Biofuels, Solar And Wind As Renewable Energy Systems Benefits And Risks

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Slide 2: Biofuels, Solar and Wind as Renewable Energy Systems Slide 3: David Pimentel Editor Biofuels, Solar and Wind as Renewable Energy Systems Beneﬁts and Risks 123 Slide 4: Editor Dr. David Pimentel Cornell University College of Agriculture and Life Sciences 5126 Comstock Hall Ithaca, NY 15850 USA dp18@cornell.edu ISBN: 978-1-4020-8653-3 e-ISBN: 978-1-4020-8654-0 Library of Congress Control Number: 2008931413 Chapter 5 c The Authors c 2008 Springer Science+Business Media B.V. No part of this work may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, microﬁlming, recording or otherwise, without written permission from the Publisher, with the exception of any material supplied speciﬁcally for the purpose of being entered and executed on a computer system, for exclusive use by the purchaser of the work. Cover Images Dutch windmill (Courtesy of Schoen Photography, www.schoenphotography.com) c Schoen Photography, Colorado, USA Wind turbine c 2008 JupiterImages Corporation Printed on acid-free paper 987654321 springer.com Slide 5: Preface The petroleum age began about 150 years ago. Easily available energy has supported major advances in agriculture, industry, transportation, and indeed many diverse activities valued by humans. Now world petroleum and natural gas supplies have peaked and their supplies will slowly decline over the next 40–50 years until depleted. Although small amounts of petroleum and natural gas will remain underground, it will be energetically and economically impossible to extract. In the United States, coal supplies could be available for as long as 40–50 years, depending on how rapidly coal is utilized as a replacement for petroleum and natural gas. Having been comfortable with the security provided by fossil energy, especially petroleum and natural gas, we appear to be slow to recognize the energy crisis in the U.S. and world. Serious energy conservation and research on viable renewable energy technologies are needed. Several renewable energy technologies already exist, but sound research is needed to improve their effectiveness and economics. Most of the renewable energy technologies are inﬂuenced by geographic location and face problems of intermittent energy supply and storage. Most renewable technologies require extensive land; a few researchers have even suggested that one-half of all land biomass could be harvested in order to supply the U.S. with 30% of its liquid fuel! Some optimistic investigations of renewable energy have failed to recognize that only 0.1% of the solar energy is captured annually in the U.S. by all the green plants, including agriculture, forestry, and grasslands. Photovoltaics can collect about 200 times more solar energy per year than green plants. The green plants took more than 700 million years to collect and then be stored as the concentrated energy found in petroleum, natural gas, and coal supplies. This book examines various renewable energy technologies and reports on their potential to supply the United States and other nations with needed energy. Some chapters examine several renewable energy technologies and their potential to replace fossil fuel, while others focus on one speciﬁc technology and its potential, as well as its limitations. In this volume, the aim of the contributors is to share their analyses as a basis for more research in renewable energy technologies. Basic to all the renewable energy technologies is that they attempt to minimize damage to the environment that supports all life. v Slide 6: vi Preface Several of the chapters reﬂect the current lack of agreement in the ﬁeld, as pressure mounts to explore and develop potential energy alternatives. The reader will notice considerable variability in the energy inputs and potential energy outputs in some of the studies. This is evidence of the complexity of assessing the large number of energy inputs that go into production of a biofuel crop and the extraction of its useful energy. As research continues, we will discover if current analyses of renewable energy technologies have adequately estimated energy requirements, outputs and environmental consequences. Hopefully, this research will help guide energy policy makers toward the most viable choices and away from energy costly missteps, as we collectively encounter energy descent. The authors of each of these chapters have done a superb job in presenting the most up to date perspective of various renewable energy technologies in a highly readable fashion. NY, USA D. Pimentel Slide 7: Acknowledgements I wish to express my sincere gratitude to the Cornell Association of Professors Emeriti for the partial support of our research through the Albert Podell Grant Program. In addition, I wish to thank Anne Wilson for her valuable assistance in the preparation of our book. vii Slide 8: Contents 1 Renewable and Solar Energy Technologies: Energy and Environmental Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . David Pimentel 1 2 Can the Earth Deliver the Biomass-for-Fuel we Demand? . . . . . . . . . . . 19 Tad W. Patzek 3 A Review of the Economic Rewards and Risks of Ethanol Production 57 David Swenson 4 Subsidies to Ethanol in the United States . . . . . . . . . . . . . . . . . . . . . . . . . . 79 Doug Koplow and Ronald Steenblik 5 Peak Oil, EROI, Investments and the Economy in an Uncertain Future . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109 Charles A. S. Hall, Robert Powers and William Schoenberg 6 Wind Power: Beneﬁts and Limitations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133 Andrew R.B. Ferguson 7 Renewable Diesel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153 Robert Rapier 8 Complex Systems Thinking and Renewable Energy Systems . . . . . . . . 173 Mario Giampietro and Kozo Mayumi 9 Sugarcane and Ethanol Production and Carbon Dioxide Balances . . . 215 Marcelo Dias De Oliveira 10 Biomass Fuel Cycle Boundaries and Parameters: Current Practice and Proposed Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 231 Tom Gangwer ix Slide 9: x Contents 11 Our Food and Fuel Future . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 259 Edwin Kessler 12 A Framework for Energy Alternatives: Net Energy, Liebig’s Law and Multi-criteria Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 295 Nathan John Hagens and Kenneth Mulder 13 Bio-Ethanol Production in Brazil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 321 Robert M. Boddey, Luis Henrique de B. Soares, Bruno J.R. Alves and Segundo Urquiaga 14 Ethanol Production: Energy and Economic Issues Related to U.S. and Brazilian Sugarcane . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 357 David Pimentel and Tad W. Patzek 15 Ethanol Production Using Corn, Switchgrass and Wood; Biodiesel Production Using Soybean . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 373 David Pimentel and Tad Patzek 16 Developing Energy Crops for Thermal Applications: Optimizing Fuel Quality, Energy Security and GHG Mitigation . . . . . . . . . . . . . . . . 395 Roger Samson, Claudia Ho Lem, Stephanie Bailey Stamler and Jeroen Dooper 17 Organic and Sustainable Agriculture and Energy Conservation . . . . . 425 Tiziano Gomiero and Maurizio G. Paoletti 18 Biofuel Production in Italy and Europe: Beneﬁts and Costs, in the Light of the Present European Union Biofuel Policy . . . . . . . . . . . . . . . . 465 Sergio Ulgiati, Daniela Russi and Marco Raugei 19 The Power Density of Ethanol from Brazilian Sugarcane . . . . . . . . . . . 493 Andrew R.B. Ferguson 20 A Brief Discussion on Algae for Oil Production: Energy Issues . . . . . . 499 David Pimentel Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 501 Slide 10: About our Authors Bruno J. R. Alves graduated in Agronomy from UFRRJ (Federal University of Rio de Janeiro) in 1987. He concluded the Master’s Degree (1992) and PhD (1996) in Agronomy at the same University, specializing in techniques for the study of the dynamics of N in the soil and for the quantiﬁcation of biological N2 ﬁxation in legume and non-legume species. He is a researcher at the Brazilian Corporation of Agricultural Research (Embrapa) and a teacher-advisor in the post-graduation program in Agronomy at UFRRJ. His research covers the quantiﬁcation of soil C sequestration, greenhouse gas emissions, and energy balance for biomass production. Robert Boddey graduated in 1975 from Leeds University, UK, with a BSc in Agricultural Chemistry. He earned a PhD at the University of the West Indies (Trinidad) in 1980, with a thesis on biological nitrogen ﬁxation (BNF) associated with wetland rice. He then moved to the Soil Microbiology Centre of the Brazilian Corporation for Agricultural Research (Embrapa Agrobiologia) in Serop´ dica, Rio de Janeiro. e There he developed various techniques, including those using the stable isotope 15N, to quantify inputs of BNF to grasses and cereals. His team also works on the impact of BNF on N dynamics in various agroecosystems. Boddey has published almost 100 papers in international journals, and over 60 chapters in books and conference proceedings. Marcelo E. Dias de Oliveira graduated in 1997 as an Agronomic Engineer at University of S˜ o Paulo-Brazil, working as an undergrad student with GIS and Remote a Sensing. In 2001 he started his Master’s Degree at Washington State University – Richland - USA, concluding his work in 2004. During this time he did research on hazardous materials at the Hanford site, and developed his thesis on energy balance, carbon dioxide emissions and environmental impacts of ethanol production. Currently he works as consultant for an environmental company in Brazil and is about to start his PhD studies. Jeroen Dooper holds a Bachelor degree in Ecological Material Technology and is currently completing a Master’s degree in Sustainable Development, Energy and xi Slide 11: xii About our Authors Resources at Utrecht University in the Netherlands. His research is focused on energy conversion technologies, energy policies, greenhouse gas mitigation and life cycle assessments. In 2007, he began collaboration with REAP-Canada to pursue research on various bioenergy conversion technologies and their efﬁciencies. His previous work experience includes environmental education at Econsultancy, and environmental consulting, environmental product development, and optimizing processing efﬁciency with the Avans University of Professional Education. Andrew Ferguson, after National Service ﬂying training in Canada, joined BEA (later British Airways). In the 1960s, he tried to see if it was possible to persuade his ﬂying colleagues that there was an environmental crisis ahead due to growing population. Finding that it was impossible to locate even one person to acquiesce in this proposition, he waited for more propitious times to engage in wider efforts. In the 1990s, he became a member of the Optimum Population Trust (UK), started by the late David Willey, and since 2002 has been editor of the biannual OPT Journal. Thomas Edgar Gangwer has a B.S. in Chemistry from Lebanon Valley College and a PhD in Physical Chemistry from the University of Notre Dame. His career spans basic research, applied research, regulatory compliance, and technology implementation in the chemistry, engineering, licensing, and environmental arenas. His materials processing experience includes chemical, radioactive, hazardous, sanitary, and byproduct feed stocks and wastes. For both commercial and government (NRC, DOE, DOD) clients, he has performed methodology development, process modeling, process evaluation, and project/program management covering diverse treatment, transport, pollution prevention, and disposal activities. In addition to client reports, he has over 40 scientiﬁc/technical literature publications. Mario Giampietro is an ICREA Research Professor at ICTA – Institute of Science and Technology for the Environment - Universitat Autonoma Barcelona, SPAIN. He has been visiting scholar at: Cornell University; Wageningen University; European Commission Joint Research Center, Ispra; Wisconsin University Madison; Penn State University, Arizona State University. His research addresses technical issues associated with “Science for Governance” such as Multi-Scale Integrated Analysis of Societal and Ecosystem Metabolism, Participatory Integrated Assessment of Scenarios and Technological Changes. He has published more than 150 papers and chapters of books and is the author of: ”Multi-Scale Integrated Analysis of Agro-ecosystems” 2003 (CRC press), and co-author of “The Jevons Paradox” 2008 (Earthscan). Tiziano Gomiero holds a degree in Nature Science from Padua University and a PhD in Environmental Science from the Universitat Autonoma de Barcelona, Spain. His work concerns integrated analysis of farming systems (which takes Slide 12: About our Authors xiii into consideration the environmental, social and economic domains) and rural development, including theoretical and epistemological issues, modeling, practical applications (he worked in Italian and South-East Asia contexts). He is currently a Professor of Ecology and Agroecology at Padua University. Nathan John Hagens is currently at the Gund Institute of Ecological Economics at the University of Vermont studying the impacts that a decline in liquid fuels will have on planetary ecosystems and society. On the supply side, he is exploring net-energy comparisons of the primary alternate fuel sources to oil: coal, wind, nuclear and biomass. Prior to coming to the Gund Institute, Nate developed trading algorithms for commodity systems and was President of Sanctuary Asset Management, Managing Director of Pension Research Institute, and Vice President at the investment ﬁrms Salomon Brothers and Lehman Brothers. He holds an undergraduate degree from the University of Wisconsin and an MBA with honors from the University of Chicago. Charles A. Hall is a Systems Ecologist who received his PhD from Howard T. Odum. Dr. Hall is the author of seven books and more than 200 scholarly articles. He is best known for his development of the concept