The Future of Biofuels: A Global Perspective
Biofuels will likely
be part of a portfolio of solutions to high energy
prices, including conservation, more efficient energy
use, and use of other alternative fuels.
William Coyle
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Global
biofuel production tripled between 2000
and 2007, but still accounts for less
than 3 percent of the global transportation
fuel supply.
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Increased
biofuel demand has contributed to higher
world food and feed prices.
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Biofuels
will likely be part of a portfolio of
solutions to high energy prices, including
conservation, more efficient energy
use, and use of other alternative fuels. |
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With near record oil prices, the
future of biofuel—made from plant material—is
of keen interest worldwide. Global biofuel production
has tripled from 4.8 billion gallons in 2000 to
about 16.0 billion in 2007, but still accounts for
less than 3 percent of the global transportation
fuel supply. About 90 percent of production is concentrated
in the United States, Brazil, and the European Union
(EU). Production could become more dispersed if
development programs in other countries, such as
Malaysia and China, are successful. The leading
raw materials, or feedstocks, for producing biofuels
are corn, sugar, and vegetable oils.
While rapid expansion in biofuel
production has raised expectations about potential
substitutes for oil-based fuels, there have been
growing concerns about the impact of rising commodity
prices on the global food system. According to the
International Monetary Fund, world food prices rose
10 percent in 2006 because of increases in corn,
wheat, and soybean prices, primarily from demand-side
factors, including rising biofuel demand. The Chinese
Government put a moratorium on expanded use of corn
for ethanol because of rising feed prices and is
promoting other feedstocks that do not compete directly
with food crops, such as cassava, sweet sorghum,
and jatropha (an oil-bearing plant originally from
South America).
Mexico capped tortilla prices in
early 2007 to contain food price inflation from
higher priced corn imports. Real sugar prices hit
a 10-year high in 2006, stressing budgets of low-income
people in Brazil and elsewhere. Prices have since
declined. The Indonesian Government increased the
export duty on crude palm oil, also used in biodiesel
production, in mid-2007 to slow the rising cost
of domestic cooking oil.
U.S. livestock producers are facing
increased costs for corn and other feed, which may
translate into higher retail meat prices. And in
Japan, historical concerns have been revived about
the country’s almost complete dependence on
imports of feed grain and oilseeds to support its
large livestock sector.
The outlook for global biofuels
will depend on a number of interrelated
factors, including the future price of oil, availability
of low-cost feedstocks,
sustained commitment to supportive policies by governments,
technological breakthroughs that could reduce the
cost of second-generation biofuels, and competition
from unconventional fossil fuel alternatives.
A New Era of High Oil
Prices Attracts Investment in Biofuels
The rise in oil prices is the
most important factor boosting the competitiveness
of alternative fuels, including biofuels. The unprecedented
6-year rise in oil prices has prolonged opportunities
for efficiency gains, stimulated energy conservation,
and generated increased supply from traditional
and alternative energy sources. While these adjustments
may eventually lower oil prices, most forecasts
do not show real prices falling below $50 per barrel.
Previous periods of high oil prices
were short. Prices tended to rise very sharply,
usually induced by military conflict, peaked in
a matter of weeks or months, and then declined sharply.
Following these price spikes, the rapid decline
in petroleum prices made it difficult to sustain
alternative fuel programs and reduced incentives
for consumers to curb their use of petroleum products.
Unlike previous high-price periods,
the current oil market is driven by strong demand-side
factors. These factors include robust economic growth
and rising oil demand from rapidly growing middle-income
economies, where consumers are demanding a higher
standard of living and exhibiting big appetites
for energy. Almost two-thirds of recent global growth
in oil demand has come from China and other middle-income
economies.
Profitability of Biofuels
Depends on the Availability of Low-Cost Feedstocks
Feedstock costs are the most significant
cost of biofuel production, ranging from 37 percent
for sugarcane-based ethanol in Brazil in 2003-04
to 40-50 percent for corn-based ethanol in the United
States. Sugar beets represented 34 percent of the
cost of sugar-based ethanol production in the EU.
