Ethanol - Too Good To Be True?

Ethanol -Too Good To Be True? A Presentation by The Wheeler School Team 30 April 2008 2008 Moody’s Mega Math Challenge The Wheeler School Team

Presentation Structure • Objective • Key Assumptions • Ethanol for 10% Reduction in Gasoline • Impact on CO2 Emissions • Cost Efficiency • Impact on Grain Prices • Energy Independence • Conclusion and Recommendation The Wheeler School Team

Ethanol Case Study • Objective • To evaluate the impact of use and production of corn-derived ethanol on • Environment • Grain prices and developing nations • Fuel production cost • To recommend other alternative ways of achieving energy independence The Wheeler School Team

Key Assumptions • 1. Ethanol production and corn prices based on data imported from Internet • 2. Sources of data used are accurate • 3. Changes in ethanol production costs and environmental benefits will be insignificant during the time period under consideration • 4. No expected large economic fluctuations • 5. E10 and E85 will continue to be the dominant ethanol fuel forms The Wheeler School Team

Ethanol Required to Replace 10% of Gasoline usage (1/2) • 2007 U.S. Fuel statistics[1] • Total Fuel Consumption = 142,421 million gallons • Ethanol Additives = 6,847 million gallons • Net Gasoline Consumption = 135,576 million gallons • Goal - Reduce annual Net Gasoline Consumption to • 0.9*135,576 = 122,018 million gallons • Our Calculations show • Converting all fuel to E10 alone will not reduce the net gasoline usage to the desired level [1] U.S. Energy Information Administration [2] Renewable Fuels Association, Ethanol Industry Statistics The Wheeler School Team

Ethanol Required to Replace 10% of Gasoline usage (2/2) • Efficiency of Ethanol derived fuels • E10: ~ identical to pure gasoline • E85: ~ 75% of pure gasoline • System of simultaneous equations • 0.90*QE10 + 0.15*QE85 = 122,018 million gallons • QE10 + 0.75*QE85 = 142,421 million gallons • Therefore, • 0.10*QE10 + 0.85*QE85 = 23,305 million gallons ethanol Estimated quantity of Ethanol to replace 10% of annual U.S. gasoline usage is 23,305 million gallons per year The Wheeler School Team

Impact on CO2 Emissions (1/2) • CO2 emissions per gallon of gasoline[3] • 2,421 grams of C * 0.99 (oxidation factor) * (44/12) (ratio of the molecular weight of of CO2 and C) • = 8.79 kg / gallon • CO2 emissions per gallon of Ethanol[4] • Based on combination of several contributing factors including • Ethanol usage, Ethanol refining/transportation • Production/transportation of corn, Absorption by corn crops • Estimated net emissions = 5.27 to 5.52 kg / gallon [3] Environmental Protection Agency [4] Dias De Oliveira, et al., “Ethanol as Fuel: Energy, Carbon Dioxide Balances, and Ecological Footprint.” The Wheeler School Team

Impact on CO2 Emissions (2/2) • Impact of CO2 emissions due to Ethanol Usage • CO2 emissions • = (change in gasoline usage)*(CO2 emission per gallon) + (change in Ethanol usage)*(CO2 emission per gallon) • = (0.9*135,576 – 135,576) million gallons * 8.79 kg / gallon + (23,305 – 6,847) million gallons * X kg / gallon [Note: X is in the range 5.27 to 5.52] • CO2 emissions = -28.5 to -32.6 million metric tons Net reduction in CO2 emissions due to Ethanol usage is estimated to be 28.5 to 32.6 million metric tons per year The Wheeler School Team

Cost Efficiency of Corn-Derived Ethanol (1/4) • Cost/Benefit analysis based on • Total Costs <= Quantifiable Benefits + Non-quantifiable Benefits • Total Costs = • Price of Ethanol + US Government Ethanol subsidies (direct) + US Government corn subsidies (indirect) • Quantifiable Benefits = • Value of Energy produced + Value of reduced CO2 emissions • Potential Non-quantifiable benefits: • Energy independence • Reduced volatility in energy markets • Intrinsic value of reduced CO2 emissions • Future value of developing infrastructure for ethanol production The Wheeler School Team

Cost Efficiency of Corn-Derived Ethanol (2/4) • Computing Costs and Benefits • Price of Ethanol [5] = $2.35/gallon • US Government direct subsidy [6] = $0.51 per gallon • US Government (indirect) corn subsidy • Sinusoidal with growth model based on 2006 and 2007 data [7] • Takes into account the fact that 18% of US corn production is currently converted into Ethanol • Subsidy = $0.19 per gallon • Total Costs = $(2.35 + 0.51 + 0.19)/gallon * 23,305 million gallons = $ 71,080 million [5] April 2008 futures price for Ethanol, Chicago Board of Trade [6] Runge and Senaurer, “How Bio-fuels Could Starve the Poor,” Foreign Affairs [7] The Farm Subsidy Database, “http://farm.ewg.org/farm/progdetail.php…..” The Wheeler School Team

