Biofuels ECON 373 March 26, 2012 1. Reference Bruce Gardner and Wallace Tyner. “Explorations in Biofuels Economics, Policy and History: Introduction to.

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Biofuels

ECON 373March 26, 2012

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Reference• Bruce Gardner and Wallace Tyner. “Explorations in Biofuels

Economics, Policy and History: Introduction to the Special Issue.“ Journal of Agricultural & Food Industrial Organization 5(1):1-8, 2007.

• Hill, J. E. Nelson, E. D. Tilman, S. Polasky, and D. Tiffany. “Environmental, Economic, and Energetic Costs and Benefits of Biodiesel and Ethanol Biofuels.” PNAS Vol.103, No. 30; 11206-11210, 2006

• Jörn P. W. Scharlemann and William F. Laurance. "How Green Are Biofuels?“ Science Vol. 319 : 43-44, 2008

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What is biofuel?•Energy sources derived from recently

living organic material, as opposed to fossil fuels. Biomass

energy

Biofuel Biopower

ethanol biodiesel

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Topics relating to biofuels• Demand for biofuels as related to fossil fuel markets

• Derived demand for feedstock, particularly agricultural

commodities.

• Supply of feedstock including resource constraints on

feedstock production, in land, water, and capital investment

• Environmental benefits and costs in the production and use of

biofuels and associated feedstock.

• General equilibrium effect on other markets

• International trade

• Impact of biofuel on global poverty and hunger

• Evaluation of policy options for biofuel including biofuel and

mandated use of biofuels.

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Comparison of Ethanol and Biodiesel

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Biofuel Net Energy Balance

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Biofuel Life Cycle Environmental Effects

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GMO Crops

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Demand for Ethanol

• 2005: 14% of US corn harvest proceed to the ethanol production

• 2010: 40%

• Devoting all US corn and soybean production to ethanol and biodiesel would offset 12% and 6% of US gasoline and diesel demand

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Subsidies on ethanol

•Ethanol subsidies link energy policy with agricultural policy.

•51-cents-a-gallon subsidy: voted in 2004. Reduced to 45 cents in 2008

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Subsidies• Alternatively to emission taxes, one could subsidize abatement• Economists are in favor of market-based instruments like tax.

Subsidy is negative tax• Political feasibility: yes!! Firms love subsidies!• But static inefficiency:

▫Have to be financed through distorting taxes▫Hard to stop once started

• In case of subsidy on particular technology: dynamically inefficient:▫Does government know which technology is best?▫Hampers technology competition▫Excess entry

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Subsidy = Tax?

•Tax:

•Subsidy:

𝐶 (𝑦 ,𝑒 )=𝑉 (𝑦 ,𝑒)+𝐹𝐶+𝑡 ∙𝑒𝐶 (𝑦 ,𝑎𝑦 )=𝑉 (𝑦 ,𝑎𝑦 )+𝐹𝐶+𝑡 ∙𝑎𝑦𝑀𝐶(𝑦 )=𝑀𝑉 (𝑦 )+𝑡 ∙𝑎

)

)

𝑀𝐶(𝑦 )=𝑀𝑉 (𝑦 )+𝑠 ∙𝑎

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How much would the firms abate under subsidy?•marginal abatement costs = subsidy rate

s max𝑒

𝐴𝐶 (𝑒 )−𝑠(𝑒𝑢−𝑒)

𝑀𝐴𝐶 (𝑒)=𝑠

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Effect of Subsidy

Emission (tons/month)

Marginal Abatement

(MAC) Cost

Total Abatement (TAC) Cost

Total Subsidy

at $120/Ton

Total Subsidy

Minus TAC

10 0 0 0 09 15 15 120 1058 30 45 240 1957 50 95 360 2656 70 165 480 3155 95 260 600 3404 120 375 720 3453 150 525 840 3152 185 710 960 2501 230 940 1080 1400 290 1230 1200 -30

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Effect of TaxEmissions

(tons/month)

Marginal Abatement

Cost

Total Abatement

CostTotal Tax BillAt $120/ton

Total Cost

10 0 0 1200 1200

9 15 15 1080 1095

8 30 45 960 1005

7 50 95 840 935

6 70 165 720 885

5 95 260 600 860

4 120 375 480 855

3 150 525 360 885

2 185 710 240 950

1 230 940 120 1060

0 290 1230 0 1230

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Subsidies on Abatement•Subsidy (a) $3 and (b) $5 per ton of

abatement

Table 3. Abatement and Marginal abatement cost schedule for two firms

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Regression is everywhere

Financial Time: Once more Over a Barrel. March 24, 2012