1. Draft Recommendations and Issues for Consideration Subgroup 2: Issues Related to Co-Product Credit s Presented to the LCFS Expert Workgroup October 15, 2010 Davis, CA 15-OCT-2010 INTERIM WORKING DRAFT FOR DISCUSSION WITH THE EWG -- DO NOT QUOTE OR CITE -- 1

2. Subgroup 2 Membership Alan Glabe, ARB Staff Phil Heirigs, Chevron Paul Hodson/Oyvind Vessia, European Commission Stephen Kaffka, U.C. Davis Don O’Connor, (S&T) 2 Mark Stowers, POET, Inc. 2 15-OCT-2010 INTERIM WORKING DRAFT FOR DISCUSSION WITH THE EWG -- DO NOT QUOTE OR CITE --

3. Issues that Should be Investigated in the Short-Term (From Subgroup 2 Work Plan) High Priority Issues: Diet substitution effects/displacement ratios for co-products used in animal feed. Consistent treatment of co-products between GTAP and GREET. Special issues in co-products related to soy oil (e.g., negative crushing margins in GTAP). Co-product treatment for other virgin oils used in the manufacture of biofuels (e.g., canola). Other Issues: New and expanded uses of existing co-products. How well GTAP is doing on substitution effects. How are co-products valued, especially as opportunities of using them change over time. Displacement of petroleum based products with bio-based co-products. Marginal use/impact of co-products coming out of biofuels production. Consistent approach in dealing with co-products as it relates to land use and direct emissions. Issue of double-counting between GTAP and GREET. Consistent methodologies between biofuel and petroleum co-products – is that possible or even desired? 15-OCT-2010 INTERIM WORKING DRAFT FOR DISCUSSION WITH THE EWG -- DO NOT QUOTE OR CITE -- 3

4. Issues that Should be Investigated in the Long-Term (From Subgroup 2 Work Plan) High Priority Issues: New co-products. Integrated bio-refineries and co-products. Other Issues: New and expanded uses of existing co-products. How are co-products valued, especially as opportunities of using them change over time. Displacement of petroleum based products with bio-based co- products. 15-OCT-2010 INTERIM WORKING DRAFT FOR DISCUSSION WITH THE EWG -- DO NOT QUOTE OR CITE -- 4

5. Draft Recommendations for Short-Term Modifications in the Treatment of Co-Products 15-OCT-2010 INTERIM WORKING DRAFT FOR DISCUSSION WITH THE EWG -- DO NOT QUOTE OR CITE -- 5

6. DGS Substitution/Displacement Ratios ARB’s current modeling assumes that 1 lb. of distiller’s grains and solubles (DGS) displaces 1 lb. of feed corn. Research by other parties indicates that: > DGS typically displaces both feed corn and soybean meal (SBM) in animal rations (as well as other nutrition components). >For some animals (e.g., beef cattle), DGS may displace feed corn and SBM on a greater than 1:1 basis (by mass). >For example, the Argonne’s most recent estimates for GREET assumes that 1 lb. of DGS displaces 0.786 lb. of feed corn, 0.304 lb. of SBM, and 0.023 lb. of urea (i.e., 1:1.11 by mass). 15-OCT-2010 INTERIM WORKING DRAFT FOR DISCUSSION WITH THE EWG -- DO NOT QUOTE OR CITE -- 6

7. DGS Substitution/Displacement Ratios Continued... This issue has been a main focus of the Co-Products Subgroup investigation, which has included two meetings with animal feed and nutrition experts (the final meeting is scheduled for next week). Recommendation: ARB should re-evaluate its use of a 1:1 displacement of feed corn by DGS to include other components (e.g., SBM and urea) and available data on displacement ratios as a function of animal type and region. However, ARB needs to be mindful of potential issues associated with translating research results to the real world (e.g., how roughage is handled, whether DGS is fed dry or wet, how protein is handled, etc.). 15-OCT-2010 INTERIM WORKING DRAFT FOR DISCUSSION WITH THE EWG -- DO NOT QUOTE OR CITE -- 7