With rising commodity prices, these cost shares
are even higher now. Another major cost component
is energy, which may account for as much as 20 percent
of biofuel operating costs in some countries.
The ratio of crude oil prices
to feedstock prices offers a simple indicator of
the competitiveness of biofuel made from various
feedstocks. The ratio of crude oil to corn prices,
for example, rose sharply after 2004 as oil and
ethanol prices increased and corn prices were stable.
But the ratio dropped sharply after September 2006,
making biofuels less cost competitive. Biodiesel
producers in Europe and Southeast Asia also faced
declining competitiveness as soy and palm oil prices
rose in 2006-07. World sugar prices, on the other
hand, declined by 50 percent from 10-year highs
in 2006, boosting relative prospects in Brazil’s
ethanol sector.
The sale or productive use of
byproducts also contributes to a biofuel plant’s
profitability. Dried distillers’ grain (DDG),
a byproduct of corn ethanol production, can be used
as a protein-rich livestock feed additive. Sales
of DDG can add as much as 10-15 percent to ethanol
producers’ incomes. Carbon dioxide, usually
released into the atmosphere, is captured by some
ethanol plants and sold for use in the food and
beverage sector. Bagasse, the fibrous material left
over from pressing sugarcane, can be burned to provide
heat for distillation and electricity to power machinery
or sold to local utilities. Glycerin, a byproduct
of biodiesel production, has a wide number of pharmaceutical,
food-processing, and feed applications.
Government Support Is
Used To Reduce Volatility
Strong long-term government intervention
is a feature in the two top biofuel-producing countries—the
United States and Brazil (see box,
“Lessons From Brazil”)—as
well as the EU, China, and other countries. Governments
justify support in the name of achieving broad societal
goals: to diversify energy sources, to enhance energy
security, and to meet environmental and rural development
objectives. Governments tend to introduce support
to help fledgling biofuel ventures overcome cost
and scale disadvantages and weather the inherent
volatility in profits.
Governments have introduced a
variety of policy tools that reduce risk and uncertainty
in response to investor and producer concerns about
the double-edged uncertainty of volatile feedstock
and energy input prices and biofuel output prices.
The most common tool is a requirement to blend biofuel
with its fossil fuel counterpart to provide a guaranteed
market for biofuels. The nature of this requirement
varies around the world in the extent to which it
is mandatory, the phase-in period, the volume or
blend percentage mandated, and whether a nationwide
or regional strategy is used.
Countries also rely on subsidies,
tax credits, and preferential taxes to overcome
the higher cost of biofuel production relative to
gasoline and diesel and to encourage consumers to
buy biofuel-containing gasoline or diesel. Europe
offers an 18.7-euro per acre energy premium for
production of biofuel feedstocks. India’s
Government offers sugar mills interested in setting
up ethanol production facilities subsidized loans
for 40 percent of project costs. Brazil encourages
consumption by imposing a lower sales tax for hydrous
ethanol (containing water) and E25 (25 percent ethanol)
than for gasoline.
The United States provides a $.51
per gallon tax refund for blenders of ethanol and
$1.00 per gallon for biodiesel from vegetable oils
and animal fat ($.50 for recycled cooking oil or
animal fat). Some States also provide support, and
other Federal incentives are provided for smaller
biofuel plants.
Import restrictions are also used
to promote the emerging biofuel industry. Effective
tariffs range from 9 percent in Canada (for ethanol
imports from Brazil, 0 tariff for renewable fuels
from the U.S.) to about 45 percent for undenatured
and 24 percent for denatured ethanol in the EU.
Import duties and tariffs are waived by the EU for
many developing countries (not including Brazil).
The U.S. tariff on ethanol is currently about 25
percent when the 2.5-percent tariff is combined
with the $.54 per gallon duty.
