Policies to Accelerate the Bioeconomy: Unintended Effects and Effectiveness Madhu Khanna University of Illinois, Urbana-Champaign

Major Low Carbon/Renewable Fuel Policies in the US Bioenergy offers significant potential for low carbon, renewable energy Largely compatible with existing infrastructure High value use for land High costs have necessitated policy support Renewable Fuel Standard: Quantity mandates for 3 major categories of biofuels Cellulosic biofuels with a life-cycle GHG intensity 60% lower than conventional gasoline Advanced biofuels with a life-cycle GHG intensity 50% lower than conventional gasoline Conventional biofuels with a life-cycle GHG intensity 20% lower than conventional gasoline Low Carbon Fuel Standard in California Lower the life-cycle GHG intensity of transportation fuel by a given percentage Provides flexibility in the quantity of different low carbon fuels to blend based on their specific LC GHG intensity

Unintended Effects of Biofuel Policies Increased competition for land: food vs fuel Conversion of land from marginal/non-agricultural uses to crop production Release of carbon stocks in soils and vegetation Need to consider direct emissions intensity of producing biofuels and indirect emissions intensity due to land use change Raised two issues: Assessment of the indirect land use change (ILUC) effect of biofuels Policy mechanisms to reduce the ILUC effect

Assessment of Indirect Land Use Change CRP Acres (Millions) CRP Declined by 10 Million acres since 2007 Barr et al., 2011 Data Low elasticity of acreage to crop prices 58% ($100/acre)increase in land rent (2004/06-2007/09) 0.8% (1 M hectare) land use expansion Models: 4-6 Million hectares of land use change in the US in 2007-2009 due to 15 B gallons of biofuels Fargione et al., 2010

APRI Model (Dumortier et al (2011)) 1. Addition of idle land 2. More spatially disaggregated carbon coefficients 3. Agricultural Costs are related to enGTAP (Hertel et al; Tyner et al.) Addition of unused cropland and cropland pasture TEM model to determine productivity of marginal land Higher level of disaggregation Improvements in technology, land productivity and yields ergy costs 4. Crop Yields are price elastic

Regulation of ILUC Effect Requirements of RFS, EISA CA-LCFS assumes no incremental biofuel requirement beyond RFS; uses direct and indirect GHG intensity associated with meeting the RFS

Focus of this presentation Provide a validated assessment of indirect land use change due to corn ethanol Using observed changes in CRP acres (2007-2012) Isolating the effects due to corn ethanol by comparing to a counterfactual No-ethanol scenario Effectiveness of regulating ILUC effects by including an ILUC factor in the GHG intensity of biofuels in implementing a LCFS policy Compare the economic costs of a national LCFS with and without an ILUC factor Additional costs of abatement of GHG emissions due to the ILUC factor Distributional effects of including an ILUC factor

Economic Model Integrated model of Agricultural, Forestry and Transportation Sectors of the US Maximizes surplus of consumers of Vehicle Miles Travelled and major agricultural commodities and producer surplus in multiple markets subject to technology, production and land constraints Endogenously determines equilibrium quantities and prices in these sectors under various scenarios Examine extent ot conversion of expiring CRP acres and marginal land to convert to cropland was due to biofuel production (2007-2012)

Validation and Calibration of the Economic Model Calibrate the model: Productivity of CRP/marginal land Costs of conversion of marginal land to cropland Examine the fit of the model to observed data on total cropland and on amount of land in CRP under alternative assumptions about productivity and costs of conversion With observed levels of biofuel production

34% of reduction in CRP acres due to biofuels 30-40% (7.3 million acres) of marginal land converted to biofuels due to biofuels

Comparison of Results EPA estimates: FASOM/FAPRI 375-436 acres/million gallons Taheripour and Tyner (2013) 353 acres/million gallons Our estimates: Land conversions occurred slower increase in ethanol production Declining ration of acres/million gallons over time 251 to 108 acres/million gallons Single shot view of land use change overstates land use change 402-435 acres/million gallons at a point in time

Cost effectiveness of using an ILUC factor to regulate ILUC effect of biofuels

Inclusion of an ILUC factor in an LCFS policy Carbon intensity of a biofuel= Direct CI+ ILUC factor Biofuel policies implicitly subsidize biofuels and tax gasoline Inclusion of an ILUC factor lowers the subsidy on a biofuel Raises the implicit carbon price of achieving an LCFS by making all biofuels more carbon intensive Leads to a switch to biofuels with lower ILUC factors Also raises cost of blending biofuels and fuel prices for consumers

Alternative ILUC Factors (g CO2/MJ) Use ILUC factors from three sources: California Air Resources Board EPA Searchinger et al (2008)

Effect of Including an ILUC Factor Implicit subsidy for corn stover increases Corn ethanol is taxed under the Searchinger factors Subsidies for perennial grasses decreases Higher tax on gasoline

Effect of Inclusion of ILUC Factor on Prices Higher carbon price raises price of gas/diesel Lower demand for corn ethanol reduces land rents Higher demand for biomass raises price

Effect of Inclusion of ILUC Factor on Fuel Use Decrease in fossil fuel and corn ethanol consumption Increase in cellulosic biofuels from energy crops under CARB and EPA scenarios but not in Searchinger case Increase in crop residue ethanol

Distribution of Welfare Costs Due to ILUC Factor Discounted value (2007- 2027) Loss in fuel consumer surplus $18-$ 176 B Loss in Fuel producers surplus $12-$138 B Significant gains to agricultural consumers and producers in Searchinger case Net Cost $35-211B

LCFS_With_ILUC Factor Effect of Inclusion of ILUC Factor on Additional Emissions Reduction and Welfare Costs Compared to No ILUC Factor Scenario LCFS_With_ILUC Factor CARB EPA Searchinger US GHG Emissions (with ILUC) % reduction   -1.3% -1.6% -2.6% US Abatement Cost Relative to No_LCFS Baseline ($ Billion) $ 35 B $ 50 B $ 211 B US Cost of Additional Global Abatement Due to ILUC Factor ($/Mg CO2) $60.7 $73.7 $186.6 Social cost of Carbon is $50 per ton with 3% discount rate Cost of abatement with ILUC factor is 20% to 270% higher than SCC

Conclusions ILUC effects are dynamic and changing over time An ILUC factor is not a cost-effective approach to addressing the unintended land use effects of biofuels Various approaches to reducing ILUC should be considered incentivizing low ILUC effect feedstocks Non-food crop based High yielding perennials that can be grown on low quality land GHG intensity performance based policies like LCFS instead of quantity mandates Certification of low ILUC biofuels Enforcement of direct regulations restricting land use change