born subsidized: biofuels production in the usa -...
TRANSCRIPT
Born subsidized: Biofuel production in the USA
by Ronald SteenblikDirector of Research
GSI studies• Seven national studies
– Australia– Brazil– Canada– EU– Switzerland– USA (10.06)
• Synthesis Report
History of Ethanol in the USA (1)• Ethanol was produced in rural areas until the Prohibition
era (1920s).• Interest returned in the late 1970s, with an increase in the
price of gasoline, and surplus capacity in plants (especially ADM) producing high-fructose corn syrup.
• In 1978, an exemption was granted on the 4¢/gallon (1¢/litre) federal gasoline excise tax for E10.
• This was followed by a “secondary duty” on imported ethanol in 1980 — initially 40¢/gallon (10.6¢/litre), currently 54¢/gallon (14.3¢/litre).
• Several states (e.g., Minnesota & North Dakota) followed with their own incentives, up to 40¢/gallon (10.6¢/litre).
• Meanwhile, subsidies for the production of corn (maize) continued to be provided.
• Small ethanol producer tax credit introduced in 1990.
History of Ethanol in the USA (2)• By the early 2000s, the cost of the excise-tax exemption in
lost revenues to the Federal Highway Trust Fund had become apparent.
• In 2004, the U.S. Congress eliminated the excise tax break and created a new incentive, the volumetric ethanol excise tax (VEETC), which is actually an income tax credit of $0.51 per gallon ($0.135 per litre) of pure alcohol blended for fuel.
• More importantly, the Energy Policy Act of 2005 created a “Renewable Fuels Standard” (RFS) of 4 billion gallons (15.1 billion litres) in 2006, rising to 7.5 billion gallons (28.4 billion litres) in 2012.
U.S. ethanol production, 1980-2006M
illio
ns o
f gal
lons
Source: Iowa Corn Promotion BoardBiodiesel
The U.S. Biofuels BoomPrices of Crude Oil vs. Corn
Sep-02
Jan-07
Jan-03
Jul-03Jan-04
Jul-04Jan-05
Jul-05
Jan-06
Jul-06
10
20
30
40
50
60
70
80
90
1 1.5 2 2.5 3 3.5 4 4.5
Corn Chicago cash prices ($/bushel)
Cus
hing
, OK
WTI
Spo
t Pri
ce F
OB
($
/bar
rel)
Data Source : USDA, EIA
Source: Steven Perkins, European Conference of Ministers of Transport using USDA & US EIA data; cost equivalence calculation: Bear Stearns, “Ethanol 201: Beyond Corn”, 2006.
Price of corn futures in 2006(Chicago Board of Trade, $/bushel)
$2.50
$3.50
$3.00
$2.00
Source: TFC Commodity Charts, http://futures.tradingcharts.com/
Demand-side developments• Market developments (rising oil prices, starting in
2003) have also helped spur growth.• But policies have favored ethanol above all else:
– Government procurement rules for “alternative-fuel vehicles”
– “Dual-fuel loophole” for manufacturers of flex-fuel vehicles (vehicles able to run on E85)
– Subsidies (especially since 2006) for installing E85 infrastructure.
– Special exemptions and regulatory favours in states and cities (e.g., rights to use highway lanes otherwise reserved for vehicles carrying two or more people).
E85-capable AFVs made available in 2005, by vehicle type
Light trucks and SUVs, 556,078
Medium-duty vehicles, 8,255
Automobiles and Minivans,
179,615
Source: U.S. Energy Information Administration www.eia.doe.gov/cneaf/alternate/page/datatables/atf14-20_05.html
February 2007 USDA-ERS Projections and “Alternative Fuels Target”
0
20000
40000
60000
80000
100000
120000
140000
2005
/0620
06/07
2007
/0820
08/09
2009
/1020
10/11
2011
/1220
12/13
2013
/1420
14/15
2015
/1620
16/17
Crop years
Mill
ions
of l
itres
Alternative fuels target
Tax credit and tariff extended
Tax credit and tariff expire
Feedstock crop
Energy
Labor
Capital
Water
Intermediate inputs
Land
Subsidies to the supplyof intermediate inputs
Subsidies to value-adding factors
Crop & irrigation subsidies
Energy subsidies
Subsidies to production of biofuels• Production-linked payments and tax credits;•Tax exemptions;•Market price support ( e.g. import tariffs)Value-adding factors
Biofuel
By-products
Subsidies to storage and distribution infrastructure
Vehicles (car, bus,
truck)
Subsidies for purchase of biofuel
Subsidies for purchase of or operation of vehicle
Consumers of by-
products (e.g.,
livestock producers
)
Subsidies to by-product consuming industry
Subsidies to intermediate inputs
Production Consumption
BiofuelManufacturing
Plant
BiofuelManufacturing Plant
Intervention points
USA: aggregate support and subsidy intensity
Subsidies to ethanol and biodiesel: total and per gasoline or diesel gallon equivalent Ethanol Biodiesel Units Low High Low High Total support
Estimate for 2006 $ billions 5.1 6.8 0.4 0.5 Annualized estimate, 2006-2012 $ billions 6.3 8.7 1.7 2.3
Subsidy per gallon gasoline (gge) or diesel (gde) equivalent
Estimate for 2006 $/gge or $/gde 1.42 1.87 1.69 2.15Annualized estimate, 2006-2012 $/gge or $/gde 1.44 1.96 1.24 1.70
Source: Doug Koplow, Biofuels — At What Cost?: Government Support for Ethanol and Biodiesel in the United States, Geneva: Global Subsidies Initiative of the International Institute for Sustainable Development, October 2006.