of EROI, or energy return on investment, which is an examination of how organisms, including humans, invest energy into obtaining additional energy to increase biotic or social ﬁtness. He has applied these approaches to ﬁsh migrations, carbon balance, tropical land use change and petroleum extraction, in both natural and human-dominated ecosystems. He is developing a new ﬁeld, biophysical economics, as a supplement or alternative to conventional neoclassical economics. Edwin Kessler graduated from Columbia College in 1950 and received the Sc.D. in Meteorology from MIT in 1957. From 1954-1961 he specialized in radar meteorology with the Air Force Cambridge Research Laboratories in Massachusetts, and from 1961-1964 he was Director of the Atmospheric Physics Division, Travelers Research Center in Hartford, Connecticut. From 1964 until retirement in 1986, he was Director of the National Oceanic and Atmospheric Administration’s National Severe Storms Laboratory in Norman, Oklahoma. In 1989, he received the Cleveland Abbe award of the American Meteorological Society. He has been Chair of Common Cause Oklahoma and is now Vice-Chair. He manages 350 acres of pastures with woodlands and stream in central Oklahoma. Doug Koplow is the founder of Earth Track in Cambridge, MA (www.earthtrack. net), an organization focused on making the scope and cost of environmentally harmful subsidies more visible. The author of Biofuels - At What Cost? Government support for ethanol and biodiesel in the United States (Global Subsidies Initiative, Geneva: 2006 and 2007), Doug has worked on natural resource subsidy issues for nearly twenty years. He holds an MBA from the Harvard Graduate School of Business Administration and a BA in economics from Wesleyan University. Slide 13: xiv About our Authors Claudia Ho Lem is currently a Project Manager for REAP-Canada’s International Development and Bioenergy Programs. A rural development specialist with over 10 years of experience in environmental project management, Ms. Ho Lem holds a B.Sc. in Environmental Science specializing in Biology and Chemistry from the University of Calgary. She has worked on bioenergy, climate change and agroecological development in China, the Philippines, Cuba, West Africa and Canada, supporting farming communities in increasing their self-sufﬁciency through participatory assessments, training and research. Her experience has given her an integrated understanding of the social, economic, biological, ecosystem and health impacts of agricultural development. Kozo Mayumi, a former student of Georgescu-Roegen, has been working in the ﬁeld of energy analysis, ecological economics and complex hierarchy theory. He is a professor at the University of Tokushima and an editorial board member of Ecological Economics, Organization and Environment, and International Journal of Transdisciplinary Research. He is the author of The Origins of Ecological Economics: The Bioeconomics of Georgescu-Roegen, published by Routledge in 2001, and The Jevons Paradox and The Myth of Resource Efﬁciency Improvements from Earthscan in 2008. Together with Dr. Mario Giampietro and three other researchers, Mayumi started a biennial international workshop, (“Advances in Energy Studies,”) in 1998. Kenneth Mulder obtained his PhD in Ecological Economics from the Gund Institute for Ecological Economics at the University of Vermont. His research is multidisciplinary, applying systems modeling and analysis to problems in ecology, economics and agriculture. He is particularly interested in the development of meaningful indicators for alternative energy technologies. Dr. Mulder currently manages an integrated student farm at Green Mountain College and teaches in the Environmental Studies Department there. Maurizio G. Paoletti is a Professor of Ecology at Padova University, Padova, Italy. With a background in biology and human ecology, he is an internationally recognized researcher in biodiversity, agroecology, entomology and ethnobiology. He has held visiting professorships in a number of countries (Finland, China, USA and Australia). He has organised more than ten international conferences on agroecology, sustainable agriculture, biodiversity, and is very active in public conferences to inform citizens on sustainability issues. Overall, he has completed 260 scientiﬁc papers and 18 edited books. Tad Patzek is a professor of Geoengineering at U.C. Berkeley. Prior to joining Berkeley in 1990, he was a scientist at Shell Development, a research company managed for 20 years by M. King Hubbert. Patzek’s current research involves mathematical modeling of earth systems with emphasis on ﬂuid ﬂow in soils and rocks. He also works on the thermodynamics and ecology of human survival and energy Slide 14: About our Authors xv supply for humanity. Currently, he teaches courses in hydrology, ecology and energy supply, computer science, and mathematical modeling of earth systems. Patzek is a coauthor of over 200 papers and reports, and is writing ﬁve books. David Pimentel is a professor of ecology and agricultural sciences at Cornell University, Ithaca, NY. His PhD is from Cornell University. His research spans the ﬁelds of energy, biotechnology, sustainable agriculture, and environmental policy. Pimentel has published more than 600 scientiﬁc papers and 25 books. He has served on many national and government committees including the National Academy of Sciences; President’s Science Advisory Council; U.S Department of Agriculture and U.S. Department of Energy; Ofﬁce of Technology Assessment of the U.S. Congress; and the U.S. State Department. In 2008 he received an Honorary Doctorate from the University of Massachusetts for his work in recognizing and publicizing critical trends in interactions between humans and the environment. Robert Powers is ﬁnishing a BS in Environmental Science at the State University of New York College of Environmental Science & Forestry under Dr. Charles Hall. He is interested in the intersection of energy and economic issues, speciﬁcally in modeling problems to ﬁnd innovative solutions. He has also started a Masters in System Dynamics at the University of Bergen (Norway) to further develop his modeling skills. Marco Raugei obtained a Master’s degree in Chemistry and a PhD in Chemical Sciences at the University of Siena (Italy), with a thesis on Life Cycle Assessment. He is currently working as a researcher and consultant in Life Cycle Assessment and Environmental Management, with active collaborations with Ambiente Italia Research Institute (Rome, Italy), University Parthenope (Naples, Italy), Brookhaven National Laboratory (NY, USA), Columbia University (NY, USA), and Escola Superior de Commerc Internacional - Universitat Pompeu Fabra (Barcelona, Spain). ¸ He has published over 35 peer-reviewed papers in various international journals, books and conference proceedings. Robert Rapier has Bachelor’s Degrees in Chemistry and Mathematics, and a Master’s Degree in Chemical Engineering from Texas A&M University. Passionate about energy and sustainability issues, his R-Squared Energy Blog is devoted to debate and discussion of those topics. Robert has over 15 years of experience in the petrochemicals industry, including experience with cellulosic ethanol, gas-to-liquids (GTL), reﬁning, and butanol production. He holds several U.S. and international patents, and works for a major oil company. Robert is currently based in Scotland where he lives with his wife and three children. Daniela Russi earned a Master’s Degree in Environmental Economics at the University of Siena (Italy). She did an internship at the Wuppertal Institute for Climate, Environment and Energy, in Wuppertal (Germany). She obtained a PhD in Slide 15: xvi About our Authors Environmental Sciences at the Autonomous University of Barcelona (Spain) with a thesis on Social Multi-Criteria Evaluation (SMCE) applied to a conﬂict concerning rural electriﬁcation and large-scale biodiesel use in Italy. She has published peerreviewed papers in international journals, and contributed to various books and conference proceedings on these topics. She is presently working for the environmental consultancy Amphos21. Roger Samson is the Executive Director of Resource Efﬁcient Agricultural Production (REAP)-Canada, a charitable organization working to develop and commercialize ecological solutions to energy, ﬁbre and food production. Mr. Samson is a leading world expert in biomass energy development. He has authored over 60 publications on bioenergy, ecological farming, and climate change mitigation and has been working on bioenergy projects in North America, Europe, China, the Philippines, and West Africa since 1991. His work has pioneered ecological approaches for bioenergy production and thermodynamically efﬁcient bioenergy conversion systems. Mr. Samson holds a B.Sc. (Crop Science) from Guelph University and a M.Sc. (Plant Science) from McGill University in Montreal. William Schoenberg graduated from the State University of New York College of Environmental Science & Forestry with a Bachelors Degree in Environmental Studies. He is very interested in energy issues, especially peak oil and its ramiﬁcations for society. He is continuing his studies at the University of Bergen, Norway in the System Dynamics program, where he will be able to more fully explore dynamic modeling and its ability to help society prepare for the backside of the peak oil curve. Luis Henrique de B. Soares is an Agronomist who graduated from Federal University of Rio Grande do Sul State (UFRGS, Brazil). He received a Master’s degree in Environmental Microbiology, and his PhD in Molecular and Cellular Biology (Biotechnology Centre, Federal University fo Rio Grande do Sul, 2003), working on microbial enzymes for industrial applications. Dr. Soares is currently a Research Scientist at Embrapa Agrobiologia, Rio de Janeiro, studying principally agroenergy. The areas of his research include biofuels production and processing, enzymology, and energy balances for the assesmenet of agroecosystem sustainability. Ms. Bailey Stamler is the Climate Change Project Manager with REAP-Canada. She has been working with REAP developing business plans for international carbon trading projects using small scale biomass energy technologies in the Philippines, Nigeria and Ethiopia since 2005. Ms. Bailey Stamler is experienced in bioenergy and bioheat pellet potential in Canada, focusing on the use of energy crops, agriculture and crop milling residues for heating applications. She also has experience quantifying GHG emissions, mitigation potential and relative efﬁciencies of biofuels. Ms. Bailey Stamler holds B.Sc. (Environmental Science) from Laurentian University and an M.Sc. from McGill University (Natural Resource Sciences). Slide 16: About our Authors xvii Ronald Steenblik at the time of writing was Director of Research for the Global Subsidies Initiative (GSI) of the International Institute for Sustainable Development (IISD). Ronald’s career spans three decades, in industry, academia, the U.S. federal government, and intergovernmental organizations, working on policy issues related to natural resources, the environment, or trade. Prior to joining the IISD, he was a senior trade policy analyst in the Trade Directorate of the Organisation for Economic Co-operation and Development (OECD), where his analyses supported the WTO negotiations on environmental goods and services. Ronald holds degrees from Cornell University and the University of Pennsylvania. David Swenson is an associate scientist in economics at Iowa State University and a lecturer there in community and regional planning as well as in the graduate program in urban and regional planning at The University of Iowa. His primary area of research focuses on regional economic changes and their ﬁscal and demographic implications for communities. He has completed scores of economic impact studies, and written and presented extensively on the uses of impact models for decision making. Of late, he has scrutinized the potential community economic outcomes associated with biofuels development in the Midwest and the Plains. Sergio Ulgiati received an education in Physics and Environmental Chemistry. He is a Professor of Life Cycle Assessment and General Systems Theory at Parthenope University in Napoli, Italy. He has expertise in Energy Analysis, LCA, Environmental Accounting and Emergy Synthesis. He has published over 200 papers in national and international journals and books. His research in LCA covers renewable and nonrenewable energy systems (wind, geothermal, hydro, bioenergy; solar thermal and photovoltaic, hydrogen and fuel cells; thermal fossil-powered power plant, including cogeneration and NGCC plants), as well as zero emission technologies and strategies (ZETS). He is the organizer and Chair of the Biennial International Workshop “Advances in Energy Studies.” Segundo Urquiaga graduated in Agronomy in 1973 from the Agrarian University “La Molina”, Lima, Per´ , with BSc, and defended his PhD thesis in 1982 in the u Agricultural college “Luiz de Queiroz” of the S˜ o Paulo State University, Piracia caba, S˜ o Paulo. In 1984 he moved to the Brazilian Corporation for Agricultural a Research (Embrapa Agrobiologia) in Serop´ dica, Rio de Janeiro. At present he is e studying the inﬂuence of biological nitrogen ﬁxation (BNF) on the energy balance of several renewable energy sources such as sugar cane, soybean and elephant grass. Urquiaga has published over 120 papers in national and international journals, and over 50 chapters in books and conference proceedings. Slide 17: Contributors Bruno J.R. Alves Embrapa-Agrobiologia, BR-465, Km 07, Caixa Postal 75.505, Serop´ dica, e 23890-000, Rio de Janeiro, Brazil Robert M. Boddey Embrapa-Agrobiologia, BR-465, Km 07, Caixa Postal 75.505, Serop´ dica, e 23890-000, Rio de Janeiro, Brazil, e-mail: bob@cnpab.embrapa.br Jeroen Dooper Resource Efﬁcient Agricultural Production (REAP) – Canada, Box 125 Centennial Centre CCB13, Ste. Anne de Bellevue, Quebec, Canada H9X 3V9 Andrew R.B. Ferguson 11 Harcourt Close, Henley-on-Thames, RG9 1UZ, England, e-mail: andrewrbferguson@hotmail.com