Centre for Environmental Policy, Imperial College London Valuing consumer preferences for sustainable biofuels MSc Environmental Technology, EEP Option Group Project Matthieu Bergère, Hookyung Kim, Hannah Kyrke-Smith and Lorcan Lyons 13 th March 2009
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Valuing Consumer Preferences for Sustainable Biofuels
Biofuels for use in the transport sector have been promoted in recent years as a response to energy security and climate change concerns. However, questions have been raised as to their sustainability. The European Commission and others have proposed “sustainability criteria”, which are currently under discussion. This Group Project aims to quantify the value to consumers of a range of sustainability criteria (economic, social and environmental). Choice modelling was the primary methodology used to determine willingness-to-pay for sustainable biofuels, along with a contingent valuation exercise for the purposes of benchmarking. Choice modelling reveals how survey respondents value individual sustainability attributes as well as giving an overall value. A web-based survey was carried out, with 308 complete responses. The relationships between variables were evaluated using a conditional logit model.
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Centre for Environmental Policy, Imperial College London
Valuing consumer preferences for sustainable biofuels MSc Environmental Technology, EEP Option Group Project
Matthieu Bergère, Hookyung Kim, Hannah Kyrke-Smith and Lorcan Lyons 13th March 2009
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Acknowledgments:
Thanks to Clive Potter and Jose Olmo for the opportunity to undertake this project and
their useful advice
To Susana Mourato, Eleni Fimereli, and George MacKerron for their practical advice
To Rob Sheldon and Deevya Chudasama without whom the survey would have not been
possible
To all our respondents for their time and their availability
List of Figures Figure 1 - World biofuels production (IEA, 2008) ............................................................. 7
Figure 2 - Survey screenshot............................................................................................. 16 Figure 3 - Example choice set for a user who currently pays £40 for a tank of petrol ..... 17
Figure 4 - Contingent valuation by price per litre............................................................. 26
List of Tables Table 1 - RFA sustainability criteria ................................................................................. 11
Table 2 - Variables of the conditional logit model ........................................................... 21
Table 3 - Results of conditional logit analysis .................................................................. 22
Table 4 - Willingness-to-pay expressed as a percentage change in price ......................... 23 Table 5 - WTP expressed as a trade-off with rainforest protection .................................. 24
Table 6 - Willingness-to-pay of the whole sample in pence per litre (Model 1) .............. 25
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Biofuels Group Project:
Valuing consumer preferences for sustainable biofuels
Matthieu Bergère, Hookyung Kim, Hannah Kyrke-Smith and Lorcan Lyons.
Abstract
Biofuels for use in the transport sector have been promoted in recent years as a response
to energy security and climate change concerns. However, questions have been raised as
to their sustainability. The European Commission and others have proposed
“sustainability criteria”, which are currently under discussion. This Group Project aims to
quantify the value to consumers of a range of sustainability criteria (economic, social and
environmental). Choice modelling was the primary methodology used to determine
willingness-to-pay for sustainable biofuels, along with a contingent valuation exercise for
the purposes of benchmarking. Choice modelling reveals how survey respondents value
individual sustainability attributes as well as giving an overall value. A web-based survey
was carried out, with 308 complete responses. The relationships between variables were
evaluated using a conditional logit model.
The main findings were that there is a willingness to pay for sustainability criteria, and
within criteria respondents value greenhouse gas emissions most highly. Respondents
were also found to place a significant value on biodiversity and rainforest, but social and
food factors were valued distinctly less. The overall value placed on the criteria ranged
from 16.1 pence per litre for 60% greenhouse gas emissions reduction to 5.8 pence per
litre to ensure no diversion from food crops.
Some policy implications that can be drawn from our results are that sustainability
criteria are justifiable on the grounds of consumers‟ preferences and economic efficiency,
with greenhouse gas emissions reduction as a key factor. In addition, promoting increased
awareness of the RTFO would be recommended.
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Introduction
Background
Given growing demand for energy diversity and awareness of environmental issues,
considerable attention and concern is now focusing on biofuels as a new energy source.