Brazil is the only country promoting
biofuel use beyond minimal blending levels by allowing
consumers to choose it as a fuel substitute. The
Brazilian Government has promoted the availability
of ethanol at almost every gasoline station and
the manufacture of flexible fuel cars (capable of
using pure gasoline, E25, or pure hydrous alcohol).
Proposed U.S. legislation would also provide incentives
for expanding E85 distribution and the manufacture
of more E85-capable vehicles.
While biofuels share similar attributes
with oil-based fuel, they are not perfect substitutes.
Biofuels can be used in existing gasoline and diesel
engines in blends of up to 10 percent in the case
of ethanol and 20 percent for biodiesel with little
or no engine modification. This compatibility contrasts
with hydrogen fuel cell technology, which would
require a radically different distribution system.
However, ethanol has only two-thirds
the energy content of gasoline, and biodiesel has
90 percent that of diesel. Thus, a car will get
fewer miles per gallon the greater the biofuel blend.
Shipping ethanol is more expensive; it cannot be
transported by low-cost pipelines because of potential
contamination from ethanol’s tendency to absorb
water and to dissolve impurities on the inside surfaces
of multiproduct pipelines. Dedicated pipelines for
ethanol are being considered in Brazil and the United
States and may become economical with expanded production.
Biofuel
blending targets, selected countries |
Country |
Feedstocks |
2007
production
forecast (million gals.) |
Blending
targets |
|
Ethanol |
Biodiesel |
Ethanol |
Biodiesel |
|
Brazil |
sugarcane,
soybeans, palm oil
|
castor
seed |
4,966.5 |
64.1 |
25 percent
blending ratio of ethanol with gasoline (E25)
in 2007; 2 percent blend of biodiesel with
diesel (B2) in early 2008, 5 percent by 2013. |
Canada |
corn, wheat,
straw |
animal
fat, vegetable oils |
264.2 |
25.4 |
5 percent
ethanol content in gasoline by 2010; 2 percent
biodiesel in diesel by 2012. |
China |
corn, wheat,
cassava, sweet sorghum |
used and
imported
vegetable oils, jatropha |
422.7 |
29.9 |
Five provinces
use 10 percent ethanol blend with gasoline;
five more provinces targeted for expanded
use. |
EU |
wheat,
other grains, sugar beets, wine, alcohol |
rapeseed,
sunflower, soybeans |
608.4 |
1,731.9 |
5.75 percent
biofuel share of transportation fuel by 2010,
10 percent by 2020. |
India |
molasses,
sugarcane |
jatropha,
imported palm oil |
105.7 |
12.0 |
10 percent
blending of ethanol in gasoline by late 2008,
5 percent biodiesel blend by 2012. |
Indonesia |
sugarcane,
cassava |
palm oil,
jatropha |
-- |
107.7 |
10 percent
biofuel by 2010. |
Malaysia |
none |
palm oil |
-- |
86.8 |
5 percent
biodiesel blend used in public vehicles; government
plans to mandate B5 in diesel-consuming vehicles
and in industry in the near future. |
Thailand |
molasses,
cassava, sugarcane |
palm oil,
used
vegetable oil
|
79.3 |
68.8 |
Plans call
for E10 consumption to double by 2011 through
use of price incentives; palm oil production
will be increased to replace 10 percent of
total diesel demand by 2012.
|
United States |
primarily
corn |
soybeans,
other oilseeds, animal fats, recycled fats
and oil |
6,498.7 |
444.5 |
Use of
7.5 billion gallons of biofuels by 2012; proposals
to raise renewable fuel standard to 36 billion
gallons (mostly from corn and cellulose) by
2022. |
Looking to the Future:
The Potential of Second-Generation Biofuels
Many uncertainties remain for
the future of biofuels, including competition from
unconventional fossil fuel alternatives and concerns
about environmental tradeoffs. Perhaps the biggest
uncertainty is the extent to which the land intensity
of current biofuel production can be reduced. The
amount of biofuel that can be produced from an acre
of land varies from 100 gallons per acre for EU
rapeseed to 400 gallons per acre for U.S. corn and
660 gallons per acre for Brazilian sugarcane.
