Is this the future of biofuels?

Second generation (2G) liquid biofuels are seen as a promising future technology for meeting global energy demand in the transportation sector, which is currently dominated by fuels derived from crude oil. Life cycle analyses demonstrate that 2G biofuels offset considerably more carbon emissions than corn based ethanol, and environmental advocates see them as a way of reducing the global carbon footprint, especially in the aviation sector, where low carbon alternatives to biofuels do not yet exist. As feedstocks for 2nd generation biofuels include non-edible biomass such as switchgrass and forest and harvest residues, they don’t directly compete with food crops.  Thus, those interested in poverty and nutrition see 2G biofuels as a channel for lessening biofuels’ impact on food prices.

The US, EU countries, and advanced developing countries like Brazil, India and China have invested in 2nd generation biofuels, according to a recent UNCTAD report, and their commercial implementation has long been ‘just over the horizon – perhaps a decade away’.

With recent innovations and higher oil prices over the recent decade, the report of theCommittee on Economic and Environmental Impacts of Increasing Biofuels of the National Research Council suggested that we may be on the verge of finally seeing commercial scale implementations of cellulosic to liquid fuel conversion technologies. But what is the overall economic value to society of developing and implementing these new technologies? And what factors determine this value? How sensitive is this valuation to uncertainty in climate impacts and policies, economic growth, energy prices and population growth?

Valuation of net benefits from global scale implementation of 2G biofuel technology has many challenges. The viability of 2G technology depends on policies relating to renewable fuels and climate mitigation, climate impacts, and oil prices. Indeed, a recent study has shown that private investors are currently reluctant to invest in second generation biofuel technology at a large scale due to the enormous uncertainty in future oil prices. And absent a global market for carbon emissions, private firms will not factor into their decisions the potential impacts of biofuels on GHG emissions. However, large scale implementation of 2G biofuels technology will have impacts well beyond GHG emissions. Profound and long lived changes in global land use with potential implications for the provision of non-market ecosystem services by natural lands, as well as interactions through land markets with commercial timber, livestock and cropping activities are also potentially significant.

In a recent study we contribute to better understanding these questions by providing a systematic valuation of improved 2G biofuel technology in the context of large scale uncertainty and non-market externalities using a computable partial equilibrium model of global land use nicknamed FABLE (model description can be found here). By running the model twice – once with 2G technology available, and once without –  we can ascertain the global value to society of 2G biofuels. Furthermore, we can decompose the factors driving this valuation, including things such as land conversion costs, cropland rents, fertilizer costs and the bequest value of forests and natural lands at the end of the planning horizon.

Our baseline case rests on several assumptions, including:

1. petroleum prices rise over the 21st century according to EIA reference forecasts;
2. 2G technology is available based on best current practice in biochemical engineering;
3. climate impacts on food crop yields are moderate;
4. economic and population growth follow their most likely paths according to the UN projections; and
5. there is no climate regulation for land based GHG emissions.

Fig. 1 Valuation of 2G biofuel conversion technology in $/capita.

Values on the y-axis correspond to the difference in global per capita welfare and were obtained by solving FABLE model twice: once with technology and once without. The difference is the value of current 2G technology (square markers) or improved 2G technology (circle markers) under four alternative sets of baseline assumptions. Colored components refer to the sources of welfare change under current technology.

In the absence of government mandates for 2G biofuels, current 2G technology is predicted to become commercially viable in 2035, and its global discounted value to society is estimated to be to be $10.03/capita, or $64.2 billion in $US at 2004 prices and population levels (Fig. 1, grey circle in the first bar). Under this baseline scenario, nearly all of the societal benefits are generated by reduced petroleum expenditures (Fig. 1, blue segment). However, focusing solely on this change would be grossly misleading from the point of view of overall societal benefits. Heightened competition for land in the presence of 2G biofuels affects land rents and thereby boosts the cost of producing other land-based services, including crops, livestock and forestry products and ecosystem services. This reduces consumption levels of other land based products (Fig. 1, green component). It also encourages additional land conversion, which is itself costly. Because the introduction of 2G technology encourages additional conversion of land for biofuel feedstocks, it also reduces the amount of forests and natural lands still remaining in 2205, the end date for the scenarios. This diminishes the value of society’s ‘bequests’ to future generations which, in turn, also diminishes the total value of 2G technology to society (Fig. 1, light blue component).