Tom Gangwer 739 Battlefront Trail, Knoxville, TN 37934, USA, e-mail: fcha-tom@charter.net Mario Giampietro ICREA Research Professor, Institute of Environmental Science and Technology (ICTA), Autonomous University of Barcelona , Building Q – ETSE - (ICTA), Campus of Bellaterra 08193 Cerdanyola del Vall` s (Barcelona), Spain, e e-mail: mario.giampietro@uab.cat Tiziano Gomiero Department of Biology, Padua University, Italy, Laboratory of Agroecology and Ethnobiology, via U. Bassi, 58/b, 35121-Padova, Italy, e-mail: tiziano.gomiero@libero.it Nathan John Hagens Gund Institute for Ecological Economics, University of Vermont, 617 Main Street, Burlington, VT 05405, USA, e-mail: Nathan.Hagens@uvm.edu Charles A. S. Hall State University of New York, College of Environmental Science and Forestry, Syracuse, New York, NY 13210, USA, e-mail: chall@esf.edu xix Slide 18: xx Contributors Edwin Kessler 1510 Rosemont Drive, Norman, OK 73072, e-mail: kess3@swbell.net Doug Koplow Earth Track, Inc., 2067 Massachusetts Avenue, 4th Floor, Cambridge, MA 02140, USA, e-mail: dkoplow@earthtrack.net Claudia Ho Lem Resource Efﬁcient Agricultural Production (REAP) – Canada, Box 125 Centennial Centre CCB13, Ste. Anne de Bellevue, Quebec, Canada H9X 3V9 Kozo Mayumi Faculty of IAS, The University of Tokushima, Minami-Josanjima 1-1, Tokushima City 770-8502, Japan, e-mail: mayumi@ias.tokushima-u.ac.jp Kenneth Mulder Green Mountain College, Poultney VT, USA Marcelo Dias De Oliveira Avenida 10, 1260, Rio Claro - SP – Brazil, CEP 13500-450, email: dias oliveira@msn.com Maurizio G. Paoletti Dept. of Biology, Padua University, Italy, Lab. of Agroecology and Ethnobiology, via U. Bassi, 58/b, 35121-Padova, Italy, e-mail: paoletti@bio.unipd.it Tad W. Patzek Department of Civil and Environmental Engineering, University of California, 425 David Hall, MC1716, Berkeley, CA 94720, USA, e-mail: patzek@patzek.ce.berkeley.edu David Pimentel College of Agriculture and Life Sciences, Cornell University, 5126 Comstock Hall, Ithaca, NY 15850, USA, e-mail: Dp18@cornell.edu Robert Powers State University of New York, College of Environmental Science and Forestry, Syracuse, New York, NY 13210, USA Robert Rapier Accsys Technologies PLC, 5000 Quorum Drive, Suite 310, Dallas, TX 75254, USA, e-mail: rrapier1@yahoo.com Marco Raugei Department of Sciences for the Environment, Parthenope University of Napoli, Centro Direzionale – Isola C4, 80143 Napoli, Italy Daniela Russi Autonomous University of Barcelona, Department of Economics and Economic History, Ediﬁci B, Campus de la UAB, 08193 Bellaterra (Cerdanyola del V.), Barcelona, Spain Slide 19: Contributors xxi Roger Samson Resource Efﬁcient Agricultural Production (REAP) – Canada, Box 125 Centennial Centre CCB13, Ste. Anne de Bellevue, Quebec, Canada H9X 3V9, e-mail: rsamson@reap-canada.com William Schoenberg State University of New York, College of Environmental Science and Forestry, Syracuse, New York, NY 13210, USA Luis Henrique de B. Soares Embrapa-Agrobiologia, BR-465, Km 07, Caixa Postal 75.505, Serop´ dica, e 23890-000, Rio de Janeiro, Brazil Stephanie Bailey Stamler Resource Efﬁcient Agricultural Production (REAP) – Canada, Box 125 Centennial Centre CCB13, Ste. Anne de Bellevue, Quebec, Canada H9X 3V9 Ronald Steenblik Global Subsidies Initiative of the International Institute for Sustainable Development, Maison Internationalle de l’Environment 2, 9, chemin de Balexert, 1219 Chˆ telaine Gen` ve, Switzerland, e-mail: ronald.steenblik@gmail.com a e David Swenson Department of Economics, 177 Heady Hall, Iowa State University, Ames IA 50011, e-mail: dswenson@iastate.edu Sergio Ulgiati Department of Sciences for the Environment, Parthenope University of Napoli, Centro Direzionale – Isola C4, 80143 Napoli, Italy, e-mail: Sergio.ulgiati@uniparthenope.it Segundo Urquiaga Embrapa-Agrobiologia, BR-465, Km 07, Caixa Postal 75.505, Serop´ dica, e 23890-000, Rio de Janeiro, Brazil Slide 20: Chapter 1 Renewable and Solar Energy Technologies: Energy and Environmental Issues David Pimentel Abstract A critical need exists to investigate various renewable and solar energy technologies and examine the energy and environmental issues associated with these various technologies. The various renewable energy technologies will not be able to replace all current 102 quads (quad = 1015 BTU) of U.S. energy consumption (USCB 2007). A gross estimate of land and water resources is needed, as these resources will be required to implement the various renewable energy technologies. Keywords Biomass energy · conversion systems · ethanol · geothermal systems · hydroelectric power · photovoltaic systems · renewable energy · solar · wind power 1.1 Introduction The world, and the United States in particular, face serious energy shortages and associated high energy prices during the coming decades. Oil, natural gas, coal, and nuclear power provide more than 88% of world energy needs; the other 12% is provided by various renewable energy sources (Table 1.1). Oil, natural gas, coal, and nuclear provide more than 93% of U.S. energy needs; the other 9% consists of various renewable and non-renewable energy sources (Table 1.1). The U.S., with slightly more than 45% of the world’s population, accounts for nearly 25% of the world’s energy consumption (Table 1.1). On average, each American uses nearly 8,000 L of oil equivalents per year for all purposes, including transportation, industry, heating and cooling. The United States now imports more than 63% of its oil at an annual cost of approximately $200 billion (USCB 2007). Projections are that within 20 years the U.S. will be importing more than 90% of its oil. The United States has consumed more than 90% of its proved oil reserves (Pimentel et al. 2004a). Because the U.S. D. Pimentel College of Agriculture and Life Sciences, Cornell University, 5126 Comstock Hall, Ithaca, NY 15850 e-mail: Dp18@cornell.edu D. Pimentel (ed.), Biofuels, Solar and Wind as Renewable Energy Systems, C Springer Science+Business Media B.V. 2008 1 Slide 21: 2 D. Pimentel Table 1.1 Fossil and solar energy use in the U.S. and world (quads = 1015 BTU) (USCB 2007) Fuel Petroleum Natural Gas Coal Nuclear Biomass Hydroelectric power Geothermal and windpower Biofuels Total U.S. 40.1 23.0 22.3 8.2 3.0 3.4 0.4 0.5 100.9 World 168 103 115 28 30 27 0.8 0.9 472.7 population is growing nearly twice as fast as that of China per capita, and is adding 3.3 million to the population each year, energy resources are becoming scarce (PRB 2006). These shortages are now contributing to greater interest in renewable energy resources. Diverse renewable energy sources currently provide 6.8% of U.S. needs and about 12% of world needs (Table 1.1). In addition to energy conservation, the development and use of renewable energy is expected to increase as fossil fuel supplies decline and become highly expensive. Eight different renewable technologies are projected to provide the U.S. with most of its energy in the future: hydropower, biomass, wind power, solar thermal, photovoltaics, passive energy systems, geothermal, and biogas. In this chapter, I assess the potential of these 8 renewable energy technologies, including their environmental beneﬁts and risks, and their energetic and economic costs. 1.2 Hydroelectric Power Hydropower contributes signiﬁcantly to world energy, providing 6% of the supply (Table 1.1). In the United States, hydroelectric plants produce approximately 3% or 3.4 quads of total U.S. energy (340 billion kWh) (1 kWh = 860 kilocalories [kcal] = 3,440 BT = 3.6 megajoules), or 11% of the nation’s electricity, each year at a cost of $0.02 per kWh (Table 1.2; USCB 2007). Development and rehabilitation of existing dams in the United States could produce an additional 5 quads per year (Table 1.3). Hydroelectric plants, however, require considerable land for their water storage reservoirs. An average of 75,000 hectares (ha) of reservoir land area and 14 trillion L of water are required per 1 billion kWh per year produced (Table 1.2, Gleick and Adams 2000). Based on regional estimates of US land use and average annual energy generation, reservoirs currently cover approximately 26 million ha of the total 917 million ha of land area in the United States (Pimentel 2001). To develop the remaining best candidate sites, assuming land requirements similar to those in past developments, an additional 7 million ha of land would be required for water storage (Table 1.3). Slide 22: 1 Renewable and Solar Energy Technologies 3 Table 1.2 Land resource requirements and total energy inputs for construction of renewable and other facilities that produce 1 billion kWh/yr of electricity. Energy return on investment is listed for each technology. (See text for explanations) Electrical energy Technology Hydroelectric power Biomass Parabolic troughs Solar ponds Wind power Photovoltaics Biogas Geothermal Coal (non-renewable) Nuclear (non-renewable) a Land required (ha) 75,000a 200,000b 1,100d 5,200f 9,500g 2,800j ——k 30b 166b 30b Energy input:output 1:24 1:7b 1:5b 1:4b 1:4h 1:7j 1:1.7−3.3l 1:48b 1:8b 1:5b Cost per kWh ($) $0.02a 0.058c 0.07−09e 0.15b 0.07i 0.25b 0.02l 0.064b 0.03b 0.05b Life in years 30 30 30 30 30 30 30 20 30 30 Based on a random sample of 50 hydropower reservoirs in the United States, ranging in area from 482 ha to 763,00 ha (Pimentel, unpublished). b Pimentel, unpublished. c Production costs based on 70% capacity factor (J. Irving, Burlington Electric, Vermont, personal communication 2001). d Calculated (DOE/EREN 2000). e (DOE/EREN 2000). f Based on 4,000 ha solar ponds plus an additional 1,200 ha for evaporation ponds. g (Andrew Ferguson, Optimum Population Trust (UK), personal communication, June 16, 2007). h (Tyner 2002). i (Peace Energy 2003). j Calculated from DOE 2000. k No data available. l (B. Jewell, Cornell University, Ithaca, NY, personal communication 2001). Table 1.3 Current and projected US gross annual energy supply from various renewable energy technologies, based on the thermal equivalent and required land area Energy technology Current (2005) Quads Biomass Ethanol Hydroelectric power Geothermal energy Solar thermal energy Photovoltaics Wind power Biogas Passive solar power Total a b Projected (2050) Million hectares 75b 4 26c 0.5 <0.01 <0.01 1.00 <0.001 0 107 Quads 5 0.2 5 1.2 10 11 7 0.5 6 45.9 Million hectares 102b 5 33 1 11 3 8 0.01 1 164 4.5a 0.16 3.9a 1.7a <0.06 <0.06 0.11a <0.001 0.3d 10.8 USCB (2004–2005). This is the equivalent land area required to produce 3 metric tons per hectare. c Total area based on an average of 75,000 hectares per reservoir area per 1 billion kilowatt-hours per year produced. d Pimentel et al. (2002). Slide 23: 4 D. Pimentel Despite the beneﬁts of hydroelectric power, the plants cause major environmental problems. The impounded water frequently covers valuable, agriculturally productive, alluvial bottomland. Sediments build up behind the dams, reducing their effectiveness and creating another major environmental problem. Further, dams alter the existing plants, animals, and microbes in the ecosystem (Nilsson and Berggren 2000). Fish species may signiﬁcantly decline in river systems because of these numerous ecological changes. 1.3 Biomass Energy Most biomass is burned for cooking and heating, however, it can also be converted into electricity and liquid fuel. Under sustainable forest conditions in both temperate and tropical ecosystems, approximately 3 dry metric tons (t/ha) per year of woody biomass can be harvested sustainably (Birdsey 1992, Repetto 1992, Trainer 1995, Ferguson 2003). Although this amount of woody biomass has a gross energy yield of 13.5 million kcal/ha, it requires an energy expense of approximately 33 L of diesel fuel per ha, plus the embodied energy for cutting and collecting wood for transport to an electric power plant. Thus, the energy input per output ratio for a woody biomass system is calculated to be 1:22. The cost of producing 1 kWh of electricity from woody biomass is about $0.06, which is competitive with other electricity production systems that average $0.07 in the U.S. (Table 1.2) (USCB 2007). Approximately 3 kWh of thermal energy is expended to produce 1 kWh of electricity, an energy input/output ratio of 1:7 (Table 1.2). Per capita consumption of woody biomass for heat in the United States amounts to 625 kilograms (kg) per year. In developing nations, use of diverse biomass resources (wood, crop residues, and dung) average about 630 kg per capita (Kitani 1999). Developing countries use only about 500 L of oil equivalents of fossil energy per capita compared with nearly 8,000 L of oil equivalents of fossil energy used per capita in the United States (Table 1.1). Woody biomass could supply the United States with about 5 quads (1.5 × 1012 kWh thermal) of its total gross energy supply by the year 2050, provided there was adequate forest land available (Table 1.3). A city of 100,000 people using the biomass from a sustainable forest (3 t/ha per year) for electricity would require approximately 200,000 ha of forest area, based on an average electrical demand of slightly more than 1 billion kWh (electrical energy [e]) (860 kcal = 1 kWh) (Table 1.2). Environmental impacts of burning biomass are less harmful than those associated with coal, but more harmful than those associated with natural gas (Pimentel 2001). Biomass combustion releases more than 200 different chemical pollutants, including 14 carcinogens and 4 co-carcinogens, into the atmosphere (Burning Issues 2003). Globally, but especially in developing nations where people cook with fuelwood over open ﬁres, approximately 4 billion people suffer from continuous exposure to smoke (Kids for Change 2006). In the United States, wood smoke kills 30,000 Slide 24: 1 Renewable and Solar Energy Technologies 5 people each year (EPA, 2002). However, the pollutants from electric plants that use wood and other biomass can be controlled. 