Steve Polasky University of Minnesota September 26, 2010

1. Full Cost Accounting for Liquid Transportation Fuels: Ethanol and Gasoline Steve Polasky University of Minnesota September 26, 2010

2. On integrating economic, ecological and regulatory dimensions of biofuels • Good news: we already have methods & tools that can accomplish integrated assessments • Bad news: the devil is in the details (many, many details…) • Talk about particular approach for integration of economic, engineering and ecological dimensions: full cost accounting

3. Full cost accounting • For society, what alternative fuel source can be produced and consumed with least social cost? • Research goal: compare the “full cost” of conventional fossil-fuel vs. biofuels alternatives • Simple objective...mess of details

4. Full cost • Energy production and use generates significant environmental impacts • Full cost: include the cost of environmental externalities with direct production costs to estimate social cost

5. Not so full cost… • Title really should be “Comparing the Partial Full Costs…” • Include estimates of • Direct production costs • Costs associated with GHG emissions • Costs associated with air emissions leading to formation of fine particulate matter (PM2.5)

6. Don’t include costs of… • Water quality issues (nitrates, phosphorus, pesticides…) • Some air quality issues (ozone, air toxics) • Habitat issues • Oil spills • Energy security issues • Agricultural supports…

7. Where the research stands • Parts of this work has had prior scrutiny: (environmental externalities) • Hill, J., S. Polasky, E. Nelson, D. Tilman, H. Huo, L. Ludwig, J Neumann, H. Zheng, D. Bonta. 2009. Climate change and health costs of air emissions from biofuels and gasoline. Proceedings of the National Academy of Sciences 106(6): 2077-2082. • Parts of this has not (direct cost calculations)

8. The research approach • Calculate direct production cost and external cost from “wells to wheel” to produce an equivalent amount of energy from alternative sources • Lifecycle assessment: estimates for all inputs and outputs from production of raw materials to emissions from tailpipe • Combine lifecycle assessment with input and output prices to estimate direct production and external costs

9. The research approach • 1 billion gallon expansion in US production and combustion of ethanol (0.66 billion gallons of gasoline – conversion on BTU basis) • Note: roughly equal to the 2006–2007 increase in US gasoline consumption

10. The research approach • To make fair comparisons, we assumed: • All production activity occurs in the US • Hold production of all other goods and services in the economy constant • Avoids problem of assessing welfare consequences of changes in consumption of other goods (e.g., increased food prices) • Additional corn or biomass needed for biofuel production occurs on land converted from US Conservation Reserve Program (CRP) • Crop residues harvested from existing cropland

11. Comparison of alternatives • Fossil-fuels: gasoline from conventional crude oil • Corn-grain ethanol • Natural gas process heat • Natural gas process heat with technology improvements (higher corn yield, higher refinery efficiency) • Coal process heat • Corn stover process heat • Cellulosic ethanol • Corn stover • Switchgrass • Mixed prairie grass • Miscanthus

12. Externalitycostmethodology

13. Carbon cost per ton • Carbon mitigation (capture and storage) costs for an integrated gasification combined-cycle electricity generating plant are $92–$147 Mg-1 C • We use the midpoint of this range, $120 Mg-1 C • Alternative: social cost of carbon. • Tol (2005, 2009) median estimate $43 Mg-1 C (mean of $85 Mg-1 C) • Wide range of estimates: from below 0 (benefit) to over $1,000 Mg-1 C

14. External cost of GHG emissions C = $120 / tonne Land use component from CRP expansion is almost identical to some estimates of indirect land use: 30 g / MJ

15. Spatial LCA Farming Corn Transport Coproduct Generation Fertilizer Production With respect to pollution costs, GHG is the exception rather than the rule. Location of emissions matters! Ethanol Plant Ethanol Transport

16. Ethanol stage locations • Areas where agricultural lime and N, P, and K fertilizer is produced • Locations of electrical plants powering lime and N, P, and K production • Pesticide production facility locations • Areas farmed for corn and biomass, and their relative productivity • Locations of electrical plants providing power to farms • Areas over which corn and biomass are transported • Locations of biorefineries • Locations of electrical plants providing power to biorefineries • Areas from which natural gas is extracted and coal is mined • Areas over which the finished product (ethanol) is transported • Areas in which the finished product (ethanol) is sold and combusted

17. Location of corn production and ethanol production facilities American Chemical Society2009

18. Gasoline stage locations • Areas where crude oil is extracted • Locations of electrical plants providing power for crude oil extraction • Areas over which crude oil is transported • Locations of refineries • Locations of electrical plants providing power to refineries • Areas from which natural gas is extracted and coal is mined • Areas over which the finished product (gasoline) is transported • Areas in which the finished product (gasoline) is sold and combusted

19. Air quality impacts (PM2.5)

20. Health effects of PM2.5 • Acute bronchitis • Acute myocardial infarction • Acute respiratory symptoms • Asthma exacerbation • Chronic bronchitis • Emergency room visits, Respiratory • Hospital admissions, Cardiovascular • Hospital admissions, Respiratory • Lower respiratory symptoms • Premature mortality • Upper respiratory symptoms • Work loss days