8. DGS Substitution/Displacement Ratios Continued... A consensus has not been reached among the invited experts on how best to handle DGS substitution ratios. – The feeding value of a by-product feed depends on the feeding values of the other feeds used in the ration and the animal species, and is not absolute. Learning is involved. – Actual performance is difficult to predict in high performing ruminant animals, perhaps less so in monogastric animals like poultry and swine. If least cost, optimized ration balancing occurs, there is no large substitution effect to be achieved. Rations with DGS and without DGS can be (and are) created to achieve the same livestock performance targets. 15-OCT-2010 INTERIM WORKING DRAFT FOR DISCUSSION WITH THE EWG -- DO NOT QUOTE OR CITE -- 8

9. DGS Substitution/Displacement Ratios Continued... But by-product feeds do displace purpose-grown feed crops. The proper questions are: (1) how many acres of crops are displaced, and (2) what GHG savings can be attributed to that displacement? Given the dynamic nature of livestock feeding and the diversity of feed options available, this is also difficult to determine with certainty. Actual feed usage at the national scale provides one coarse approach to estimation. In reality, the substitution depends on the ration used for comparison. Adding an energy rich feed to an energy deficient diet will appear to provide an increase in livestock performance (substitution ratio > 1.0), but if comparably optimized diets are compared, this ratio will remain essentially 1:1. 15-OCT-2010 INTERIM WORKING DRAFT FOR DISCUSSION WITH THE EWG -- DO NOT QUOTE OR CITE -- 9

10. DGS Substitution/Displacement Ratios Continued... The LCFS depends on the idea that GHGs can be determined with sufficient certainty so that a particular biofuel can be determined to reduce the GHG intensity of a transport fuel. However, LCA cannot effectively reflect the dynamic nature of the feed industry (e.g., animal rations can be formulated on a weekly basis depending on availability and cost of feed products) and is potentially a significant source of error. In the area of by-product feeding, substitution ratios cannot be determined with finality or sufficient certainty. 15-OCT-2010 INTERIM WORKING DRAFT FOR DISCUSSION WITH THE EWG -- DO NOT QUOTE OR CITE -- 10

11. Consistent Treatment of Co-Products Between GTAP and GREET Even if the physical displacement ratios can be determined there remains the issue of translating those into GTAP, which uses elasticity parameters to determine the substitution of DGS with corn and protein meals. The change in price of DGS determines the substitution rate for the competing feeds. DGS selling price is the price which matches the supply and demand. The value of DGS is different in the different market segments depending on what is being displaced. The price is set by the lowest value market segment. For the other market segments, value is transferred from the producer to the consumer. 15-OCT-2010 INTERIM WORKING DRAFT FOR DISCUSSION WITH THE EWG -- DO NOT QUOTE OR CITE -- 11

12. Consistent Treatment of Co-Products Between GTAP and GREET Continued... Therefore DGS price alone may not allow the model to determine what is physically displaced and thus provide the real changes in land demand. Recommendation: Effort should be made to ensure consistency in co-product treatment between GTAP and GREET. In particular, this needs to go beyond a single GTAP run that only considers DGS, SBM, and feed corn in economic terms – changes in mass are what matter to the GHG emissions estimates. It may be possible to investigate this issue with a series of GTAP sensitivity runs to better understand model output as a function of different inputs. 15-OCT-2010 INTERIM WORKING DRAFT FOR DISCUSSION WITH THE EWG -- DO NOT QUOTE OR CITE -- 12

13. GTAP Modeling of Soy Biodiesel The modeling that was done for soybean biodiesel has some fundamental economic issues. – The crush margin (value of the products less the cost of inputs) goes negative in the modeled scenario. Soybean meal price drops by 44%. – Soybean meal prices in linked economies are vastly different. Crush Margins: 15-OCT-2010 INTERIM WORKING DRAFT FOR DISCUSSION WITH THE EWG -- DO NOT QUOTE OR CITE -- 13

14. GTAP Modeling of Soy Biodiesel Continued... Clearly, negative crush margins are not sustainable. At the August EWG meeting, Wally Tyner noted that the version of GTAP used for ARB’s previous analysis included two errors that have since been fixed: – When soy oil and SBM was split, the SBM did not go into the correct economic sector – The trade linkages for DGS and SBM were not handled correctly 15-OCT-2010 INTERIM WORKING DRAFT FOR DISCUSSION WITH THE EWG -- DO NOT QUOTE OR CITE -- 14