Oil prices seem to be increasingly unstable while climate change has become the critical
issue to be addressed at the national and international level, in both the private and public
spheres. The Kyoto Protocol has created a binding agreement for European Union
member states to reduce greenhouse gas emissions by an average of 8% by the year 2012.
It seems to have become the conventional wisdom that the extensive use of fossil fuels is
not sustainable, and that renewable sources have the potential to provide energy in the
required forms and at an appropriate scale as part of the energy mix (Gross et al, 2003).
In the case of the UK the transport sector is responsible for 33% of UK energy
consumption (EAC, 2006) and is the sector with the fastest rate of emissions growth
(Hammond et al, 2008). Reducing transport‟s 98% reliance on fossil fuels would help
diversify and improve the security of fuel supply, as well as provide alternative sources
of income in rural areas (Hammond et al, 2008).
In recent years, biofuels have been strongly supported by some governments, including
those of the UK and the US, and international trade has been vigorous. Despite
uncertainty over when 2nd
-generation biofuels will become commercially available (see
below), biofuels are perceived as one of the most promising alternative energy sources
and have established a more mature market and policy development than most other
renewable sources. The EU has established the goal to achieve 20% of its energy supply
from renewable energy by 2020, and biofuels use is considered by the EU to be one of
the ways in which it can meet its Kyoto targets. The UK target was set at 5% of all
transport fossil fuels by volume to be replaced with biofuels by 2010.
What are biofuels?
Biofuels are liquid fuels produced from organic matter primarily for use in transport.
They can substitute and be blended with fossil fuel-based gasoline and diesel, and in low
concentrations can be used in regular combustion engines of cars and trucks (Hammond
et al, 2008). As a result they can be distributed by oil companies relying on existing
infrastructure. They have the potential to be more efficient and less polluting than
petroleum fuels (Bozbas, 2008).
1st-generation biofuels are found in two different forms depending upon their source
materials (EAC, 2008). Biodiesel is produced from oils such as rendered animal fats,
rapeseeds and palm oils (EAC, 2008). Bioethanol is produced from the fermentation of
any feedstock that contains a high content of sugar or starch. Typical feedstocks are
sugarcane, sugar beet and maize. 2nd
-generation biofuels are produced from the whole
plant, not just from sugar and oil-rich parts. These fuels are expected to have greater
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potential for greenhouse gas savings, smaller input requirements and a higher yield per
hectare than 1st-generation biofuels. However, 2nd-generation technologies are not
commercially viable yet, requiring considerable further research and investment. As a
result, these fuels are not likely to reach the market for a number of years (Banse &
Grethe, 2008; Keyzer et al, 2008; Dickie, 2007).
Recent trends in biofuels
Bioethanol and biodiesel are both produced around the world, showing upward trends
since their early development. More bioethanol is produced than biodiesel; the former is
mainly produced and consumed in the US and Brazil, whilst the main producer of and
market for the latter is the EU (Dufey, 2006) (See Appendix A).
Brazil in particular has been leading the world in production of bioethanol, prompted by
the increase in oil prices in the early 1970s. The US has been the second largest producer
for bioethanol. In 2005, Brazil and the US were responsible for more than 70% of the
world ethanol production (RFA, 2006). However a significant growth in bioethanol
production has occurred over the past few years, and in 2007 the US overtook Brazil‟s
production, becoming the largest bioethanol producer (IEA, 2008). Several countries
such as China and India are trying to replicate Brazil‟s success, and are introducing
measures to stimulate bioethanol production (Junginger et al, 2006).
Figure 1 - World biofuels production (IEA, 2008)
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Biodiesel started to be widely produced in the early 1990s and since then production has
been increasing steadily. The EU is the main producer of biodiesel, accounting for about
95% of global production, and this situation is expected to persist (Dufey, 2006). At
present only limited amounts of biodiesel from the EU enter the international market,
however promising export markets are likely to be Asian countries such as Japan, Korea
and Taiwan, which have very little land available for increased production (Dufey, 2006).