1.4 Wind Power For many centuries, wind power has provided energy to pump water and to run mills and other machines. Today, turbines with a capacity of at least 500 kW produce most of the commercially wind-generated electricity. Operating at an ideal location, one of these turbines running at 30% efﬁciency can yield an energy output of 1.3 million kWh (e) per year (AWEA 2000a). An initial investment of approximately $500,000 for a 500 kW capacity turbine operating at 30% efﬁciency, will yield an input/output ratio of 1:4 over 30 years of operation (Table 1.2). During the 30-year life of the system, the annual operating costs amount to about $50,000. The estimated cost of electricity generated is $0.07 per kWh (e) (Table 1.2). Some report costs ranging from $0.03 to $0.05 per kWh (Sawin 2004). These values are probably located in favorable wind sites. In the United States, 2502 megawatts (MW) of installed wind generators produce about 6.6 billion kWh of electrical energy per year (Chambers 2000). The American Wind Energy Association (AWEA 2000b) estimates that the United States could support a capacity of 30,000 MW by the year 2010, producing 75 billion kWh (e) per year at a capacity of 30%, or approximately 2% of the annual US electrical consumption. If all economically feasible land sites are developed, the full potential of wind power is estimated to be about 675 billion kWh (e) (AWEA 2000b). Offshore sites could provide an additional 102 billion kWh (e) (Gaudiosi 1996), making the total estimated potential of wind power 777 billion kWh (e), or 23% of current electrical use. Widespread development of wind power is limited by the availability of sites with sufﬁcient wind (at least 20 kilometers per hour [km/h]) and the number of wind machines that the site can accommodate. An average area for one 50 kW turbine is 1.3 ha to allow sufﬁcient spacing to produce maximum power (Table 1.2). Based on this ﬁgure, approximately 9,500 ha of land are needed to supply 1 billion kWh per year (Table 1.2). Because the turbines themselves only occupy approximately 2% of the area, most of the land can be used for vegetables, nursery stock, and cattle (Natural Resources Canada 2002). However, it may be impractical to produce corn or other grains because of the heavy equipment used in this type of farming. An investigation of the environmental impacts of wind energy production reveals a few hazards. Locating the wind turbines in or near the ﬂyways of migrating birds and wildlife refuges may result in birds ﬂying into the supporting towers and rotating blades. For this reason, it is suggested that wind farms be located at least 300 meters (m) from nature reserves to reduce their risk to birds. The estimated 13,000 wind turbines installed in the United States kill an estimated 2,600 birds per year (Sinclair 2003). Choosing a proper site and improving repellant technology with strobe lights or paint patterns might further reduce the number of birds killed. Slide 25: 6 D. Pimentel Bat fatalities are another serious concern. It is projected that by 2020 annual bat fatalities caused by wind turbines will range from 33,000 to 62,000 individuals annually (Kunz et al. 2007). Most bat fatalities are from species that migrate long distances and are tree roosting. Eastern U.S wind turbines installed along forested ridgetops have the highest rate of bat kills, ranging from 15.3 to 41.1 bats per MW of installed capacity per year (Kunz et al. 2007). Monitoring for bat and bird fatalities and research for the reduction of these should be included in all wind energy planning. The rotating magnets in the turbine electrical generator produce a low level of electromagnetic interference that can affect television and radio signals within 2–3 km of large installations (Sagrillo 2006). Fortunately, with the widespread use of cable networks or line-of-sight microwave satellite transmission, both television and radio are unaffected by this interference. The noise caused by rotating blades is another unavoidable side effect of wind turbine operation. Beyond 2.1 km, however, the largest turbines are inaudible even downwind. At a distance of 400 m, the noise level is estimated to be about 60 decibel, corresponding roughly to the noise level of a home air-conditioning unit. 1.5 Solar Thermal Conversion Systems Solar thermal energy systems collect the sun’s radiant energy and convert it into heat. This heat can be used directly for household and industrial purposes or produce steam to drive turbines that produce electricity. The complexity of these systems ranges from solar ponds to electricity-generating parabolic troughs. In the following analyses, I convert thermal energy into electricity to facilitate comparison to the other solar energy technologies. 1.5.1 Solar Ponds Solar ponds are used to capture radiation and store the energy at temperatures of ◦ nearly 100 degrees Celsius ( C). Constructed ponds can be made into solar ponds by creating a layered salt concentration gradient. The layers prevent natural convection, trapping the heat collected from solar radiation in the bottom layer of brine. The hot brine from the bottom of the pond is piped out to use for heat, for generating electricity, or both. For successful operation of a solar pond, the salt concentration gradient and the water level must be maintained. A solar pond covering 4,000 ha loses approximately 3 billion L of water per year (750,000 L/ha per year) under arid conditions (Tabor and Doran 1990). Recently, solar ponds in Israel have been closed because of such difﬁculties. To counteract the water loss and the upward diffusion of salt in the ponds, the dilute salt water at the surface of the ponds has to be replaced with fresh water and salt added to the lower layer (Solar Pond 2007). Slide 26: 1 Renewable and Solar Energy Technologies 7 The efﬁciency of solar ponds in converting solar radiation into heat is estimated to be approximately 1:4, assuming a 30-year life for the solar pond (Table 1.2). A 100 ha (1 km2 ) solar pond can produce electricity at a rate of approximately $0.30 per kWh (Australian Government 2007). Some hazards are associated with solar ponds, but most can be avoided with careful management. It is essential to use plastic liners to make the ponds leakproof and prevent contamination of the adjacent soil and groundwater with salt. 1.5.2 Parabolic Troughs Another solar thermal technology that concentrates solar radiation for large-scale energy production is the parabolic trough. A parabolic trough, shaped like the bottom half of a large drainpipe, reﬂects sunlight to a central receiver tube that runs above it. Pressurized water and other ﬂuids are heated in the pipe and used to generate steam that drives turbogenerators for electricity production or provides heat energy for industry. Parabolic troughs that have entered the commercial market have the potential for efﬁcient electricity production because they can achieve high turbine inlet temperature. Assuming peak efﬁciency and favorable sunlight conditions, the land requirements for the central receiver technology are approximately 1,100 ha per1 billion kWh per year (Table 1.2). The energy input:output ratio is calculated to be 1:5 (Table 1.2). Solar thermal receivers are estimated to produce electricity at approximately $0.07–$0.09 per kWh (DOE/EREN 2001). The potential environmental impacts of solar thermal receivers include the accidental or emergency release of toxic chemicals used in the heat transfer system. Water availability can also be a problem in arid regions. 1.6 Photovoltaic Systems Photovoltaic cells have the potential to provide a signiﬁcant portion of future U.S. and world electrical energy (Energy Economics 2007). Photovoltaic cells produce electricity when sunlight excites electrons in the cells. The most promising photovoltaic cells in terms of cost, mass production, and relatively high efﬁciency are those manufactured using silicon. Because the size of the unit is ﬂexible and adaptable, photovoltaic cells can be used in homes, industries, and utilities. However, photovoltaic cells need improvements to make them economically competitive before their use can become widespread. Test cells have reached efﬁciencies of about 25% (American Energy 2007), but the durability of photovoltaic cells must be lengthened and current production costs reduced several times to make their use economically feasible. Production of electricity from photovoltaic cells currently costs about $0.25 per kWh (DOE 2000). Using mass-produced photovoltaic cells with about 18% Slide 27: 8 D. Pimentel efﬁciency, 1 billion kWh per year of electricity could be produced on approximately 2,800 ha of land, and this is sufﬁcient electrical energy to supply 100,000 people (Table 1.2, DOE 2001). Locating the photovoltaic cells on the roofs of homes, industries, and other buildings would reduce the need for additional land by an estimated 20% and reduce transmission costs. However, because storage systems such as batteries cannot store energy for extended periods, photovoltaics require conventional backup systems. The energy input for making the structural materials of a photovoltaic system capable of delivering 1 billion kWh during a life of 30 years is calculated to be approximately 143 million kWh. Thus, the energy input per output ratio for the modules is about 1:7 (Table 1.2, Knapp and Jester 2000). The major environmental problem associated with photovoltaic systems is the use of toxic chemicals, such as cadmium sulﬁde and gallium arsenide, in their manufacture. Because these chemicals are highly toxic and persist in the environment for centuries, disposal and recycling of the materials in inoperative cells could become a major problem. 1.7 Geothermal Systems Geothermal energy uses natural heat present in Earth’s interior. Examples are geysers and hot springs, like those at Yellowstone National Park in the United States. Geothermal energy sources are divided into three categories: hydrothermal, geopressured-geothermal, and hot dry rock. The hydrothermal system is the simplest and most commonly used for electricity generation. The boiling liquid underground is produced using wells, high internal pressure drives, or pumps. In the United States, nearly 3,000 MW of installed electric generation comes from hydrothermal resources, and this is projected to increase by 4,500 MW. Most of the geothermal sites for electrical generation are located in California, Nevada, and Utah. Electrical generation costs for geothermal plants in the West range from $0.06 to $0.30/kWh (Gawlik and Kutscher 2000), suggesting that this technology offers potential to produce electricity economically. The US Department of Energy and the Energy Information Administration (DOE/EIA 2001) project that geothermal electric generation may grow three- to fourfold during the next 20–40 years. However, other investigations are not as optimistic and, in fact, suggest that geothermal energy systems are not renewable because the sources tend to decline over 40–100 years (Bradley 1997, Youngquist 1997, Cassedy 2000). Existing drilling opportunities for geothermal resources are limited to a few sites in the United States and world (Youngquist 1997). Potential environmental problems of geothermal energy include water shortages, air pollution, waste efﬂuent disposal, subsidence, and noise. The wastes produced in the sludge include toxic metals such as arsenic, boron, lead, mercury, radon, and vanadium. Water shortages are an important limitation in some regions. Geothermal systems produce hydrogen sulﬁde, a potential air pollutant; however, this could be Slide 28: 1 Renewable and Solar Energy Technologies 9 processed and removed for use in industry. Overall, these environmental costs of geothermal energy appear to be minimal relative to those of fossil fuel systems. 1.8 Biogas Wet biomass materials can be converted effectively into usable energy using anaerobic microbes. In the United States, livestock dung is normally gravity fed or intermittently pumped through a plug-ﬂow digester, which is a long, lined, insulated pit in the earth. Bacteria break down volatile solids in the manure and convert them into methane gas (65%) and CO2 (35%) (Pimentel 2001). A ﬂexible liner stretches over the pit and collects the biogas, inﬂating like a balloon. The biogas may be used to heat the digester, to heat farm buildings, or to produce electricity. A large facility capable of processing the dung from 500 cows costs nearly $300,000 (EPA 2000). The Environmental Protection Agency (EPA 2000) estimates that more than 2000 digesters could be economically installed in the United States. The amount of biogas produced is determined by the temperature of the system, the microbes present, the volatile solids content of the feedstock, and the retention time. A plug-ﬂow digester with an average manure retention time of ◦ about 16 days under winter conditions (17.4 C) produced 452,000 kcal/day and used ◦ 262,000 kcal/day to heat the digester to 35 C (Jewell et al. 1980). Using the same ◦ digester during summer conditions (25 C) but reducing the retention time to 10.4 days, the yield in biogas was 524,000 kcal/day, and it used 157,000 kcal/day for heating the digester (Jewell et al. 1980). The energy input per output ratios for these winter and summer conditions for the digester were 1:1.7 and 1:3.3, respectively. The energy output of biogas digesters is similar today (Hartman et al. 2000). In developing countries such as India, biogas digesters typically treat the dung from 15 to 30 cattle from a single family or a small village. The resulting energy produced for cooking saves forests and preserves the nutrients in the dung. The capital cost for an Indian biogas unit ranges from $500 to $900 (Kishore 1993). The price value of a kWh biogas in India is about $0.06 (Dutta et al. 1997). The total cost of producing about 10 million kcal of biogas is estimated to be $321, assuming the cost of labor to be $7/h; hence, the biogas has a value of $356. Manure processed for biogas has fewer odors and retains its fertilizer value (Pimentel 2001). 