ALIO-INFORMS International 2010 Buenos Aires, Monday, June 07, 08:30 - 10:00

1. Optimal Economic Decision Rules in the Biomass Supply Chain with CO2 ConsiderationsPeter LohmanderProfessor Dr., SUAS, Umea, SE-90183, Sweden Peter@Lohmander.com ALIO-INFORMS International2010 Buenos Aires, Monday, June 07, 08:30 - 10:00

2. Optimal Economic Decision Rules in the Biomass Supply Chain with CO2 Considerations Peter Lohmander Abstract: Decisions in the biomass supply chain influence the size of the renewable energy feedstock. Indirectly, the use of fossil fuels, CO2 uptake from the atmosphere, and emissions of CO2 to the atmosphere are affected. CCS, carbon capture and storage, is one method to limit total CO2 emissions. The total decision problem of this system is defined and general economic decision rules are derived. In typical situations, a unique global cost minimum can be obtained.

3. The role of the forest? • The best way to reduce the CO2 in the atmosphere may be to increase harvesting of the presently existing forests (!), to produce energy with CCS and to increase forest production in the new forest generations. • We capture and store more CO2!

4. CCS, Carbon Capture and Storage, has already become the main future emission reduction method of the fossile fuel energy industry Energy plant with CO2 capture and separation Oil field Coal mine Natural gas Permanent storage of CO2

5. Energy plant with CO2 capture and separation How to reduce the CO2 level in the atmosphere, not only to decrease the emission of CO2 CO2 Permanent storage of CO2

6. The role of the forest in the CO2 and energy system • The following six pictures show that it is necessary to intensify the use of the forest for energy production in combination with CCS in order to reduce the CO2 in atmosphere! • All figures and graphs have been simplified as much as possible, keeping the big picture correct, in order to make the main point obvious. • In all cases, we keep the total energy production constant.

7. CO2 The present situation. CO2 increase in the atmosphere: 5-1 =4 5 1 1 4 Coal, oil, gas 0 Permanent storage of CO2

8. CO2 If we do not use the forest for energy production but use it as a carbon sink. Before the forest has reached equilibrium, this happens: CO2 increase in the atmosphere: 5-1 =4 5 1 5 Coal, oil, gas 0 Permanent storage of CO2

9. CO2 If we do not use the forest for energy production but use it as a carbon sink. When the forest has reachedequilibrium, this happens: CO2 increase in the atmosphere: 5+1-1 =5 5 1 1 5 Coal, oil, gas 0 Permanent storage of CO2

10. CO2 If we use CCS with 80% efficiency and let the forest grow until it reaches equilibrium. CO2 increase in the atmosphere: 1+1-1 =1 1 1 1 5 Coal, oil, gas 4 Permanent storage of CO2

11. CO2 If we use CCS with 80% efficiency and use the forest with ”traditional” low intensity harvesting and silviculture. CO2 increase in the atmosphere: 1-1 =0 1 1 1 4 Coal, oil, gas 4 Permanent storage of CO2

12. CO2 If we use CCS with 80% efficiency and use the forest with increased harvesting and high intensity silviculture. CO2 ”increase” in the atmosphere: 1-2 =-1 1 2 2 CO2 DECREASES! 3 Coal, oil, gas 4 Permanent storage of CO2

13. General conclusions: • The best way to reduce the CO2 in the atmosphere may be to increase harvesting of the presently existing forests (!), to produce energy with CCS and to increase forest production in the new forest generations. • We capture and store more CO2!

19. Observation 1 • In optimum, the marginal cost for forest biomass utilization equals the marginal cost of fossil fuel utilization plus the marginal cost of global warming.

20. Observation 2 • In optimum, the marginal cost of global warming equals the marginal cost of CCS.

22. Second order minimum conditions:

26. Observations of the first and second order conditions:

31. So, if and and or or then

32. Then, the solution to represents a (locally) unique minimum.

33. Numerical Example

34. A numerically specified example:

36. Comparative statics analysis:

42. Explicit solution of the example for alternative values of K