Economic Factors Affecting the Competitiveness of Cellulosic Biofuels

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1 The Sustainability of Cellulosic Biofuels Economic Factors Affecting the Competitiveness of Cellulosic Biofuels Madhu Khanna Department of Agricultural and Consumer Economics University of Illinois

2 Promising Options for Bioenergy from Cropland: Crop Residues and Perennial Grasses Corn Stover: Readily available feedstock with no diversion of cropland Potential to produce 10 billion gallons per year of ethanol Perennial grasses: Switchgrass and Miscanthus Adaptable to wide range of growing conditions including marginal lands Low input requirements Compatible with row crop production Require conventional equipment; winter harvests

3 Factors Influencing Competitiveness: Crop Yields Corn Stover: 3 7 tons/ha delivered in Midwest Corn Stover: 3-7 tons/ha delivered in Midwest Switchgrass: 5-7 tons/ha delivered yield in Midwest; tons/ha in southern US Miscanthus: tons/ha delivered yield in Midwest

4 Crop Yields Affect the Efficiency with which Land is Utilized for Energy Generation Gallons of Ethanol per Hectare corn corn stover corn +corn stover switchgrass miscanthus

5 Factors Influencing Competitiveness: Costs of Production Costs of Production of Miscanthus ($/Hectare) $ 142 per metric ton Fertilizer a 2% Other 6% Preharvest Machinery Land d36% 1% Harvesting and Transport Storage 13% 42% Land costs: $5/bu corn; $12/bu soybeans

6 Factors Influencing Competitiveness: Costs of Production Costs t of of Production of Miscanthus ($/Hectare) t ) $ per metric ton Preharvest Fertilizer a Other Machinery Preharvest 2% 2% Other 5% 6% 1% Machinery Land d36% Land 1% Harvesting 46% Harvesting and Storage and 35% Transport Transport Storage 13% 11% 42% Land costs: $7/bu corn; $15/bu soybeans

7 Spatial Variability in Yields Miscanthus yields lower in northern and central Illinois Corn and corn stover yields lower in southern Illinois Higher costs of land and higher costs of production of bioenergy crops in northern and central Illinois

8 Costs of Cellulosic Feedstocks Corn Stover Costs $/metric ton Miscanthus Costs $/metric ton Switchgrass Costs $/metric ton

9 Potential for Celluosic Biofuels without Diverting Cropland: 2.5 billion gallons annually in Illinois Ethanol from Corn Stover Ethanol from Miscanthus on CRP Acres 1.6 billion gallons annually from corn stover on existing corn acres 1.6 billion gallons annually from corn stover on existing corn acres 0.9 billion gallons annually from Miscanthus on current 1 M CRP acres

10 Cost of Biofuels Per Gallon Feedstock cost Refinery Cost $ per gallon ethanol (net of co- product value) Greenhouse Gas Emissions relative e to gasoline Corn Ethanol % Corn Stover % Miscanthus % Switchgrass % Bi f l diff i th i t f d ti d Biofuels differ in their costs of production and carbon footprint

11 $3.5 Ethanol Price Linked to Gasoline Price $ per gallon $3.0 $2.5 $2.0 $1.5 J 07 F 07 M 07 A 07 M 07 J 07 J 07 A 07 S 07 O 07 N 07 D 07 J 08 F 08 M 08 A 08 M 08 Gasoline Ethanol Energy Equivalent Ethanol Price+ 51 c subsidy Crud de ($/bbl) Corn Price Linked to Crude Oil Price Energy basis Energy + subsidy Corn ($/bu)

12 $3.5 Ethanol Price Linked to Gasoline Price $ per gallon $3.0 $2.5 $2.0 As the price of oil increases, ethanol price and profitability increases $1.5 J 07 F 07 M 07 A 07 M 07 J 07 J 07 A 07 S 07 O 07 N 07 D 07 J 08 F 08 M 08 A 08 M 08 Corn prices get bid up to the maximum level refineries can afford to pay py Gasoline Ethanol Energy Equivalent Ethanol Price+ 51 c subsidy Ethanol subsidy raises corn prices even higher Crud de ($/bbl) Corn Price Linked to Crude Oil Price Energy basis Energy + subsidy Corn ($/bu)

13 $ per metric ton of biomass Market Price of Biomass Linked to Crude Oil Price and Biofuel Policy Energy-based Market Price of Biomass 200 Energy based dmarket Price + $1.01/gallon 150 Miscanthus Subsidy 100 Carbon based tax credit for Miscanthus Corn Stover $ per barrel of Crude Oil Carbon based tax credit for Switchgrass Corn Stover $1/gallon biofuel subsidy implicitly values carbon reduction by biofuels at more than $100/ton of CO 2 Tax credit based on carbon footprint of a biofuel would encourage less carbon-intensive biofuels Unintended effects of tax credits

14 Summary and Policy Implications Yield of perennial grasses an important determinant of competitiveness Spatial differences in competitiveness suggest a mix of biofuels likely to be viable Use of crop residues and CRP land for perennial grasses can mitigate the competition for land for food Mandates for cellulosic biofuels could raise fuel prices considerably in the absence of technology breakthroughs Preferable to use carbon-based subsidies/taxes to provide appropriate incentives for cellulosic biofuels and align energy policy and climate policy

15 Acknowledgements UIUC collaborators: Hayri Onal, Basanta Dhungana, Xiaoguang Chen External Collaborator: John Clifton-Brown Funding provided by