1.9 Ethanol and Energy Inputs The average costs in terms of energy and dollars for a large modern corn ethanol plant are listed in Table 1.4. In the fermentation/distillation process, the corn is ﬁnely ground and approximately 15 L of water are added per 2.69 kg of ground corn. After fermentation, to obtain a liter of 95% pure ethanol from the 8% ethanol and 92% water mixture, the 1 L of ethanol must be extracted from the approximately 13 L of the ethanol/water mixture. To be mixed with gasoline, the 95% ethanol must be Slide 29: 10 Table 1.4 Inputs per 1,000 L of 99.5% ethanol produced from corna Inputs Corn grain Corn transport Water Stainless steel Steel Cement Steam Electricity 95% ethanol to 99.5% Sewage efﬂuent Distribution Total a b D. Pimentel Quantity 2,690 kgb 2,690 kgb 15,000 Le 3 kgg 4 kgg 8 kgg 2, 546, 000 kcali 392 kWhi 9 kcal/Ll 20 kg BODm ◦ 331 kcal/L kcal × 1000 2,550b 322c 90f 165h 92h 384h 2,546i 1,011i 9l 69n 331 7,569 Dollars $ 287.36 21.40d 21.16f 10.60d 10.60d 10.60d 21.16j 27.44k 0.60 6.00 ◦ 20.00 $436.92 Output: 1 L of ethanol = 5,130 kcal. Pimentel (2003). c Calculated for 144 km roundtrip. d Pimentel (2003). e 15 L of water mixed with each 2.69 kg of grain. f Pimentel et al. (2004b). g Estimated. h Newton (2001). i Illinois Corn (2004). j Calculated based on the price of natural gas. k $.07 per kWh (USCB 2004–2005). l 95% ethanol converted to 99.5% ethanol for addition to gasoline (T. Patzek, personal communication, University of California, Berkeley 2004). m 20 kg of BOD per 1,000 L of ethanol produced (Kuby et al. 1984). n 4 kWh of energy required to process 1 kg of BOD (Blais et al. 1995). o DOE (2002). further processed and more water removed, requiring additional fossil energy inputs to achieve 99.5% pure ethanol (Table 1.4). Thus, a total of about 12 L of wastewater must be removed per liter of ethanol produced, and this relatively large amount of sewage efﬂuent has to be disposed of at an energy, economic, and environmental cost. To produce a liter of 99.5% ethanol uses 43% more fossil energy than the energy produced as ethanol and costs 44c per L ($1.66 per gallon or $2.76 per gallon in/ cluding the subsidy) (Table 1.4). The corn feedstock requires more than 33% of the total energy input. In this analysis the total cost, including the energy inputs for the fermentation/distillation process and the apportioned energy costs of the stainless steel tanks and other industrial materials, is $436.92 per 1,000 L of ethanol produced (Table 1.4). The largest energy inputs in corn-ethanol production are for producing the corn feedstock, plus the steam energy, and electricity used in the fermentation/distillation process. The total energy input to produce a liter of ethanol is approximately 7,570 kcal (Table 1.4). However, a liter of ethanol has an energy value of only 5,130 kcal. Based on a net energy loss of 2,440 kcal of ethanol produced, 43% more fossil energy is expended than is produced as ethanol. Slide 30: 1 Renewable and Solar Energy Technologies 11 1.10 Grasslands and Celulosic Ethanol Tilman’s research (Tillman et al. 2006) has merit in the explanation of ﬁeld experiments with various combinations of species of natural vegetation, and the productivity of diverse experimental systems. The outstanding, 30-year effort by the Land Institute in Kansas (Jackson 1980) to develop multi-species perennial ecosystems that deliver high productivity for long periods has been de facto endorsed by Tillman et al., albeit without acknowledgement. However, there are concerns about two items. First, the statement by Tillman et al. that crop residues, like corn stover, can be harvested and utilized as a fuel source. This would be a disaster for agricultural ecosystems. Without the protection of crop residues, soil loss may increase as much as 100-fold (Fryrear and Bilbro 1994). Already the U.S. crop system is losing soil 10 times faster than sustainability (NAS 2003). Soil formation rates are extremely slow or less than 1 t/ha/yr (NAS 2003, Troeh et al. 2004). Increased erosion will facilitate soil-C oxidation and contribute to the greenhouse problem (Lal 2003). Tillman et al. assume about 1,032 L of ethanol can be produced through the conversion of the 4 t/ha/yr of grasses harvested. However, Pimentel and Patzek (2007) reported a negative 50% return in switchgrass conversion. Based on the optimistic data of Tillman et al., and converting all 235 million ha of U.S. grassland into ethanol, only 12% of U.S. petroleum would be provided (USDA 2004, USCB 2004–2005). In addition, to achieve the production of this much ethanol would mean displacing about 100 million cattle, 7 million sheep, and 4 million horses now grazing on 324 million ha of U.S. grassland and rangeland (USDA 2004, Mitchell 2000). Already overgrazing is a problem on U.S. grasslands and a similar problem exists worldwide (Brown 2001). Thus, the assessment of the quantity of ethanol that can be produced on U.S. and world grasslands by Tillman et al. appears to be unduly optimistic. 1.11 Methanol and Vegetable Oils Methanol can be produced from a gasiﬁer-pyrolysis reactor using biomass as a feedstock (Hos and Groenveld 1987, Jenkins 1999). The yield from 1 ton of dry wood is about 370 L of methanol (Ellington et al. 1993, Osburn and Osburn 2001). For a plant with economies of scale to operate efﬁciently, more than 1.5 million ha of sustainable forest would be required to supply it (Pimentel 2001). Biomass is generally not available in such enormous quantities, even from extensive forests, at acceptable prices. Most methanol today is produced from natural gas. Processed vegetable oils from soybean, sunﬂower, rapeseed, and other oil plants can be used as fuel in diesel engines. Unfortunately, producing vegetable oils for use in diesel engines is costly in terms of economics and energy (Pimentel and Patzek 2005). A slight net return on energy from soybean oil is possible, if the soybeans are grown without commercial nitrogen fertilizer. The soybean under Slide 31: 12 D. Pimentel favorable conditions will produce its own nitrogen. Even assuming a slight net energy return with soy, the total United States would have to be planted to soybeans just to provide soy oil for U.S. trucks! 1.12 Transition to Renewable Energy Despite its environmental and economic beneﬁts, the transition to large-scale use of renewable energy presents several difﬁculties. Renewable energy technologies, all of which require land for collection and production, will compete with agriculture, forestry, and urbanization for land in the United States and world. The United States is at maximum use of its prime cropland for food production per capita today, but the world has less than half the cropland per capita that it needs for a diverse diet (0.5 ha) and adequate supply of essential nutrients (USDA 2004). In fact, more than 3.7 billion people are already malnourished in the world (UN/SCN 2004, Bagla 2003). With the world and US populations expected to double in the next 58 and 70 years, respectively, all the available cropland and forestland will be required to provide vital food and forest products (PRB 2006). As the growing U.S. and world populations demand increased electricity and liquid fuels, constraints like land availability and high investment costs will restrict the potential development of renewable energy technologies. Energy use based on current growth is projected to increase from the current U.S. consumption of 102 quads to approximately 145 quads by 2050. Land availability is also a problem, with the US population adding about 3.3 million people each year (USCB 2007). Each person added requires about 0.4 ha (1 acre) of land for urbanization and highways and about 0.5 ha of cropland (Vesterby and Krupa 2001). Renewable energy systems require more labor than fossil energy systems. For example, wood-ﬁred steam plants require several times more workers than coal-ﬁred plants (Giampietro et al. 1998). An additional complication in the transition to renewable energies is the relationship between the location of ideal production sites and large population centers. Ideal locations for renewable energy technologies are often remote, such as deserts of the American Southwest or wind farms located kilometers offshore. Although these sites provide the most efﬁcient generation of energy, delivering this energy to consumers presents a logistical problem. For instance, networks of distribution cables must be installed, costing about $179,000 per km 115-kV lines (DOE/EIA 2002). A percentage of the power delivered is lost as a function of electrical resistance in the distribution cable. There are complex alternating current electrical networks in North America, and 3 of these are tied together by DC lines (Nordel 2001). Based on these networks, it is estimated that electricity can be transmitted up to 1500 km. A sixfold increase in installed technologies would provide the United States with approximately 46 quads (thermal) of energy, less than half of current US consumption (Table 1.1). This level of energy production would require about 159 million ha Slide 32: 1 Renewable and Solar Energy Technologies 13 of land (17% of US land area). This percentage is an estimate, and could increase or decrease depending on how the technologies evolve and energy conservation is encouraged. Worldwide, approximately 473 quads of all types of energy are used by the population of more than 6.5 billion people (Table 1.1). Using available renewable energy technologies, an estimated 200 quads of renewable energy could be produced worldwide on about 20% of the world land area. A self-sustaining renewable energy system producing 200 quads of energy per year for about 2 billion people (Ferguson 2001) would provide each person with about 5,000 L of oil equivalents per year, approximately half of America’s current consumption per year, but an increase for most people of the world (Pimentel et al. 1999). The ﬁrst priority of the US energy program should be for individuals, communities, and industries to conserve fossil fuel resources and reduce consumption. Other developed countries have proved that high productivity and a high standard of living can be achieved with the use of half the energy expenditure of the United States (Pimentel et al. 1999). In the United States, fossil energy subsidies of approximately $40 billion per year should be withdrawn and the savings invested in renewable energy research and education to encourage the development and implementation of renewable technologies. If the United States became a leader in the development of renewable energy technologies, then it would likely capture the world market for this industry (Shute 2001). The current subsidies for ethanol production total $6 billion per year (Koplow 2006). This means that the subsidies per gallon of ethanol are 60 times greater than the subsidies per gallon of gasoline! 1.13 Conclusion This assessment of renewable energy technologies conﬁrms that these techniques have the potential to provide the nation with alternatives to meet nearly half of future U.S. energy needs. To develop this potential, the United States would have to commit to the development and implementation of non-fossil fuel technologies and energy conservation. People in the U.S. would have to reduce their current energy consumption by more than 50% and this is entirely possible. Eventually we will be forced to reduce energy consumption. The implementation of renewable energy technologies now would reduce many of the current environmental problems associated with fossil fuel production and use. The United States’ immediate priority should be to speed the transition from the reliance on nonrenewable fossil energy resources to reliance on renewable energy technologies. Various combinations of renewable technologies should be developed consistent with the characteristics of the different geographic regions in the United States. A combination of the renewable technologies listed in Table 1.3 should provide the United States with an estimated 46 quads of renewable energy by 2050. Slide 33: 14 D. Pimentel These technologies should be able to provide this much energy without interfering with required food and forest production. If the United States does not commit itself to the transition from fossil to renewable energy during the next decade or two, the economy and national security will suffer. 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Resource Economics Division, Economic Research Service, USDA, Statistical Bulletin No. 973. Retrieved October 20, 2002, from www.ers.usda.gov/publications/sb973/ Youngquist, W. (1997). GeoDestinies: The inevitable control of earth resources over nations and individuals. (Portland, OR: National Book Company.) Slide 37: Chapter 2 Can the Earth Deliver the Biomass-for-Fuel we Demand? Tad W. Patzek Abstract In this work I outline the rational, science-based arguments that question current wisdom of replacing fossil plant fuels (coal, oil and natural gas) with fresh plant agrofuels. This 1:1 replacement is absolutely impossible for more than a few years, because of the ways the planet Earth works and maintains life. After these few years, the denuded Earth will be a different planet, hostile to human life. I argue that with the current set of objective constraints a continuous stable solution to human life cannot exist in the near-future, unless we all rapidly implement much more limited ways of using the Earth’s resources, while reducing the global populations of cars, trucks, livestock and, eventually, also humans. Keywords Agriculture · agrofuel · biomass · bioreﬁnery · boundary · crop · ecology · energy · ethanol · fuel production · model · mass balance · net energy value · plantation · population · sustainability · thermodynamics · tropics · yield 2.1 Introduction The purpose of this work is to: 1. Show that the current and proposed “cellulosic” ethanol (a “second generation” agrofuel) reﬁneries are inefﬁcient, low energy-density concentrators of solar light. 