (2012) evaluate government support at $250 million/year.

Some provinces, like Quebec, have decided NOT to expand their production
capacity of corn-based ethanol, but invested $27 million to help Enerkem and
Greenfield Ethanol build a full-scale commercial cellulosic ethanol plant.
Canada’s biggest ethanol plants
Table 2. Canada’s largest ethanol plants
Ethanol Plant
Location
Feedstock
Suncor St. Clair Ethanol Plant
GreenField Ethanol Inc.
GreenField Ethanol Inc.
IGPC Ethanol Inc.
GreenField Ethanol Inc.
Terra Grain Fuels Inc.
Husky Energy Inc.
Husky Energy Inc.
Sarnia, Ontario
Johnstown, Ontario
Chatham, Ontario
Aylmer, Ontario
Varennes, Quebec
Belle Plaine, Sask.
Minnedosa, Manitoba
Lloydminster, Sask.
corn
Corn
Corn
Corn
Corn
Wheat
Wheat and corn
Wheat
Capacity
(Mmly)
400
230
195
162
155
150
130
130
Source: http://www.greenfuels.org/en/industry-information/plants.aspx
The economics of mandates
What if the mandate is increased?
What if the price of corn increases?
10
8
Ethanol S
6
PE
4
AveP
PB
2
PG
D
0
0
2
4
D
6
8
10
Biodiesel: production trends
6,000
5,000
4,000
World
3,000
US
EU
2,000
1,000
0
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Biodiesel in Canada and elsewhere

In Canada, renewable fuel regulations mandate that biodiesel be blended to
represent 2% of all diesel fuel sold, or over 1.5 billion litres of biodiesel.

Current production and production capacity are low, but Alberta, Ontario and
Quebec have projects for larger plants.

Mixes of biodiesel and petrodiesel commonly marketed include B100 (100%
biodiesel), B20 (20% biodiesel, 80% petrodiesel), B5 and B2. The last three can be
used in standard diesel engines.

In France, buses equipped with special engines run on a 50% blend.
Land diversion: US Corn acreage over time
120000000
100000000
80000000
60000000
US Corn planted acres
40000000
20000000
0
Corn acreage in Canada (1990-2011)
4000000
3500000
3000000
2500000
Canada
2000000
Quebec
Ontario
1500000
1000000
500000
0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Consequences of ethanol boom
350
300
250
Production
200
Feed
150
Ethanol
100
Exports
50
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
0


US corn demand for ethanol is up, but exports and feed use are down.
Rising feedgrain prices in the United States and Canada made livestock producers
angry at ethnanol policies, but made land owners happy. The average price for an
acre of cropland in the US was around $1600 in 2003 compared to $3200 in 2011.
Feb-12
Sep-11
Apr-11
Nov-10
Jun-10
Jan-10
Aug-09
Mar-09
Oct-08
May-08
Dec-07
Jul-07
Feb-07
Sep-06
Apr-06
Nov-05
Jun-05
Jan-05
Aug-04
Mar-04
Oct-03
May-03
Dec-02
Jul-02
Feb-02
Corn and oil prices
350
300
250
200
150
Crude Oil Price
100
Corn Price
50
0
Is ethanol responsible for the high and
volatile price of corn?




Mitchell (2008) said « yes ».
OECD (2008) said « some »
Baffes and Haniotis (2010) said “not really”
Effect on food prices differ between poor and rich countries.
Many causes:
- Strong aggregate demand stemming from economic growth in
the developping world, low inventories and inelastic supply and
demand functions;
- Weather and other exogenous shocks;
- Peculiar policies (Tangermann, 2011);
- Speculators;
- Commodity prices are not more volatile than before.
Is the price of corn more « exposed » to oil
price shocks than before?



The relationship between corn and oil prices has evolved
over time.
3 structural breaks: 2nd oil price shock, end of export
subsidy war between the US and the EU and the ethanol
boom.
The corn price systematically adjusts to oil price shocks
in recent years only. The converse is not true: the oil
price does not systematically adjust to shocks to the
price of corn (El Marzougui and Larue, 2012).
Conclusion






Biofuels are a response to concerns about dependency on
foreign fossil fuels, a desire to curb GHG emissions and a
desire to redistribute wealth with a specific
regional/commodity focus.
A more efficient way to internalize the environmental
externality would be to tax sources of GHG emissions.
Canada’s mandates on ethanol and biodiesel are relatively low
and hence not too distorting.
Ag prices are more than ever affected by oil price shocks.
Arable land endowments are trending downward in many
parts of the world, pressure to get better yields (more
bushels/acre, more ethanol per bushel).
How will demand for fuels and food change in the future?