21. External cost of PM2.5 emissions

22. Combined GHG and PM2.5 costs

23. Direct production cost • Standard production economics and finance techniques • Analysis from refinery gate onwards. Take feed stock commodity prices (crude oil, corn) as given • Do not try to calculate cost of producing oil (complications of scarcity rents) • Do not try to calculate cost of growing corn (complications of land rents)

24. Direct production cost • One exception: cellulosic feed stocks (switchgrass, corn stover) • Large scale markets do not exist • Do not have commodity prices as with oil and corn • What would farmer have to be paid to make it worthwhile to produce and transport biomass? • Corn stover – residual from corn production. Costs are baling, densifying, transporting • Switchgrass – land rents, planting and fertilizer costs, baling, densifying, transporting

25. Production costs for gasoline • Used existing data on bulk wholesale price for gasoline (average for all grades) from EIA

26. Production costs for corn-grain ethanol • Costs are estimated for a dry mill ethanol biorefinery • Products per bushel of corn: • Ethanol: 2.75 gallons • DDGS: 17 lbs. • Captured commercial quality CO2: 17 lbs • Net out the revenue from sales of “co-products” (DDGS and CO2) • Note: for cellulosic ethanol, net out excess electricity generated that can be sold back to the grid

27. Production costs for cellulosic ethanol • Commercial scale plants do not exist • Cost estimates are based largely on NREL studies (Aden 2002, 2008) • “Nth plant” assumption – cost estimates assuming that learning-by-doing has occurred • Two projections of technology • “Current” technology – currently exists and in principle could be scaled-up • “State of Technology” – NREL projections for where technology could be in the future (“optimistic” – if everything goes right where are we likely to be)

28. Assumptions: Ethanol Yield

29. Price data

30. Results with different price and technology assumptions

31. “Full” cost: 2005 prices, current cellulosic conversion efficiency

32. “Full” cost: 2005 prices, projected cellulosic conversion efficiency

33. “Full” cost: 2008 prices, current cellulosic conversion efficiency

34. “Full” cost: 2008 prices, projected cellulosic conversion efficiency

35. Important points from results • Direct production cost make up the majority of costs • Production cost rankings are sensitive to input prices (2005 v 2008) • Input prices are variable • Important input prices • Crude oil price (for gasoline) • Corn price (for corn-grain ethanol) • Natural gas • Electricity

36. Important points from results • Direct production costs • Higher for cellulosic ethanol • Similar for gasoline and corn-grain ethanol • Cellulosic ethanol is not currently produced at commercial scale • Production costs are estimates • Open questions: when will cellulosic ethanol technology be commercially viable? How fast and how far will cellulosic production costs fall?

37. Important points from results • Externality costs vary widely across fuels • Lowest external costs for cellulosic ethanol • Highest external costs for corn-grain ethanol with coal process heat • For low commodity prices: will either choose gasoline or corn-grain ethanol despite higher external costs than cellulosic ethanol • For high enough commodity prices (e.g., 2008 prices) and large enough technical progress on cellulosic then cellulosic ethanol is superior

38. Policy: environmental externalities • Basic policy principle: internalize externalities • Preferred policy: higher taxes on gasoline and corn-grain ethanol than on cellulosic ethanol • Tax products causing external damage • Lower tax on cellulosic ethanol because of lower environmental costs • Political economy: if you can’t tax then wish to have differential subsidy based on environmental impacts • Current policy to subsidize all ethanol production is not justified on the basis of env. impacts • Subsidy for corn-grain ethanol would have to rely on energy security or income distribution arguments

39. Policy: R&D • R&D has elements of public good • Learning-by-doing: to the extent that whole industry learns from experience of particular plant then operation of first generation of plants also generates a public good • Role for incentives in R&D and early adoption of new technology

40. Additional research needs • Expand the set of fuels considered • Expand the set of methods of production considered • Expand the set of externalities considered • Ozone • Water quality • Habitat • Continual need to update parameters based on new data

41. Additional research needs • Combine full cost accounting with general equilibrium models to show effects through • Changes in land use • Changes in crop production and food prices • Changes in oil, gas, and other energy markets • Changes in general economic conditions • Incorporation of policy/regulatory regime • Effect of subsidy/regulatory costs into production cost framework • Producer cost analysis in comparison to social cost analysis • Analysis of supply chain & contract issues • Consideration of increasing efficiency on demand side and conservation • Getting the prices right creates incentives on both supply and demand sides for sustainable energy supply

42. Acknowledgements • Research team: Jason Hill (University of Minnesota), Doug Tiffany (University of Minnesota), Erik Nelson (Bowdoin College), David Tilman (University of Minnesota), Hong Huo (Argonne), Lindsay Ludwig (University of Wisconsin), James Neumann (Industrial Economics, Haochi Zheng (University of Minnesota), Diego Bonta (University of Minnesota) • Thanks for valuable comments to: Joe Fargione, Ray Hattenbach, Peter Hawthorne, Moira Hill, Bryan Hubbell, John Sheehan, Kerry Smith, Steve Taff, Michael Wang, Gary Yohe • We gratefully acknowledge funding from The Initiative for Renewable Energy and the Environment, University of Minnesota