2. Prove that even if these reﬁneries were marvels of efﬁciency, they still would be able to make but a dent in our runaway consumption of transportation fuels, because the Earth simply has little or no biomass to spare in the long run. The fundamental energy unit I use in this work is 1 exajoule (EJ) or 1018 joules T. W. Patzek Department of Civil and Environmental Engineering, The University of California, Berkeley, CA 94720 e-mail: patzek@patzek.ce.berkeley.edu D. Pimentel (ed.), Biofuels, Solar and Wind as Renewable Energy Systems, C Springer Science+Business Media B.V. 2008 19 Slide 38: 20 T.W. Patzek A little over four joules heats one teaspoon of water by 1 degree Celsius. One statistical American develops average continuous power of almost exactly 100 W (Patzek, 2007). One exajoule in the digested food feeds amply 300 million people1 for one year. The actual food available for consumption in the US is ca. 2 EJ yr−1 , and the entire food system uses ∼ 20 EJ yr−1 (Patzek, 2007). Currently, Americans are using about 105 EJ yr−1 (340 GJ (yr-person)−1 ), or 105 times more primary energy than needed as food. The EU countries use 80 EJ yr−1 of primary energy or 55% less energy per capita than US. Current consumption of all transportation fuels in the US is about 33 EJ yr−1 , see Fig. 2.1. A barely visible fraction of this energy comes from corn ethanol. According to current government plans, the amount of ethanol produced in the US will reach 35 billion gallons in 2017, see Fig. 2.2, but it is difﬁcult to imagine that a 30 billion gallon per year increase will come from corn ethanol. Before peaking2 in 2006, the world production of conventional petroleum grew exponentially at 6.6% per year between 1880 and 1970, see Fig. 2.3. The Hubbert 40 35 Fuel High Heating Value, EJ/year Motor Gasoline Residual Oil Distillate Oil Aviation Fuel Ethanol 381 billion gallons of ethanol 30 25 20 15 10 5 35 billion gallons of ethanol 130 billion gallons of ethanol 0 1950 1960 1970 1980 1990 2000 Fig. 2.1 Currently, the US consumes about 33 times more energy in transportation fuels than is necessary to feed its population. This amount of energy is equivalent to 381 billion gallons of ethanol per year. The amount of energy in corn-ethanol is barely visible and it shall always remain so unless we drastically (by a factor of two for starters) lower liquid fuel consumption. Current consumption of ethanol is about 1.2% of the total fuel consumption (without considering energy inputs to the production system) Source: DOE EIA 1 2 The US population in 2006. The short-lived rate peak around 1978 was caused by OPEC limiting its oil production. Slide 39: 2 Can the Earth Deliver the Biomass-for-Fuel we Demand 35 Exponential projection Logistic projection RFA data 2017 − Bush’s Goal 21 30 Billion gallons per year 25 20 15 10 5 0 1980 1985 1990 1995 2000 2005 2010 2015 2020 Fig. 2.2 By an exponential extrapolation of ethanol production during the last 7 years at 18.5% per year, one may arrive at 35 billion gallons per year in 2017. The less optimistic logistic ﬁt of the data plateaus at 14 billion gallons per year. Where will the remaining 21 billion gallons of ethanol come from each year? Sources: DOE EIA, Renewable Fuels Association (RFA) 103 Oil production rate, (HHV) EJ/year 102 101 100 10−1 1880 1900 1920 1940 1960 1980 2000 2020 Fig. 2.3 Exponential growth of world crude oil production between 1880 and 1970 proceeded at 6.6% per year Sources: lib.stat.cmu.edu/DASL/Dataﬁles/Oilproduction.html, US EIA Slide 40: 22 180 160 140 Petroleum, EJ/Year 120 100 80 60 270 billion gallons of ethanol per year T.W. Patzek World Oil Production US Oil Consumption 40 20 0 2000 2020 2040 2060 2080 2100 2120 2140 2160 2180 2200 Fig. 2.4 The estimated decline of conventional petroleum production in the world is the red curve. If nothing changes, the current petroleum consumption of petroleum in the US will grow with its estimated population and intercept the global production about 35 years from today Sources: US EIA, US Census Bureau, (Patzek, 2007) curves are symmetrical (Patzek, 2007) and predict world production of conventional petroleum to decline exponentially at a similar rate within a decade from now, or so. This decline can be arrested for a while by heroic measures (inﬁll drilling, horizontal wells, enhanced oil recovery methods, etc.), but the longer it is arrested the more precipitous it will become. If the current per capita use of petroleum in the US is escalated with the expected growth of US population, the US will have to intercept the entire estimated production of conventional petroleum3 in the world by 2042, see Fig. 2.4. In this scenario, the projected increment of US petroleum consumption between today and 2042 is equivalent to 270 billion gallons of ethanol per year. 2.2 Background Humans are an integral part of a single system made of all life and all parts of the Earth’s near-surface shown in Fig. 2.5. Thus, as President Vaclav Havel said on July 4, 1994: “Our destiny is not dependent merely on what we do to ourselves but also 3 I stress again that I am referring to conventional, readily-available petroleum. There will be an offsetting production from unconventional sources: tar sands, ultra-heavy oil, and natural gas liquefaction, all at very high energy and environmental costs. Slide 41: 2 Can the Earth Deliver the Biomass-for-Fuel we Demand Top of atmosphere 23 Earth Empty space Human existence Fig. 2.5 A system deﬁned by the mean Earth surface at Rearth and the top of the atmosphere at Rearth + 100 km, or outer space at Rearth + 400 km. Almost all of human existence occurs along the surface of the blue sphere (edge of the blue circle). As drawn here, the line thickness actually exaggerates the thickness of the life-giving membrane on which we exist. All radii are drawn to scale on what we do for [the Earth] as a whole. If we endanger her, she will dispense with us in the interest of a higher value - life itself.” So how to proceed? It appears that humanity’s survival is subject to these ﬁve constraints: Constraint 1: An almost exponential rate of growth of human population, see Fig. 2.6. Constraint 2: Too much use of Earth resources; in particular, fossil fuels; and even more speciﬁcally, liquid transportation fuels, see Fig. 2.7. Constraint 3: The Earth that is too small to feed in perpetuity 7 billion people and counting, 1 billion cows, and – now – 1 billion cars, see Fig. 2.8. Constraint 4: The ossiﬁed political structures in which more is better, and more of the same is also safer. Constraint 5: A global climate change. Unfortunately, these ﬁve constraints prevent existence of a stable continuous solution to human life in the near-future. Alternatively, we may choose from the following two discontinuous solutions: Solution 1: Extinguish ourselves and much of the living Earth, or Solution 2: Fundamentally and abruptly change, while slowly decreasing our numbers. 2.2.1 Problems with Change The last time humanity ran mostly on living plant carbon was approximately in 1760. There was 1 billion of us, and we certainly knew how to feed ourselves Slide 42: 24 9 8 7 6 5 4 3 2 1 0 −1000 T.W. Patzek World population, billions −500 0 500 Years, AD 1000 1500 2000 Fig. 2.6 The historical and projected world population. Note the explosive population growth since 1650, the onset of the latest Agricultural Revolution (the left vertical line), and its fastest stage since 1920, the start of large-scale production of ammonia fertilizer by the Haber-Bosch process (the right vertical line). Imagine yourself standing on the population high in 2050 and looking down Source: US Census Bureau due to the latest Agricultural Revolution that started in Europe a century earlier (Osborne, 1970). Our food supply problems then had to do with political madness, inaptitude, and greed – just as they do today (Davis, 2002). Today, however, there is almost 7 times more of us, see Fig. 2.6. We can still feed ourselves, but with huge inputs of fossil carbon in addition to fresh plant carbon, minerals, and soil. These inputs also mine fossil water and pollute surface water, aquifers, the oceans, and the atmosphere. By extrapolating human population growth between 1650 and 1920 to 2007, one estimates 2.2 billion people who today could live mostly on plant carbon, but use some coal, oil, and natural gas. Therefore it is reasonable to say that today 4.5 billion people4 owe their existence to the Haber-Bosch ammonia process and the fossil fuel-driven, fundamentally unstable “Green Revolution,” as well as to vaccines and antibiotics. Agrofuels are a direct outgrowth of the “Green Revolution,” which may be viewed, see Appendix 2, as a short-lived but violent disturbance of terrestrial ecosystems on the Earth. 4 All global population increase since 1940. Slide 43: 2 Can the Earth Deliver the Biomass-for-Fuel we Demand 25 160 140 Oil production rate, EJ/year 120 100 80 60 40 20 0 −1000 −500 0 500 Years, AD 1000 1500 2000 Fig. 2.7 World crude oil production plotted on the same time scale as Fig. 2.6. At today’s rate of fossil and nuclear fuel consumption in the US, the global endowment of conventional petroleum would sufﬁce to run the US for 130 years. Of course, by now, one-half of this endowment has been produced, and the US controls little of the remainder Fig. 2.8 Human-appropriated (HA) Net Primary Production (NPP) of the Earth. Global annual NPP refers to the total amount of plant growth generated each year and quantiﬁed as mass of carbon used to build stems, leaves and roots. Note that in the large portions of South and East Asia, Western Europe, Middle East, and eastern US, humans grab up to 1–2 times the net biomass production of local ecosystems. In large cities this ratio increases to 400 times. If this present human commandeering of global NPP is augmented with massive agrofuel production, the Earth ecosystems will collapse Source: The Visible Earth, NASA images, 06-25-2004, www.nasa.gov/vision/earth/environment/ 0624 hanpp.html Slide 44: 26 T.W. Patzek Since most people have cooked or ridden in a vehicle, many feel empowered to talk about energy as though they were experts. It turns out, however, that issues of energy supply, use, environmental impacts, and – especially – of free energy are too complicated for the adlib homilies we hear every day in the media. Professor Vardaraja Raman, a well-known physicist and humanist, said it best: “A major problem confronting society is the lack of knowledge among the public as to what science is, what constitutes scientiﬁc thinking and analysis, and what science’s criteria are for determining the correctness of statements about the phonomenological world.” It is a misconception that Constraint 2 can be removed with fresh plant carbon, while forgetting the scale of Constraint 1 and ignoring Constraint 3. Constraint 4 helps us to maintain that more biomass converted to liquid fuels means more of the same lifestyles, and a stable continuation of the current socioeconomic systems – Constraint 3 be damned.5 Constraint 5 plays the role of a wild card. Its unknown negative impacts may dwarf everything else I have mentioned in this work. Sun energy H2O, CO2 Nutrients Plant Matter “Forever” Death & Decay Waste heat Other life Waste heat Fig. 2.9 Using sunlight, carbon dioxide, water, and the recycled nutrients, autotrophic plants generate food for heterotrophic fungi, bacteria, and animals. All die in place, and their bodies are decomposed and recycled. Almost all mass is conserved, and only low quality heat is exported and radiated back into space. This sustainable earth household (ecosystem) may function “forever” compared with the human time scale In his review, Dr. Silin has pointed out to me a beautiful paper by von Engelhardt et al. (1975). This chapter contains several ideas similar or identical to the ideas expressed here. The following statement is particularly salient: “This [collective human experience of exponential growth] has fostered the popular notion that growth is synonymous with progress and that further improvements in the quality of human life will be contingent upon steady or increasing rate of growth, even though growth at an increasing rate cannot be sustained indeﬁnitely within the physical limits of a ﬁnite earth.” 5 Slide 45: 2 Can the Earth Deliver the Biomass-for-Fuel we Demand Waste heat 27 Stock of fossil fuels 500 years Chemical waste Fig. 2.10 A linear process of converting a stock of fossil fuels into waste matter and heat cannot be sustainable. The waste heat is exported to the universe, but the chemical waste accumulates. To replenish some of the fossil fuel stock, it will take another 50–400 million years of photosynthesis, burial, and entrapment This leads me to the ﬁrst major conclusion of this work: Business as usual will lead to a complete and practically immediate crash of the technically advanced societies and, perhaps, all humanity. This outcome will not be much different from a collapse of an overgrown colony of bacteria on a petri dish when its sugar food runs out and waste products build up. Today, the human “petri dish” is Earth’s surface in Fig. 2.5, and “food” is the living matter and water we consume and the ancient plant products and minerals (oil, natural gas, coal, etc.) we mine and burn. The Earth operates in endless cycles as in Fig. 2.9, and modern humans race along short line segments, as in Fig. 2.10 and 2.7. At each turn of her cycles, the Earth renews herself, but humans are about to wake up inside a huge toxic waste dump with nowhere to go. 2.3 Plan of Attack As you are beginning to suspect, it is not sufﬁcient to limit ourselves just to discussing liquid transportation fuels and their future biological sources. These transportation fuels intrude upon every other aspect of life on the Earth: Availability of clean water to drink and clean air to breathe, healthy soil and healthy food supply, destruction of biodiversity and essential planetary services in the tropics, acceleration of global climate change, and so on. As with many important policy-making decision processes, I start from the end, here the cellulosic ethanol reﬁneries. This is where most public money, attention, and hope are. I show that these reﬁneries are inefﬁcient compared with the existing petroleum- and corn-based reﬁneries, and are difﬁcult to scale up. Then I return to the beginning and show that even if the cellulosic biomass reﬁneries were marvels of efﬁciency, they still could not maintain our current lifestyles by a long stretch, simply because the Earth will not give us the extra Slide 46: 28 T.W. Patzek Fig. 2.11 In the fall of 1997, an orgy of 176 ﬁres in Indonesia burned 12 million ha of virgin forest and generated as much greenhouse gases as the US in one year. 133 of these illegal ﬁres were started by oil palm plantation/logging companies to steal old-growth trees and burn the rest for new plantations. The smoke and ozone plume had global extent Sources: NASA’s Earth Probe Total Ozone Mapping Spectrometer (TOMS), October 22, 1997; (Schimel and Baker, 2002; Page et al., 2002; Patzek and Patzek, 2007) biomass needed to keep on existing as we do. For a while we might continue to rob this biomass from the poor tropics, but the results are already disastrous for all humanity, see Fig. 2.11. 