Cellulosic ethanol could raise
per acre ethanol yields to more than 1,000 gallons,
significantly reducing land requirements. Cellulosic
ethanol is made by breaking down the tough cellular
material that gives plants rigidity and structure
and converting the resulting sugar into ethanol.
Cellulose is the world’s most widely available
biological material, present in such low-value materials
as wood chips and wood waste, fast-growing grasses,
crop residues like corn stover, and municipal waste.
U.S. cellulosic fuel production
costs are now estimated at more than $2.50 per gallon,
compared with $1.65 per gallon for corn ethanol.
Venture capital and government subsidies are supporting
companies interested in making cellulosic ethanol
commercially viable, primarily in the United States,
but also in several other countries, including Canada,
Brazil, China, Japan, and Spain.
In the meantime, other costs of
cellulosic ethanol production need to be fully assessed,
such as the impacts of harvesting grasses, trees,
and crop residues on the erodibility and fertility
of land resources. There are also questions regarding
the upstream logistical and environmental costs
of harvesting, transporting, and storing large volumes
of bulky feedstock used in processing.
Competitive Fossil Fuel
Alternatives
High oil prices have drawn attention
not only to biofuels, but to a range of other liquid
fuel alternatives. Large investments are being made
in developing more difficult-to-access conventional
oil resources located in remote areas or deeper
waters, unconventional sources, such as oil sands
and heavy crude oil, and the conversion of coal
to oil. While world oil production is expected to
increase 30 percent by 2030, production from unconventional
fossil fuels will increase even faster, according
to the U.S. Department of Energy. Global biofuel
production is projected to more than double. Many
of the fossil fuel alternatives have lower costs
of production than biofuels. Canada’s oil
sands, for example, can produce oil for $30 per
barrel. Current production is more than 1 million
barrels per day, with some forecasting production
rising to more than 3.5 million barrels per day
by 2030.
Another alternative is converting
coal to oil, which is of particular interest to
economies with abundant coal resources, such as
China and the United States. Oil prices of $40 per
barrel may be sufficient to make this process profitable
despite high investment costs.
What Are the Environmental
Tradeoffs?
A key interest in developing or
expanding biofuel production and use is the environmental
benefits, including the potential to reduce emissions,
such as greenhouse gases (GHG). An estimated 25
percent of manmade global carbon dioxide (CO2) emissions,
a leading GHG, comes from road transport. Global
road transport has grown rapidly over the past 40
years and is projected to continue to increase,
especially in middle-income countries experiencing
rapid economic growth, middle-class expansion, and
urbanization.
Both biofuels and gasoline give
off CO2 when burned. Biofuels are theoretically
carbon neutral, releasing CO2 recently absorbed
from the atmosphere by the crops used to produce
them. Gasoline and other fossil fuels add to the
CO2 supply in the atmosphere by giving off CO2 absorbed
and trapped in plant material millions of years
ago.
The advantage of biofuels is less
clear in a “life-cycle” analysis that
examines not just combustion, but the production
and processing of the feedstock into fuel. Most
studies indicate that the net energy balance of
biofuels is positive (energy output is greater than
energy input), but estimates vary widely. Net balances
are small for corn ethanol and more significant
for biodiesel from soybeans and ethanol from sugarcane
and from cellulose. The biofuel with the highest
net energy balance reduces GHG the most when compared
with that for gasoline.
Another important environmental
consideration is the potential land requirements
if biofuels become a more mainstream fuel. According
to the University of Minnesota, devoting all U.S.
corn and soybean acreage to ethanol and biodiesel
production would offset only 12 percent and 6 percent
of gasoline and diesel consumption for transportation
fuel, respectively, and even less if adjustments
were made for the fossil fuel requirements for producing
the biofuel.
Use of so much land to meet a relatively
small share of transportation fuel demand is improbable.