15. GTAP Modeling of Soy Biodiesel Continued... Recommendation: ARB should re-evaluate the iLUC estimates for soy biodiesel based on the most recent GTAP model. Although the Subgroup understands this has been done by an outside group, the results are inconsistent with respect to estimated land use change, i.e., the area converted as a result of the corn shock plus the soy shock is not equal to running the model with the two shocks combined. It may be possible to resolve this issue by preparing a series of GTAP runs in which the soy shock is constant and corn is varied, then running the model holding the corn shock constant and varying soy. Furthermore, the type of land converted (forest vs. pasture) is very different for soy and corn and inconsistent for the various steps in the new GTAP model. 15-OCT-2010 INTERIM WORKING DRAFT FOR DISCUSSION WITH THE EWG -- DO NOT QUOTE OR CITE -- 15

16. Co-Product Treatment for Other Virgin Oils Used in the Manufacture of Biofuels Soybean, Canola, Camelina, Palm, and other virgin oils are and will be used in the manufacture of biofuels. Variation in oilseed meal quality depending on crop species and processing methods. Role of oilseed meals in ruminant diets and monogastric diets will be different. Different substitution ratios will be appropriate and necessary. 15-OCT-2010 INTERIM WORKING DRAFT FOR DISCUSSION WITH THE EWG -- DO NOT QUOTE OR CITE -- 16

17. Co-Product Treatment for Other Virgin Oils Used in the Manufacture of Biofuels Continued... Recommendation: ARB needs to be mindful that if biofuels produced from oilseeds beyond soy are introduced into California, work will be needed to properly assess co-product credits. 15-OCT-2010 INTERIM WORKING DRAFT FOR DISCUSSION WITH THE EWG -- DO NOT QUOTE OR CITE -- 17

18. Draft Recommendations for Longer-Term Research Related to the Treatment of Co-Products 15-OCT-2010 INTERIM WORKING DRAFT FOR DISCUSSION WITH THE EWG -- DO NOT QUOTE OR CITE -- 18

19. New Products and Co-Products Markets are always changing and responding to new opportunities and threats. Glycerine from biodiesel production world wide has led to the closure of most synthetic glycerine production facilities. Continuing increase in supply results in opportunities. – 100,000 tpy glycerine to propylene glycol facility has been built and is being commissioned. – This will take the production from about 430 million gallons of biodiesel. – GHG emissions from bio-process are 1.72 kg CO 2 eq/kg PG vs. 8.61 for petroleum based process. GHG savings are about 12.2 g/MJ biodiesel vs. 0.24 by energy allocation. 15-OCT-2010 INTERIM WORKING DRAFT FOR DISCUSSION WITH THE EWG -- DO NOT QUOTE OR CITE -- 19

20. Future Directions in Biofuel Processing and Co-Products New Co-Products – Corn Oil, as a biodiesel feedstock – Zein protein, as a petrochemical feedstock replacement – DDG(S) as filler (replacing high density polyethylene) – Energy from land-fill gas or biomass Future Co-Products – Petrochemical replacements Fermentation products using carbohydrate in DDG(S) such as lactic acid, succinic acid Use of corn oil to offset petrochemicals – Lignin and other waste stream components for biogas, steam or electricity production – Lignin as a bio-based petrochemical replacement 15-OCT-2010 INTERIM WORKING DRAFT FOR DISCUSSION WITH THE EWG -- DO NOT QUOTE OR CITE -- 20 Source: POET Company Information

21. Issues Related to Integrated Bio-Refineries Bio-refineries, with multiple inputs and multiple products, complicate LCA. For multi-feedstock, multi-product biorefineries, the difficulties associated with LCA are more complex than for a single feedstock-fuel pathway. Methodological difficulties have not been resolved, but are more difficult for consequential analysis, which with respect to biofuels and the reality of by-product feeding, may be more appropriate, but much more difficult and uncertain. ARB uses attributional LCA to estimate direct GHG intensity values for individual biofuels. In contrast, US EPA uses consequential analysis for this purpose. 15-OCT-2010 INTERIM WORKING DRAFT FOR DISCUSSION WITH THE EWG -- DO NOT QUOTE OR CITE -- 21