2.4 Efﬁciency of Cellulosic Ethanol Reﬁneries I start from a “reverse-engineering” calculation of energy efﬁciency of cellulosic ethanol production in an existing Iogen pilot plant, Ottawa, Canada. I then discuss the inﬂated energy efﬁciency claims of ﬁve out-of-six recipients of $385 millions of DOE grants to develop cellulosic ethanol reﬁneries. 2.4.1 Iogen Ottawa Facility Wheat, oat, and barley straw are ﬁrst pretreated with sulfuric acid and steam. Iogen’s patented enzyme then breaks the cellulose and hemicelluloses down into six- and Slide 47: 2 Can the Earth Deliver the Biomass-for-Fuel we Demand × 104 Iogen data Prediction 14 Cumulative production, gal EtOH 12 10 8 6 4 2 0 29 16 0 50 100 150 200 250 300 350 Days from April 1, 2004 Fig. 2.12 Ethanol production in Iogen’s Ottawa plant. Extrapolation to one year yields 158 000 gallons. Note that the data points are evenly spaced as they should be for regularly scheduled batches. Source: Jeff Passmore, Executive Vice President, Iogen Corporation, Cellulose ethanol is ready to go, Presentation to Governor’s Ethanol Coalition & US EPA Environmental Meeting “Ethanol and the Environment,” Feb. 10, 2006 ﬁve-carbon sugars, which are later fermented and distilled into ethanol. Normal yeast does not ferment the 5-carbon sugars, so genetically modiﬁed, delicate and patented yeast strains are used. Iogen’s plant has capacity of 1 million gallons of ethanol per year. The only published ethanol production is shown in Fig. 2.12. From Fig. 2.12 and a presentation6 by Maurice Hladik, Director of Marketing, Iogen Corp., the following can be deduced: r r r 158,000 gallons/year of anhydrous ethanol (EtOH), or 10 bbl EtOH/day = 6.7 bbl of equivalent gasoline/day were actually produced. In press interviews, logen claims to be producing 790,000 gallons of ethanol7 per year. There exists 2 × 52, 000 = 104, 000 gallons of fermentation tank volume. The actual ethanol production and tank volume give the ratio of 1.5 gallons of ethanol per gallon of fermenter and per year. Cellulose Ethanol is ready to go. Renewable Fuels Summit, June 12, 2006. It’s Happening in Ottawa – Grains become fuel at the world’s ﬁrst cellulosic ethanol demo plant, Grist, Sharon Boddy, 12 Dec., 2006. It is possible that the notoriously innumerate journalists confused liters with gallons: 790,000 liters is 200,000 gallons, much closer to the published data from Iogen. 7 6 Slide 48: 30 T.W. Patzek r r I assume 7-day batches + 2-day cleanups. Thus, there is ca. 4% of alcohol in a batch of industrial wheat-straw broth in contrast to 12 to 16% of ethanol in corn-ethanol reﬁnery broths. Since wheat is the largest grain crop in Canada, I use its straw as a reference (the other two straws are similar). On a dry mass basis (dmb), wheat straw has 33% of cellulose, 23% of hemicelluloses, and 17% total lignin.8 . Other sources report 38%, 29%, and 15% dmb, respectively, see (Lee et al., 2007) for a data compliation. These differences are not surprising, given experimental uncertainties and variable biomass composition. To calculate ethanol yield, I use the more optimistic, second set of data. The respective conversion efﬁciencies, assumed after Badger (2002), are listed in Table 2.1. The calculated ethanol yield, 0.18 kg EtOH (kg straw dmb)−1 , is somewhat less than a recently reported maximum ethanol yield of 0.24 kg/kg (Saha et al., 2005) achieved in 500 mL vessels, starting from 48.6% of cellulose. Simultaneous sacchariﬁcation and fermentation yielded 0.17 kg/kg, see Table 2.5 in Saha et al. (2005). Because enzymatic decomposition of cellulose and hemicelluloses is inefﬁcient, the resulting dilute broth requires 2.4 times more energy to distill than the average 15 MJL−1 in an average ethanol reﬁnery (Patzek, 2004; Patzek, 2006a), see Fig. 2.13. One may argue that Iogen’s Ottawa facility is for demonstration purposes only and that the sacchariﬁcation and fermentation batches were not regularly scheduled. In this case, an alternative calculation yields the same result: At about 0.2 to 0.25 kg of straw/L, the mash is barely pumpable. With Badger’s yield of 0.18 kg/kg of EtOH, the highest ethanol yield is 3.5 – 4.4% of ethanol in water. The higher heating value (HHV) of ethanol is 29.6 MJ kg−1 (Patzek, 2004). The HHV of wheat straw is 18.1 MJ kg−1 (Schmidt et al., 1993) and that of lignin 21.2 MJ kg−1 (Domalski et al., 1987). With these inputs the ﬁrst-law (energy) efﬁciency of Iogen’s facility is η= 0.28 × 29.6 ≈ 20% 1 × 18.1 + 0.18 × 2.4 × 15/0.787 − 0.15 × 21.2 Table 2.1 Yields of ethanol from cellulose and hemicellulose Step Dry straw Mass fraction Enzymatic conversion efﬁciency Ethanol stoichiometric yield Fermentation efﬁciency EtOH Yield, kg Source: Badger (2002) Cellulose 1 kg ×0.38 ×0.76 ×0.51 ×0.75 0.111 Hemicellulose 1 kg ×0.29 ×0.90 ×0.51 ×0.50 0.067 (2.1) 8 Biomass feedstock composition and property database. Department of Energy, Biomass Program, www.eere.energy.gov/biomass/progs/searchl.egi, accessed July 25, 2007. Slide 49: 2 Can the Earth Deliver the Biomass-for-Fuel we Demand 30 Theoretical Practical Iogen Demand 31 Kgs of Steam/Gallon Anhydrous EtOH 25 20 15 10 5 0 0 5 10 15 Volume % of Ethanol in Water Fig. 2.13 Steam requirement in ethanol broth distillation. The 3.7% broth requires 2.4 times more steam than a 12% broth Source (Jacques et al., 2003) where the density of ethanol is 0.787 kg L−1 and the entire HHV of lignin was used to offset distillation fuel (another optimistic assumption for the wet separated lignin). This calculation disregards the energy costs of high-pressure steam treatments of the straw at 120 or 140◦ C, and the separated solids at 190◦ C, sulfuric acid and sodium hydroxide production, etc. Also, the complex enzyme production processes must use plenty of energy. This analysis leads to the second conclusion: The Iogen plant in Ottawa, Canada, has operated well below name plate capacity for three years. Iogen should retain their trade secrets, but in exchange for the signiﬁcant subsidies from the US and Canadian taxpayers they should tell us what the annual production of alcohols was, how much straw was used, and what the fossil fuel and electricity inputs were. The ethanol yield coefﬁcient in kg of ethanol per kg straw dmb is key to public assessments of the new technology. Similar remarks pertain to the Novozymes projects heavily subsidized by the Danes. Until an existing pilot plant provides real, independently veriﬁed data on yield coefﬁcients, mash ethanol concentrations, etc., all proposed cellulosic ethanol reﬁnery designs are speculation. Slide 50: 32 T.W. Patzek 2.4.2 Proposed Cellulosic Ethanol Reﬁneries Now I present at face value the stated energy efﬁciencies9 of the six proposed10 cellulosic ethanol plants awarded 385 million USD by the US Department of Energy. Figure 2.14 ranks the rather imaginary claims of 5 out of 6 award recipients. For calibration, after 87 years of development and optimization, the actual energy efﬁciency of Sasol’s Fischer-Tropsch coal-to-liquid fuels plants is about 42% (Steynberg and Nel, 2004). The average energy efﬁciency of the highly optimized corn ethanol reﬁneries is 37% (not counting grain coproducts as fuels). An average petroleum reﬁnery is about 88% energy-efﬁcient.11 For details, see (Patzek, 2006a,b,c) The DOE/USDA report by Perlack et al. (2005) has led to the claims by an inﬂuential venture capitalist, Mr. Vinod Khosla (2006), of being able to produce 130 billion gallons of ethanol from 1.4 billion tons of biomass (dmb), apparently at a 52% thermodynamic efﬁciency. Range Fuels of Broomfield, CO Broin Companies of Sioux Falls, SD ALICO, Inc. of LaBelle, FL BlueFire Ethanol, Inc. of Irvine, CA Iogen Ottawa plant Avg.corn ethanol refinery Perlack et al. (2005) Avg petroleum refinery Iogen Bioref. Partners, of Arlington, VI Abengoa Bioenergy Biomass of KS 0 20 40 60 Energy efficiency, % 80 100 Fig. 2.14 Stated energy efﬁciencies of the six future cellulosic ethanol reﬁneries awarded $385 millions in DOE grants. The calculated energy efﬁciency (left line) of an existing cellulosic ethanol reﬁnery in Ottawa serves to calibrate the rather inﬂated efﬁciency claims of 5/6 grant recipients. Energy efﬁciencies of an average ethanol reﬁnery and petroleum reﬁnery (Patzek, 2006a) are also shown (second and last line from the left) 9 The HHV of ethanol out divided by the HHV of biomass in. No fossil fuels inputs into the plants and the raw materials they use are accounted for. 10 Environmental and Energy Study Institute, 122 C Street, N. W., Suite 630 Washington, D. C., 2001, www.eesi.org/publications/Press%20Releases/2007/2-28-07 doe bioreﬁnery awards.pdf 11 As pointed out by Drs. John Benemann and John Newman, this comparison may be unfair. No liquid fuel technology will ever match petroleum reﬁning, but petroleum-derived fuels will not last for very long. Slide 51: 2 Can the Earth Deliver the Biomass-for-Fuel we Demand 33 To see how very different the new fossil-energy-free world will be, let’s compare power from Iogen’s plant with that from an oil well in the US. Ever more power is what we must have to continue our current way of life (cf. Footnote 5). Iogen’s plant delivers the power of 7 barrels of oil per day (68 kW). Average power of petroleum wells in the largely oil-depleted US was 10 bbl (well-day)−1 in 200612 (98 kW). Therefore, an average US petroleum well delivers more power than a city-block size Iogen facility in Ottawa and its area of straw collection, probably 50 km in radius, which at this time is saturated with fossil fuels outright and their products (ammonia fertilizers, ﬁeld chemicals, roads, etc.). The petroleum well also uses little input power; unfortunately, soon petroleum will not be a transportation option. Such is the difference between solar energy stocks (depletable fossil fuels) and ﬂows (daily photosynthesis). One can calculate that an average agricultural worker in the US uses 800 kW of fossil energy inputs and outputs 3,000 kW. An average oil & gas worker in California uses 2,800 kW of fossil energy inputs and outputs 14,500 kW. Due to fossil energy and machines these two workers are supermen, each capable of doing the work of 8,000 and 28,000 ordinary humans, respectively. These two fellows are about to become human again, and we need to get used to this idea. Now, you may want to go back to Section 2.2.1 and rcread it. 2.5 Where will the Agrofuel Biomass Come from? Collectively, the EU and the US have spent billions of dollars to be able to construct the inefﬁcient behemoth factories, which in the distant future might ingest megatonnes or gigatonnes of apparently free biomass “trash” and spit out priceless liquid transportation fuels. It is therefore prudent to ask the following question: Call out using the new paragraph and gray background. The answer to this question is immediate and unequivocal: Nowhere, close to nothing, and for a very short time indeed. On the average, our planet has zero excess biomass at her disposal. 2.5.1 Useful Terminology Several different ecosystem13 productivities, i.e., measures of biomass accumulation per unit area and unit time have been used in the ecological literature, e.g., (Reichle et al., 1975; Randerson et al., 2001) and many others. Usually this biomass is expressed as grams of carbon (C) per square meter and per year, or as grams of water-free biomass (dmb) per square meter and year.14 The conversion 12 13 See www.cia.doe.gov/emeu/aer/txt/ptb0502.html, accessed July 25, 2007. An ecosystem is deﬁned in more detail in Appendix 1. 14 Or as kilograms (dmb) of biomass per hectare and per year. Slide 52: 34 T.W. Patzek factor between these two estimates is the carbon mass fraction in the fundamental building blocks of biomass, CHx O y , where x and y are real numbers, e.g., 1.6 and 0.6, that express the overall mass ratios of hydrogen and oxygen to carbon. The following deﬁnitions are common in ecology: 1. Gross Primary Productivity, GPP = mass of CO2 ﬁxed by plants as glucose. 2. Ecosystem respiration, Re = mass of CO2 released by metabolic activity of autotrophs, Ra , and heterotrophs (consumers and decomposers), Rh : Re = Ra + R h (2.2) where decomposers are deﬁned as worms, bacteria, fungi, etc. Plants respire about 1/2 of the carbon available from photosynthesis after photorespiration, with the remainder available for growth, propagation, and litter production, see (Ryan, 1991). Heterotrophs respire most, 82–95%, of the biomass left after plant respiration (Randerson et al., 2001). 3. Net Primary Productivity, NPP = GPP −Ra . 4. Net Ecosystem Productivity NEP = GPP − Re − Non − R sinks and ﬂows (2.3) The older NEP deﬁnitions would usually neglect the non respiratory losses, e.g., (Reichle et al., 1975). All ecological deﬁnitions of NEP I have seen, lump incorrectly mass ﬂows and mass sources and sinks, calling them “ﬂuxes,” see, e.g., (Randerson et al., 2001; Lugo and Brown, 1986). For more details, see Appendix 2. The typical net primary productivities of different ecosystems are listed in Appendix 3. 2.5.2 Plant Biomass Production The reason for the Earth recycling all of her material parts can be explained by looking again at Fig. 2.5. The Earth is powered by the sun’s radiation that crosses the outer boundary of her atmosphere and reaches her surface. The Earth can export into outer space long-wave infrared radiation.15 But, because of her size, the Earth holds on to all mass of all chemical elements, except perhaps for hydrogen. By maintaining an oxygen-rich atmosphere, life has managed to prevent the airborne hydrogen from escaping Earth’s gravity by reacting it back to water (and destroying ozone). 