WEAI/AERE 2009 - Individual Paper Abstract
Title: The Cost-Effectiveness of Biofuel Policies: Multiple Objectives, Indirect Effects, and Uncertainty
Author(s): William K. Jaeger and Thorsten Egelkraut, Oregon State University (photo credit: NREL photo eXchange 10403, Jim Yost)
Abstract:
Policies to expand production and use of biofuels have been promoted in the U.S. and elsewhere on the basis of multiple policy objectives including reduced reliance on fossil fuels, increased energy security, and reductions in greenhouse gas emissions (GHGs). Additional effects and consequences include impacts on food prices and food security, rural employment, and other environmental effects on water, land use, soil quality, and non-point pollution. The extent to which biofuels can achieve these main goals when replacing petroleum-based fuels has been the subject of considerable debate. The "net energy" contribution of some biofuels has been shown to be small when energy life-cycle analyses take account of the energy used in production and processing (Hill et al., 2006). And general-equilibrium estimates of net reductions in GHG emissions have been questioned when displaced food production gives rise to land use changes (Searchinger et al., 2008). Estimates vary for the net energy gains and GHG reductions from biofuels; and the potential future improvements in technology or practices are uncertain: some recent research suggests that advances in technologies and farm management can significantly improve their net energy gains and reduce the adverse land use change effects.
The cost-effectiveness of biofuels with respect to these multiple goals, however, has not been formally evaluated in a model where alternative policies may differ in terms of cost, but also in terms of outcomes for each of several policy objectives. For example, forest carbon sequestration can reduce GHGs emissions but will not improve energy security; a gas/carbon tax will reduce fossil fuel use and GHG emissions. The complexity, uncertainty, and potential complementarities for alternative policy tools to address multiple policy objectives make computation of an explicit cost-effectiveness measure difficult. The current analysis develops a general-equilibrium model for biofuel policies to substitute biofuels (corn and cellulosic ethanol, soy biodiesel) for fossil fuels, resulting in changes in private and public costs, fossil fuel use, GHGs, food production and land use changes. Alternative scenarios are also evaluated involving policies such as a carbon tax, carbon sequestration and raising CAFE standards. Finally, explicit measures of cost-effectiveness are developed that compare comparable gains toward multiple objectives with the differences in costs across differing policies or for combinations of policies (e.g., in cases where one or more policy tools advance a single objective).
Results indicate that relative to a gas tax, corn-ethanol, for example, is many times more costly for reducing fossil fuel use, and may be ineffective (infinitely more costly than a gas tax) at reducing net GHG emissions. Even with optimistic assumptions about future technical and management improvements cost-effectiveness for biofuels appears to be a remote possibility. The merits of joint versus independent consideration of these multiple objectives are considered in light of these estimates. Differences in social cost to achieve U.S. biofuel targets are estimated based on supply and cost function estimates for feedstocks and other inputs, public costs (subsidies versus tax revenues), etc.