The biofuels controversy: food prices, greenhouse gas emission savings
Despite this growth in consumption, recent research has raised some doubts about the
sustainability of 1st-generation biofuels. In particular, rapid increases in food prices in
2008 are argued to have resulted from the latest expansion of biofuels production (EAC,
2008). Also, there is uncertainty about the contribution of biofuels to the reduction of
greenhouse gas emissions. Both claims need to be addressed for the future of biofuels to
be sustainable.
Rising food prices
Internationally traded food commodity prices have increased sharply since 2002 and the
prices of major staples, such as grains and oilseeds have doubled in just the past two
years (Mitchell, 2008). Rapidly increasing food prices have become a real concern,
imposing an increased burden on the poor in developing countries. Some research has
proposed that growing demand for biofuels might have contributed to the increase in
prices. Notably, the World Bank claims that there has been a large increase in biofuels
production from grains and oilseeds in the US and EU. It has been argued that without
these increases, global wheat and maize stocks would not have been declined appreciably
and the price change would have been moderate (Mitchell, 2008). In agreement with this
view, the Gallagher Review (RFA, 2008b) stated that an increasing demand for biofuels
might lead to an increase in the price of some food commodities.
Nevertheless it is also generally accepted that the methodologies for measurement may
vary significantly due to the nature of this subject, which is enormous in scale. Moreover,
it is widely accepted that this recent increase in food prices results from various factors
such as population growth, increasing energy prices in general and economic growth; and
that the scale of their effects is complex and rather uncertain. As for a global food crisis,
there is a view that it is more about the accessibility of and ability to obtain sufficient
food (Junginger et al, 2006), rather than a lack of food, which means that there is enough
to feed the population but the distribution system is not efficient or equitable. Therefore,
the growth of the biofuels industry might be a possible cause of the global food crisis, but
perhaps not the most significant factor.
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Greenhouse gas emissions reduction
It was initially believed that biofuels would not cause any net increase in emissions of
CO2 (the main greenhouse gas) because the CO2 that is emitted into the atmosphere when
they are burnt is offset by the CO2 that the crop absorbs as it grows (DEFRA, 2008a).
However, recent research published in the Gallagher Review has revealed that biofuels
may not necessarily reduce CO2 emissions, and could accelerate deforestation (RFA,
2008b). Whether bioethanol produces more or less CO2 than fossil fuels is a function of
how it is produced (Fargione et al, 2008; Kirchgaessner & Allison, 2008). Major land use
change and inefficient plant operation can completely negate the carbon saving from
biofuels as well as reduce biodiversity and damage other ecosystem resources (DEFRA,
2008a). Some US corn-based ethanol plants are powered by electricity from coal-fired
power plants; it is likely that emissions from such power plants are much higher than the
reduction in emissions from the energy sources they produce (Kirchgaessner & Allison,
2008).
Nonetheless, in the case of the UK, it is believed that biofuels will help the government to
reduce greenhouse gas emissions from transport significantly, and the 5% biofuels target
for transport fuel would save around 0.7 to 0.8 million tonnes of carbon per year
(DEFRA, 2008a). This target would need to be based on the efficient operation of the
whole transportation system.
The role of certification in ensuring sustainability of biofuels
The biofuels industry involves a wide range of stakeholders, including producers,
consumers and other facilitators in the international market. In addition, biofuels are
heterogeneous products and are grown under different conditions. In this respect and in
light of the controversy discussed above, the role of certification and standards is
considered to be very significant. Certification is the process whereby an independent
third party assesses the quality of management in relation to a set of predetermined
requirements (standards) (Vandam et al, 2008). It can give a more firm and universal
credibility to the biofuels production system, and also ensure the sustainability of biofuels
(Biomass Technology Group, 2008).
Sustainability Criteria
There are currently several sets of sustainability criteria under discussion
worldwide, some of which are discussed below. Despite policy-makers having the
common goal to develop criteria that will result in biofuels being deemed 'sustainable',
the criteria proposed by different groups are in some ways quite different to each other,
perhaps as a result of the term 'sustainability' having no single definition.
