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Biofuels in the United States Transportation Sector: Public Policy and Its Effects on the Industry

Biofuels in the United States Transportation Sector: Public Policy and Its Effects on the Industry. Nicholas Horelik 8/4/08 2008 WISE Intern Tufts University Sponsored by the American Institute of Chemical Engineers. Introduction. Outline. Definitions and Scope Industry Players

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Biofuels in the United States Transportation Sector: Public Policy and Its Effects on the Industry

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  1. Biofuels in the United States Transportation Sector: Public Policy and Its Effects on the Industry Nicholas Horelik 8/4/08 2008 WISE Intern Tufts University Sponsored by the American Institute of Chemical Engineers

  2. Introduction

  3. Outline • Definitions and Scope • Industry Players • Policy Objectives • Describing the Recent Growth • Policy and Market Causes of Recent Growth • Historically • Recently • Current and Future Challenges • Conclusions

  4. “Biofuels” • Broadly: Any fuel derived from biomass • For This Presentation: Ethanol • Other biofuels are worth mentioning, but in analyzing past policy, ethanol provides the most information • Biodiesel • Algae-Derived Fuels • Other Alcohols

  5. Industry Players • Ethanol Producers • Corn mills in the Midwest • Sell ethanol as well as other valuable co-products • Fuel Blenders and Retailers • RBOB mixed with ethanol for reformulated gasoline • Vehicle Makers • Regular Vehicles • Low blends of gasoline and ethanol: E10 or lower • Flexible Fuel Vehicles (FFVs) • High blends: E85

  6. Policy Objectives • Replace 30% of Gasoline Use by 2022 • According to the RFS, most of the replacement will come from ethanol • Half of this ethanol will be from cellulosic feedstocks • Economic Catch 22 • No Demand? No Infrastructure is Built • No Infrastructure? No Demand Develops

  7. Significant Recent Growth

  8. Use of E85 in Vehicles

  9. What Brought About This Growth? • Market Conditions • High gasoline prices made ethanol competitive • State and Federal Policies • Tax preferences kept the industry solvent • Regulations and mandates created the demand Historically, indirect policies and market conditions have had the greatest effects…

  10. First: Historical Context

  11. Pre-1970s Ethanol Developments • Early 1900s • Ethanol was relatively ubiquitous • 1907 – Texas oil becomes popular • Early 1930s • Gasoline-Ethanol Blends Marketed • Lead replaces ethanol as the octane booster of choice • The Great Depression + Dustbowl • Incentives for Farmers Proposed • Shot down by the petroleum lobbies • World War II • Ethanol Production Increased • Used for non-fuel purposes But ethanol never actually caught on…

  12. The Energy Crises of the 1970s • Oil Embargo 1973 • Instability in the Middle East in 1979 • Policies Promoting Alternative Fuels Enacted • Taxes, R&D Money, Investment Incentives • By 1984, there were 163 ethanol plants producing 510 million gallons annually

  13. Ethanol Growth Stalls • The Oil Glut of the 1980s • Reagan Non-intervention • Investment incentives not renewed • Gasoline was more competitive • By 1985, only 74 plants were still in operation (45% of previous year) • The ethanol industry did not gain a stable foothold, but the seeds were planted…

  14. Setting the Stage for Today’s Growth • Lead phased out by 1986 • Replaced with MTBE and other ethers • Oxygenate requirements – Clean Air Act Amendments • MTBE gained widespread use • CAFE standards – EPCA1974, EPACT1992 • FFVs produced and purchased by fleets • Taxes preferences remained • Ethanol import tariff

  15. 16

  16. Why Biofuels Are Attractive Again • Energy Prices Are Rising Again • Global Growth Raises Oil Demand • China and India • Slowed US Economy • Environmental Concerns • Global Climate Change and CO2 But that’s not why production capacity jumped in recent years…

  17. MTBE Phased Out

  18. Keeping the Demand Strong • Federal Mandates • The Renewable Fuel Standard • Blenders and refiners can be fined for not using the mandated amount • Fleet Requirements • Executive Order 13423 in 2007 • Annual 10% increases in non-petroleum consumption

  19. Current and Future Challenges • Building Up Distribution Infrastructure • Shipping methods expensive, at capacity • Getting Away From Corn • Many concerned about food prices • Economic Troubles • Arguably, subsidies are required to keep many producers solvent

  20. Looking To the Future • You can subsidize to maintain solvency, but only increased demand will actually make the market move • The demand created by MTBE is now saturated • Next Steps: • All gasoline blended with 10% ethanol • All gasoline blended with 20% ethanol • Move to higher blends such as E85 Cellulosic MUST become viable for any of this to happen…

  21. Conclusions • Regulations and mandates are the most effective way for government policy to affect market demands • Even though it can affect prices negatively • It is imperative to maintain government aid and regulations if the ethanol industry is to obtain a permanent foothold before gas prices fall • Specifically for new infrastructure • Other alternative fuels shouldn’t be ignored • Perhaps the market should decide which renewable environmentally friendly alternative is the most advantageous

  22. Thank You

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