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Lose-Lose on Biofuels?

Tuesday, May 26, 2009

Forcing the market to produce large amounts of renewable fuel will harm consumers. Even though it reduces some emissions, it increases others.

The Environmental Protection Agency recently released its analysis of the renewable fuel standard enacted by the Energy Independence and Security Act of 2007. The standard requires 11.1 billion gallons of renewable fuel to displace petroleum fuel in 2009, ratcheting up each year until reaching 36.0 billion gallons of renewable fuels by 2022. There are separate volume requirements for advanced biofuels, cellulosic, and biodiesel.

Forcing the market to produce large amounts of renewable fuel will harm consumers in two ways: it will increase prices at the pump, because biofuels are more costly than gasoline, and it will drive up the price of food, because it diverts crops into fuel. The impact of food price inflation will weigh most heavily in developing countries where food purchases comprise larger shares of consumption. Food expenditures account for as much as 70 percent of household consumption among lower income groups in the developing world.

What can justify a policy that deliberately increases the price of food and fuel? Calling passage of the bill the “shot heard ‘round the world,” House Speaker Nancy Pelosi said it would improve the “health of our children.” But this is questionable at best. While the Environmental Protection Agency (EPA) analysis suggests that the switch toward renewables will decrease ammonia, carbon monoxide, and benzene, it also predicts “significant increases in ethanol and acetaldehyde emissions” and “more modest increases in nitrogen oxides, formaldehyde, particulate matter, hydrocarbons, acrolein, and sulfur dioxide.” Citing time constraints, the EPA did not do a full analysis of the net health effects of these emission profiles, but a reasonable assumption is that the detrimental health impacts from increased particulate matter will at least offset the health improvements from the predicted reductions in the other pollutants.

The EPA’s analysis suggests that the switch toward renewables will significantly increase various emissions.

Supporters of the Energy Independence and Security Act of 2007 (EISA) also claimed that it will reduce greenhouse gases. Both Speaker Pelosi and then-President Bush said the bill will help reverse global warming. Indeed, much of the early enthusiasm for biofuels was based on the belief that their use would reduce greenhouse gases. It is true that burning biofuels results in less tailpipe emissions of greenhouse gases relative to burning petroleum. Yet this ignores the increase in emissions that results from the production of biofuels, especially the land use changes as farmers convert forest and grassland into cropland for biofuel production. An article published in Sciencemagazinein 2008 found that “corn-based ethanol nearly doubles greenhouse gas emissions over 30 years and increases greenhouse gases for 167 years.” Another article in Scienceconcluded that crop-based biofuels create a “biofuel carbon debt of 17 to 420 times more carbon dioxide than the greenhouse gas reductions that these biofuels would provide by displacing fossil fuels.”

Congress was aware of this concern. EISA requires that the mandated renewable fuels reduce greenhouse gases relative to petroleum, and it also requires emissions to be measured on a “lifecycle” basis that includes any “significant emissions from land use changes.” Under EISA, corn-based renewable fuel must result in a 20 percent reduction relative to petroleum; advanced (i.e., noncorn based) biofuels and biodiesel must result in a 50 percent reduction; and cellulosic biofuel must result in a 60 percent reduction. However, EISA gives the EPA discretion to lower these requirements by up to 10 percentage points.

Forcing the market to produce large amounts of renewable fuel will harm consumers by increasing prices at the pump and driving up the price of food.

This is where the EPA’s analysis is especially interesting. Given the results published in Science, many biofuels might not meet the greenhouse gas reduction required by EISA. This would largely gut the biofuel mandate.  

The EPA’s findings indeed show a substantial increase in greenhouse gas emissions stemming from the initial land use changes needed to meet the mandate. Only over a long time horizon do the relatively clean-burning fuels start to accrue reductions in greenhouse gases relative to petroleum.

The following figure from the EPA’s analysis shows the estimated emission profiles for corn-based biofuel, soy-based biodiesel, sugarcane ethanol, and switchgrass ethanol, stemming from the 2022 mandate of 36.0 billion gallons. There is an extremely large spike in emissions due to initial land-use changes, especially for corn-based ethanol and soy-based biodiesel. It takes more than 30 years for the emission reductions from these cleaner burning fuels to make up for the spike in emissions from the land-use changes. (Sugarcane and switchgrass biofuels fare much better.)

Gayer

Opting not to substantially gut EISA’s biofuel mandate, the EPA evaluates these time profiles using either a very long time horizon of 100 years (so that there are more years in the future garnering emission reductions in order to dominate the first-year emissions spike), or a shorter time horizon (30 years) but with a zero discount rate (eliminating the typically assumed preference for current benefits relative to future benefits).

This figure clearly calls into question the merits of the renewable fuel standard. At a cost of higher fuel prices (the EPA predicts 2.7 to 10.9 cents more per gallon), higher food prices (the EPA predicts $10 more per person per year on food), increases in harmful local pollutants, and a considerable increase in short-term greenhouse gas emissions, the standard only starts paying climate-related dividends many years in the future.

Many biofuels might not meet the greenhouse gas reduction required by the Energy Independence and Security Act of 2007. This would largely gut the biofuel mandate.

There are three important concerns here: First, it is dangerously naïve to consider only direct emissions stemming from different fuels. As acknowledged in EISA, the full lifecycle emissions from a fuel include “all stages of fuel and feedstock production and distribution, from feedstock generation or extraction through the distribution and delivery and use of the finished fuel to the ultimate consumer.” A lifecycle analysis is extremely complex and the results are highly uncertain.

Second, a lifecycle analysis will present different emission time profiles for different fuels, leading to the tricky question of weighing the current emissions increase from land-use changes to the relative emission reductions in later years. The net results are highly contingent on the time horizon used for the evaluation, as well as the discount rate selected.

The third, and most important, lesson is an old one: reducing greenhouse gas emissions is best achieved from a comprehensive cap or tax that allows full flexibility across sectors or industries. Right now, Congress is considering the Waxman-Markey bill, which would establish an economy-wide cap on greenhouse gases. With a firm cap in place, a law that mandates different fuel mixes will increase the cap’s compliance costs and will not achieve any further reductions. Indeed, to the extent that land use changes are not captured by the cap, the biofuels mandate may actually lead to emission increases. Unfortunately, not only does the Waxman-Markey bill keep the biofuels mandate in place; it goes one step further by creating a renewable electricity standard that mandates different fuel types for electricity generation. 

Ted Gayer is an associate professor at Georgetown University’s Public Policy Institute. From July 2007 to July 2008, he served as deputy assistant secretary of economic policy at the Treasury Department. 

Image by Darren Wamboldt/Bergman Group.

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