By altering the assumptions surrounding our baseline scenario, we are able to evaluate the sensitivity of 2G technology valuation to factors such as climate impacts on crop yields, oil prices, global economic and population growth rates, GHG regulation and the rate at which society discounts future benefits.

Limits on global land based GHG emissions increase the social value of forests, introducing a disincentive for their conversion to agricultural uses. This raises the cost of land in food and biofuel production, which contributes to higher costs for food, forest and ecosystem goods and services – highlighting the tradeoff between GHG emissions and consumption. By reducing emissions from liquid fossil fuel production and combustion, deployment of 2G biofuels technology frees up room within a GHG constraint for additional land conversion, fertilizer use, etc., thereby lowering the opportunity costs and boosting consumption of land-based goods and services (Fig. 1: climate regulation/green component).  Overall, current 2G technology is worth more than twice as much to society under the constraint on global GHG emissions than in its absence, raising the global gains from 2G deployment to nearly $22/capita, with a total value of $139 billion at 2004 population levels.

The emergence and application of new technologies for extracting shale oil and gas raises the specter of fossil energy abundance and a reversal of the recent trend of rising oil prices. Indeed, oil prices have recently fallen to about $50/bbl. In this case, (and the absence of land based GHG emissions regulation) 2G biofuel technology has almost no economic value to society (Fig. 1 Flat Energy Prices).

Recent scientific evidence suggests that stronger adverse impacts of climate change on agriculture could lead to a significant drag on productivity growth for the world’s food crops. Our modelling results indicate that more cropland then would be required to meet global food demand, which raises the opportunity cost of land for biofuels production and slightly diminishes the amount of biofuel produced. However, total economic welfare is little affected (Fig. 1 Climate impacts: $9.98/capita vs. $10.03/capita under baseline technology).

Low rates of economic growth serve to diminish the rate at which land rents rise over time. With land relatively less scarce, land-using 2G biofuel technology faces less competition and therefore becomes somewhat more valuable than under the baseline rate of economic growth (Fig. 1 Low growth: $10.14 vs. $10.03/capita). And the same principle applies in the case of high population growth – only this time working in the opposite direction. With population growing more rapidly than under the baseline scenario, there are more people to feed and house and land becomes scarcer. In this case the 2G technology is less valuable to society, dropping to $8.54/capita in the case of rapid population growth (Fig. 1 High Population).

Considerable public investments are currently being undertaken to improve 2G technology, and we estimate that total cost reductions of 18% could potentially be achieved. These technological enhancements would contribute roughly 30 percent more (about $20 billion at 2004 population) to the social valuation of 2G technology (Fig. 1, black circle in the first bar) relative to the baseline. On the other hand, if the technology pessimists are correct, and 2G technology pilots do not scale up effectively, the global valuation of 2G technology could be less than projected. In our pessimistic case, with projected costs 18% higher than baseline, the social valuation of 2G technology is about $7.49/capita or $47.9 billion at 2004 population (Fig. 1, white circle in the first bar).

Our findings highlight the fact that estimates of the social benefits of 2G technology must go beyond displaced petroleum expenditures and biofuels’ production costs. Aggressive expansion of cellulosic biofuels will have broader impacts including increased land rents and land conversion costs, reduced consumption of other land-based goods and services, and reductions in natural forests and protected lands left for future generations. Having considered these, we find that access to improved technology could deliver significant benefits to society in the context of a world in which climate change mitigation is a high priority and 2G technologies continue to advance.

This post first appeared on The World Bank Let’s Talk Development Blog. Publication does not imply endorsement of views by the World Economic Forum.

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Author: Jevgenijs Steinbuks is an Economist at the World Bank Development Research Group.Thomas Hertel is Distinguished Professor of Agricultural Economics at Purdue University. Professor Tyner is an energy economist and James and Lois Ackerman Professor of Agricultural Economics, Purdue University.

Image: A woman walks through a field with bio-diesel in the north-eastern Greek region of Thrace near the town of Xanthi April 18, 2014. REUTERS/Yannis Behrakis