The resource commitment to meet domestic fuel demand
would be less in a lower income economy. Expanding
feedstock production, however, that encroaches on
fragile rainforest areas and wildlife habitats is
still a concern in countries like Indonesia, Malaysia,
and Brazil.
Future Role of Biofuels
Depends on Profitability and New Technologies
Technological advances and efficiency
gains—higher biomass yields per acre and more
gallons of biofuel per ton of biomass—could
steadily reduce the economic cost and environmental
impacts of biofuel production. Biofuel production
will likely be most profitable and environmentally
benign in tropical areas where growing seasons are
longer, per acre biofuel yields are higher, and
fuel and other input costs are lower. For example,
Brazil uses bagasse, which is a byproduct from sugar
production, to power ethanol distilleries, whereas
the United States uses natural gas or coal.
The future of global biofuels will
depend on their profitability, which depends on
a number of interrelated factors. Key to this will
be high oil prices: 6 years of steadily rising oil
prices have provided economic support for alternative
fuels, unlike previous periods when oil prices spiked
and then fell rapidly, undercutting the profitability
of nascent alternative fuel programs. On the other
hand, the sector’s profitability has been
negatively affected by rising feedstock prices (corn
and vegetable oil, not sugar), which account for
a very large share of biofuel cost of production.
For this commodity-dependent industry, government
support to reduce profit uncertainty has been a
common theme in the U.S., Brazil, and the EU, where
biofuel production has been most significant.
Biofuels will most likely be part
of a portfolio of solutions to high oil prices,
including conservation and the use of other alternative
fuels. The role of biofuels in global fuel supplies
is likely to remain modest because of its land intensity.
In the U.S., replacing all current gasoline consumption
with ethanol would require more land in corn production
than is presently in all agricultural production.
Technology will be central to boosting the role
of biofuels. If the energy of widely available,
cellulose materials could be economically harnessed
around the world, biofuel yields per acre could
more than double, reducing land requirements significantly.
Lessons
From Brazil |
Brazil
has the world’s second largest ethanol
program and is capitalizing on plentiful soybean
supplies to expand into biodiesel. More than
half of the nation’s sugarcane crop
is processed into ethanol, which now accounts
for about 20 percent of the country’s
fuel supply.
Initiated in the 1970s after
the OPEC oil embargo, Brazil’s policy
program was designed to promote the nation’s
energy independence and to create an alternative
and value-added market for sugar producers.
The government has spent billions to support
sugarcane producers, develop distilleries,
build up a distribution infrastructure, and
promote production of pure-ethanol-burning
and, later, flex-fuel vehicles (able to run
on gasoline, ethanol-gasoline blends, or pure
hydrous ethanol). Advocates contend that,
while the costs were high, the program saved
far more in foreign exchange from reduced
petroleum imports.
In the mid- to late 1990s,
Brazil eliminated direct subsidies and price
setting for ethanol. It pursued a less intrusive
approach with two main elements—a blending
requirement (now about 25 percent) and tax
incentives favoring ethanol use and the purchase
of ethanol-using or flex-fuel vehicles. Today,
more than 80 percent of Brazil’s newly
produced automobiles have flexible fuel capability,
up from 30 percent in 2004. With ethanol widely
available at almost all of Brazil’s
32,000 gas stations, Brazilian consumers currently
choose primarily between 100-percent hydrous
ethanol and a 25-percent ethanol-gasoline
blend on the basis of relative prices.
Approximately 20 percent
of current fuel use (alcohol, gasoline, and
diesel) in Brazil is ethanol, but it may be
difficult to raise the share as Brazil’s
fuel demand grows. Brazil is a middle-income
economy with per capita energy consumption
only 15 percent that of the United States
and Canada. Current ethanol production levels
in Brazil are not much higher than they were
in the late 1990s. Production of domestic
off- and on-shore petroleum resources has
grown more rapidly than ethanol and accounts
for a larger share of expanding fuel use than
does ethanol in the last decade. |
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