Cost-effectiveness of U.S. support policies, estimates for 2006
Ethanol Biodiesel Cellulosicethanol
(hypothetical case)1
Units Low High Low High Low High
Subsidy per net litre of liquid petroleum fuels displaced (assuming 32.5 or 35.6 MJ/litre)
$/litre equiv.
0.49 0.52 14.60 18.60 0.34 0.43
Subsidy per net GJ of fossil fuels displaced
$/GJ 30.90 41.00 27.20 34.70 10.70 13.40
Subsidy per metric ton of CO2-equivalent emission reduced
$/tonne NA 520 NQ NQ 118 147
Source: Doug Koplow, Biofuels — At What Cost?: Government Support for Ethanol and Biodiesel in the United States, Geneva: Global Subsidies Initiative of the International Institute for Sustainable Development, October 2006.
International comparison of ethanol incentives (euro cents/litre)
Country Production incentive
Reduced excise tax
Import tariff(MFN)1
Exceptions from tariff
Australia — 28.9Value of rebate on excise tax
Effective rate because excise tax not rebated
—
4.3¢
24.1¢
27.7¢
2.5% + 14.3¢
None
Brazil — ¢ (Sao Paulo) Mercosur
Canada up to 16.4(variable rate, QB)
up to 15.1¢(BC)
NAFTA, CAFTA, Chile
EU — up to 70.9¢(Ger)
EFTA, GSP (not incl. Brazil)
Switzerland — 57.8¢ EU, GSP (incl. Brazil)
USA 13.5¢ + state up to 8.4¢ (MO) NAFTA, CBI
1. Undenatured ethyl alcohol for use as a fuel.
Source: Doug Koplow, Biofuels — At What Cost?: Government Support for Ethanol and Biodiesel in the United States, Geneva: Global Subsidies Initiative of the International Institute for Sustainable Development, October 2006.
The rise of corn
Corn
100th meridian
Existingbiorefinery
10 existingbiorefineries
Biorefineries underconstruction, Oct 06
Top tier of counties,nitrate runoff
Top two tiers of counties, nitrate runoff
Location of biorefinery plants in relation to the Mississippi River Basin
Legend
Sources: Map from Environmental Working Group (www.ewg.org/reports/deadzone/top10.php), used with permission;plant locations from Renewable Fuels Association (www.ethanolrfa.org/objects/documents/834/plantmap_100506.pdf); plant locations are approximate. Ogallala formation location fromhttp://upload.wikimedia.org/wikipedia/commons/f/f7/Ogallala_changes_in_feet_1980-1995_USGS.gif
Top three tiers of counties, nitrate runoff
Ogallala Aquifer
History of Biodiesel in the USA• Some pure vegetable oil used by hobbyists in the 20th
century, but industry only emerged in the late 1990s, based on waste cooking oil (“yellow grease”).
• Main federal support measure for biodiesel created in 2004: $1.00/gallon ($26.4/litre) for biodiesel made from virgin agricultural materials; $0.50/gallon ($13.2/litre) for biodiesel made from recycled materials.
• Biodiesel also counts against the Renewable Fuels Standard (1.5 x actual volume used).
• Small biodiesel producer tax credit introduced in 2005.• Unlike ethanol, the import tariff on biodiesel is small —
2.5% — though import tariffs on some vegetable oils are high (e.g., 19.1% on soybean oil).
• Several states (e.g., Missouri, Kentucky) also offer their own incentives, up to $1.00/gallon ($26.4/litre).
U.S. Biodiesel Production(millions of gallons)
0
20
40
60
80
100
120
140
160
1999 2000 2001 2002 2003 2004 2005 2006
Source: National Biodiesel Board
Commercial biodiesel production plants in the USA(as of 31 January 2007)
Source: National Biodiesel Board, www.nbb.org/buyingbiodiesel/producers_marketers/ProducersMap-Existing.pdf
Conclusions• Pushing industry down the “cumulative production” curve is helping to gain
experience that may lead to further economies and improvement in efficiency. But the fermentation-distillation process is a relatively mature technology already.
• Most support is production-related, benefiting first-generation biofuels in practice. May be raising costs of second-generation ethanol.
• Subsidies for production are subsidies for motor use, and are contrary to the principle of internalizing externalities. The stimulus to conserve, and to develop energy-conserving technologies, is thus less than it might be otherwise.
• The advantage of liquid biofuels is that they can be used in small percentages in the fuel used by the existing fleet of vehicles. The disadvantage is that they favour the status quo. Mandates for biofuel use, combined with government incentives to build infrastructure for E85, virtually assure that transport policy will continue to be supply-side and internal-combustion engine oriented.
• A policy that is more targeted the policy variable — e.g., carbon emissions —would allow more competition among technologies, and reward those who conserve.