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International - Version Zero by the Roundtable on Sustainable Biofuels
Working on an international level with stakeholders such as farmers, NGOs and
governments, the RSB aims to ensure that the production and processing of biofuels is
sustainable. In August 2008 they released Version Zero (RSB, 2008), a draft of their
principles and criteria for sustainable biofuels, as developed through working group
discussions with stakeholders from across the world. Following feedback on Version
Zero, Version One is expected to be published in April 2009.
Version Zero comprises a set of twelve principles, each accompanied by its own criteria
and guidance, that if implemented would be followed by farmers and producers to
prevent unintended negative consequences of biofuel production. The principles are as
follows:
1. Legality [following both the laws of the country in which biofuel production
occurs, and relevant international treaties]
2. Consultation, planning and monitoring
3. Climate change and greenhouse gas [reducing emissions in order to contribute
to climate change mitigation]
4. Human and labour rights
5. Rural and social development
6. Food security
7. Conservation and biodiversity
8. Soil [improving soil health and minimising degradation]
9. Water [optimising resource use, and minimising contamination or depletion of
resources]
10. Air [minimising air pollution along the supply chain]
11. Economic efficiency, technology and continuous improvement [for cost-
effective production]
12. Land rights
Europe – Renewable Energy Directive proposal by the European Commission
As part of this proposal there is a requirement that biofuels produced both within and
outside the Community will have to meet certain sustainability criteria. Article 15 of the
Directive (EC, 2008) puts forward three such criteria for biofuels and other bioliquids,
namely:
Land with high carbon stocks should not be converted for biofuel production
Land with high biodiversity should not be converted for biofuel production
Biofuels should achieve greenhouse gas savings of at least 35%
The Commission also suggests that there should be rewards for the production of
2nd
-generation biofuels (produced from more diverse feedstocks), and penalties for
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biofuels that fail to comply with the criteria. The proposal states that it will be necessary
to develop a tracking system to identify biofuels that comply with the criteria, in order to
reward them with a price premium compared to those that don‟t comply.
UK – Renewable Transport Fuels Obligation by the Renewable Fuels Agency
The Renewable Fuels Agency (RFA) was established in 2007 with the task of
implementing and administering the Renewable Transport Fuels Obligation (RTFO), a
voluntary scheme which commenced in April 2008. This requires that a certain
percentage (2.5% for the year 2008-9) of road fuels supplied in the UK consists of
renewable fuels. In addition, the RTFO requires fuel suppliers to submit reports relating
to the sustainability and greenhouse gas emissions savings of the biofuels they supply,
before they can receive Renewable Transport Fuel Certificates. By making information
on supplier performance available to the public, the RFA aims to help consumers make
decisions as to which fuels to purchase. A „meta-standard‟ approach has been adopted,
consisting of seven environmental and social principles, as shown in the table below
(RFA, 2008a):
Table 1 - RFA sustainability criteria
Environmental principles
1. Biomass production will not destroy or damage large above or below ground carbon
stocks
2. Biomass production will not lead to the destruction or damage to high biodiversity
areas
3. Biomass production does not lead to soil degradation
4. Biomass production does not lead to the contamination or depletion of water
sources
5. Biomass production does not lead to air pollution
Social principles
6. Biomass production does not adversely affect workers rights and working
relationships
7. Biomass production does not adversely affect existing land rights and community
relations
Further criteria
In addition to these three sets of criteria, there are others that have also been proposed
and in some countries even implemented. An example of this is in Sweden, where since
August 2008 an ethanol company called SEKAB has been selling sustainable ethanol,
verified by an independent international company (BEST, 2009). The ethanol is produced
in Brazil, and as such Brazilian producers helped to develop the criteria, which cover the
whole production chain in terms of environmental and social sustainability.
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As can be seen, there is considerable agreement between the sets of criteria discussed
above, but also some divergence as to where priorities lie and therefore which specific
principles and criteria have been put forward. Each group believes their criteria need to
be met by producers and suppliers of biofuels in order for the entire life cycle of biofuels
to be sustainable. It is generally accepted that the same criteria would apply to both
imported and domestically produced biofuels in order to comply with international trade