Cost Efficiency of Corn-Derived Ethanol (3/4) • Computing Costs and Benefits (cont’d) • Value of energy produced based on 3 March ’08 per gallon price of regular gasoline [8] • Value of energy = $3.162/gallon * (0.1*135,576) million gallons of gasoline replaced = $42,869 million • Value of reduced emissions based on based on carbon credit market price [8] • Value of CO2 reduction = $ 33.15 * 32.6 million metric tons = $1,080 million • Quantifiable value = $43,949 million [8] European Climate Exchange The Wheeler School Team

Cost Efficiency of Corn-Derived Ethanol (4/4) • For net benefit of corn-derived Ethanol fuel • Non-quantifiable Benefits >= Total Costs - Quantifiable Benefits • Non-quantifiable Benefits >= $ 27,132 million • However • Transportation sector is responsible for only 28% of the total annual fuel consumption, and • 86% of the total energy is derived from fossil fuels • Hence • Replacing 10% of gasoline by Ethanol is equivalent to reducing dependence on non-renewable fuels by only 3% Proposed 10% gasoline replacement by Ethanol does not appear to be a cost effective way of producing fuel The Wheeler School Team

Impact on Grain Prices and Developing Nations (1/2) • Corn Price as a function of Ethanol Production • Based on 2006-07 data from Renewable Fuels Association and Chicago Board of Trade • Modeled as a linear function with least squares regression • Predicted corn price in 2008 • Based on current rate of Ethanol production, i.e., 9.3 billion gallons = [0.0007*(Ethanol Produced)/(12*1000) + 0.8274] / 100 = $ 5.43 per bushel • Modeled corn price if Ethanol production is increased to reduce gasoline usage by 10% • Based on predicted Ethanol production of 23,305 million gallons = 0.0007*(Ethanol Produced)/(12*1000) + 0.8274/100 = $ 13.42 per bushel The Wheeler School Team

Impact on Grain Prices and Developing Nations (2/2) • Example of impact due to increased food prices • Average family income spent on food in Mexico [9] = 45% • Average yearly increase in real income [10] over the next 5 years = 5% • Since corn plays a significant role in the national diet, it is assumed that food prices will have direct correlation with corn price • Estimated family income spent on food in 5 years from now = [45*(13.42/5.43) / (100*1.055)]*100 = 87.1% [9] mexicolaw.com [10] finfacts.com Proposed use of corn-derived Ethanol as fuel additive will have severe negative impact on food prices in developing countries The Wheeler School Team

Better Approach to National Energy Independence (1/2) • Corn-derive Ethanol is not an effective approach • It is expensive • Reduced emissions are only a small fraction of the total annual CO2 produced in US • Will significantly increase food prices worldwide • Cellulose-based Ethanol can be a better alternative • Considerable improvement in CO2 emissions [4] (1.75 kg/gallon versus 5.27 kg/gallon for corn-derived Ethanol) • Minimal impact on grain prices, if any • A clear disadvantage is the current cost of production [11] (twice the cost of corn-derived Ethanol) – but could probably be reduced with advances in technology • An example: 30% of the automotive fuel in Brazil is made from sugarcane (cellulose-based) [11] Wikipedia.com The Wheeler School Team

Better Approach to National Energy Independence (2/2) • Hydrogen Fuel Cells offer another alternative for achieving energy independence • Eliminates CO2 emissions • Has highest energy to unit weight ratio [12] • The only disadvantage – it is prohibitively expensive to produce • However, • Cost of one gallon of gasoline equivalent dropped form $5 in 2003 to $3 in 2007 • Progress is being made to reduce this further to $2 by 2015 [12] US Department of Energy Although there will be additional costs associated with the transportation and delivery infrastructure, Hydrogen Fuel Cell technology may in the long run be the best alternative to achieve energy independence The Wheeler School Team

Conclusion and Recommendation • Conclusion • Costs associated with corn-derived Ethanol for fuel far outweigh the benefits • It is expensive to produce, and has relatively small impact on reducing CO2 emissions • Diverting corn to Ethanol production severely impacts the worldwide grain prices (as further evidenced by recent riots in Haiti and Bangladesh) • Recommendation • Invest in long term solution(s) such as the Hydrogen Fuel Cell technology • Seek better alternative(s) in the near/intermediate term such as Cellulose based Ethanol The Wheeler School Team

Ethanol - Too Good To Be True?