15 Therefore, the Earth is an open system with respect to electromagnetic radiation. Life could emerge on her and be sustained for 3.5 eons because of this openness. Slide 53: 2 Can the Earth Deliver the Biomass-for-Fuel we Demand 35 If all mass must stay on the Earth, all her households must recycle everything; otherwise internal chemical waste would build up and gradually kill them. Mother Nature does not usually do toxic waste landﬁlls and spills. In a mature ecosystem, one species’ waste must be another species’ food and no net waste is ever created, see Fig. 2.9. The little imperfections in the Earth’s surface recycling programs have resulted in the burial of a remarkably tiny fraction of plant carbon in swamps, lakes, and shallow coastal waters16 , see Fig. 2.15. Very rarely the violent anoxic events would kill most of life in the oceanic waters and cause faster carbon burial. Over the last 460,000,000 years (and going back all the way 180 2005 world soybean crop Carbon burial, Mega tonnes dry biomass/yr 160 140 120 100 80 2005 US soybean crop 60 40 −600 −500 −400 −300 Time, MYr −200 −100 0 Fig. 2.15 Plot of global organic carbon burial during the Phanerozoic eon. Carbon burial rate modiﬁed from Berner (2001, 2003). The units of carbon burial have been changed from 1018 mol C Myr−1 to Mt biomass yr−1 . The very high carbon burial values centered around 300 Myr ago are due predominantly to terrestrial carbon burial and coal formation. Most plants have been buried in swamps, shallow lakes, estuaries, and shallow coastal waters. Note that historically the average rate of carbon burial on the Earth has been tiny, half-way between the US- and world crops of soybeans in 2005. This burial rate amounts to 120 × 106 /110 × 109 × 100% = 0.1% of global NPP of biomass Much of this burial has been eliminated by humans. We have paved over most of the swamps and destroyed much of the coastal mangrove forests, the highest-rate local sources of terrestrial biomass transfer into seawater. 16 Slide 54: 36 T.W. Patzek to 2,500,000,000 years ago), the Earth has gathered and transformed some of the buried ancient plant mass into the fossil fuels we love and loath so much. The proper mass balance of carbon ﬂuxes in terrestrial ecosystems, see Appendix 2, conﬁrms the compelling, thermodynamic argument that sustainability of any ecosystem requires all mass to be conserved on the average. The larger the spatial scale of an ecosystem and the longer the time-averaging scale are, the stricter adherence to this rule must be. Such are the laws of nature. Physics, chemistry and biology say clearly that there can be no sustained net mass output from any ecosystem for more than a few years. A young forest in a temperate climate grows fast in a clear-cut area, see Fig. 2.16, and transfers nutrients from soil to the young trees. The young trees grow very fast (there is a positive NPP), but the amount of mass accumulated in the forest is small. When a tree burns or dies some or most of its nutrients go back to the soil. When this tree is logged and hauled away, almost no nutrients are returned. After logging young trees a couple of times the forest soil becomes depleted, while the populations of insects and pathogens are well-established, and the forest productivity rapidly declines (Patzek and Pimentel, 2006). When the forest is allowed to grow long enough, its net ecosystem productivity becomes zero on the average. 2.5 NPP Rh 2 NEP 1.5 kg/m2−yr 1 0.5 0 −0.5 0 100 200 300 Age, years 400 500 600 Fig. 2.16 Forest ecosystem biomass ﬂuxes simulated for a typical stand in the H. J. Andrews Experimental Forest. The Net Primary Productivity (NPP), the heterotrophic respiration (Rh ), and the Net Ecosystem Productivity (NEP) are all strongly dependent on stand age. This particular stand builds more plant mass than heterotrophs consume for 200 years. After that, for any particular year, an old-growth stand is in steady state and its average net ecosystem productivity is zero. Adapted from Songa and Woodcock (2003) Slide 55: 2 Can the Earth Deliver the Biomass-for-Fuel we Demand 37 Therefore, in order to export biomass (mostly water, but also carbon, oxygen, hydrogen and a plethora of nutrients) an ecosystem must import equivalent quantities of the chemical elements it lost, or decline irreversibly. Carbon comes from the atmospheric CO2 and water ﬂows in as rain, rivers and irrigation from mined aquifers and lakes. The other nutrients, however, must be rapidly produced from ancient plant matter transformed into methane, coal, petroleum, phosphates,17 etc., as well as from earth minerals (muriate of potash, dolomites, etc.), – all irreversibly mined by humans. Therefore, to the extent that humans are no longer integrated with the ecosystems in which they live, they are doomed to extinction by exhausting all planetary stocks of minerals, soil and clean water. The question is not if, but how fast? It seems that with the exponentially accelerating mining of global ecosystems for biomass, the time scale of our extinction is shrinking with each crop harvest. Compare this statement with the feverish proclamations of sustainable biomass and agrofuel production that ﬂood us from the confused media outlets, peer-reviewed journals, and politicians. 2.5.3 Is There any Other Proof of NEP = 0? I just gave you an abstract proof of no trash production in Earth’s Kingdom, except for its dirty human slums. Are there any other, more direct proofs, perhaps based on measurements? It turns out that there are two approaches that complement each other and lead to the same conclusions. The ﬁrst approach is based on a top-down view of the Earth from a satellite and a mapping of the reﬂected infrared spectra into biomass growth. I will summarize this proof here. The second approach involves a direct counting of all crops, grass, and trees, and translating the weighed or otherwise measured biomass into net primary productivity of ecosystems. Both approaches yield very similar results. 2.5.4 Satellite Sensor-Based Estimates Global ecosystem productivity can be estimated by combining remote sensing with a carbon cycle analysis. The US National Aeronautics and Space Administration Over millions of years, the annual cycles of life and death in ocean upwelling zones have propelled sedimentation of organic matter. Critters expire or are eaten, and their shredded carcasses accumulate in sediments as fecal pellets and as gelatinous ﬂocs termed marine snow. Decay of some of this deposited organic matter consumes virtually all of the dissolved oxygen near the seaﬂoor, a natural process that permits formation of ﬁnely-layered, organic-rich muds. These muds are a biogeochemical “strange brew,” where calcium – derived directly from seawater or from the shells of calcareous plankton – and phosphorus – generally derived from bacterial decay of organic matter and dissolution of ﬁsh bones and scales – combine over geological time to form pencil-thin laminae and discrete sand to pebble-sized grains of phosphate minerals. Source: Grimm (1998). 17 Slide 56: 38 T.W. Patzek (NASA) Earth Observing System (EOS) currently “produces a regular global estimate of gross primary productivity (GPP) and annual net primary productivity (NPP) of the entire terrestrial earth surface at 1-km spatial resolution, 150 million cells, each having GPP and NPP computed individually” (Running et al., 2000). The MOD17A2/A3 User’s Guide (Heinsch et al., 2003) provides a description of the Gross and Net Primary Productivity estimation algorithms (MOD17A2/A3) designed for the MODIS18 sensor. The sample calculation results based on the MOD17A2/A3 algorithm are listed in Table 2.2. The NPPs for Asia Paciﬁc, South America, and Europe, relative to North America, are shown in Fig. 2.17. The phenomenal net ecosystem productivity of Asia Paciﬁc is 4.2 larger than that of North America. The South American ecosystems deliver 2.7 times more than their North American counterparts, and Europe just 0.85. It is no surprise then that the World Bank19 , as well as agribusiness and logging companies – Archer Daniel Midlands (ADM), Bunge, Cargill, Monsanto, CFBC, Safbois, Sodefor, ITB, Trans-M, and many others – all have moved in force to plunder the most productive tropical regions of the world, see Fig. 2.18. Table 2.2 Version 4.8 NPP/GPP global sums (posted: 01 Feb 2007)a Yearb 2000 2001 2002 2003 2004 2005 a GPP (Pg C/yrc ) 111 111 107 108 109 108 NPPd (Pg C/yr) 53 53 51 51 52 51 Numerical Terradynamic Simulation Group, The University of Montana, Missoula, MT 59812, images.ntsg.umt.edu/index.php. b 2000 and 2001 were La Ni˜ a years, and 2002 and 2003 were weak El n Ni˜ o years. n c 1 Pg C = 1 peta gram of carbon = 1015 grams = 1 billion tonnes = 1 Gt of carbon. 50 Gt of carbon per year is equivalent to 1800 EJ yr−1 . d This represents all above-ground production of living plants and their roots. Humans cannot dig up all the roots on the Earth, so effectively ∼1/2 NPP might be available to humans if all other heterotrophs living on the Earth stopped eating. 18 MODIS (or Moderate Resolution Imaging Spectroradiometer) is a key instrument aboard the Aqua and Terra satellites. The MODIS instrument provides high radiometric sensitivity (12 bit) in 36 spectral bands ranging in wavelength from 0.4 to 14.4 μm. MODIS provides global maps of several land surface characteristics, including surface reﬂectance, albedo (the percent of total solar energy that is reﬂected back from the surface), land surface temperature, and vegetation indices. Vegetation indices tell scientists how densely or sparsely vegetated a region is and help them to determine how much of the sunlight that could be used for photosynthesis is being absorbed by the vegetation. Source: modis.gsfc.nasa.gov/about/media/modis brochure.pdf. 19 Source: (Anonymous, 2007). The World Bank through its huge loans is behind the largest-ever destruction of tropical forest in the equatorial Africa. Slide 57: 2 Can the Earth Deliver the Biomass-for-Fuel we Demand 39 Europe North America South America Asia Pacific 0 1 2 3 4 NPP relative to North America 5 Fig. 2.17 NPP’s of Asia-Paciﬁc, South America, and Europe – relative to North America Source: MOD17A2/A3 model According to a MODIS-based calculation (Roberts and Wooster, 2007) of biomass burned in Africa in February and August 2004, prior to the ﬁres shown here, the resulting carbon dioxide emissions were 120 and 160 million tonnes per month, respectively. The ﬁnal result of this global “end-game” of ecological destruction will be an unmitigated and lightening-fast collapse of ecosystems protecting a large portion of humanity.20 2.5.5 NPP in the US The overall median values of net primary productivity may be converted to the higher heating value (HHV) of NPP in the US, see Fig. 2.19. In 2003, thus estimated net annual biomass production in the US was 5.3 Gt and its HHV was 90 EJ. One must be careful, however, because the underlying distributions of ecosystem productivity are different for each ecosystem and highly asymmetric. Therefore, lumping them together and using just one median value can lead to a substantial systematic error. For example, the lumped value of US NPP of 90 EJ, underestimates the overall 20 For example, in the next 20 years, Australia may gain another 100 million refugees from the depleted Indonesia, look at Haiti for the clues. Slide 58: 40 T.W. Patzek Fig. 2.18 Hundreds of ﬁres were burning in the Democratic Republic of Congo and Angola on Dec 16, 2005 (top), and Aug 11, 2006 (bottom). Most of the ﬁres are set by humans to clear land for farming, rangelands, and industrial biomass plantations. In this way, vast areas of the continent are being irreversibly transformed Source: Satellite Aqua, 2 km pixels size. Images courtesy MODIS Land Rapid Response Team at NASA Slide 59: 2 Can the Earth Deliver the Biomass-for-Fuel we Demand 20 18 16 14 NPP HHV, EJ/month 12 10 8 6 4 2 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Mean Median 41 Fig. 2.19 A MOD17A2/A3-based calculation of US NPP in the year 2003. Monthly data for the mean and median GPP were acquired from images.ntsg.umt.edu/browse.php. The land area of the 48 contiguous states plus the District of Columbia = 7444068 km2 . Conversion to higher heating values (HHV) was performed assuming 17 MJ kg−1 dmb biomass. Conversion from kg C to kg biomass was 2.2, see Footnote b in Table 2.6 in Appendix 3. NPP = 0.47× GPP for 2003. The robust median productivity estimate of the 2003 US NPP is 90 EJ yr−1 2003 estimate21 of 0.408 × 7444068 × 106 × 17 × 106 × 2.2 × 10−18 = 113 EJ by some 20%. To limit this error, one can perform a more detailed calculation based on the 16 classes of land cover listed in Table 2.2 in (Hurtt et al., 2001). The MODIS-derived median NPPs are reported for most of these classes. The calculation inputs are shown in Table 2.3. Since the spatial set of land-cover classes cannot be easily mapped onto the administrative set of USDA classes of cropland, woodland, pastureland/rangeland, and forests, Hurtt et al. (2001) provide an approximate linear mapping between these two sets, in the form of a 16 × 4 matrix of coefﬁcients between 0 and 1. I have lumped the land-cover classes somewhat differently (to be closer to USDA’s classes), and the results are shown in Table 2.4 and Fig. 2.20. The Cropland + Mosaic class here comprises the USDA’s cropland, woodland, and some of the pasture classes. The Remote Vegetation class comprises some of the USDA’s rangeland and pastureland classes. The USDA forest class is somewhat larger than here, as some of the smaller patches of forest, such as parks, etc., are in the Mosaic class. Thus calculated 2003 US NPP is 118 EJ yr−1 , 74 EJ yr−1 of 21 The median 2003 US NPP of 0.408 kg Cm−2 yr−1 was posted at images.ntsg.umt. edu/browse.php. Slide 60: 42 Table 2.3 The 2003 US NPP by ground cover class Class 1 2 3 4 5 6 7 8 a b a T.W. Patzek Areaa 106 ha 219 123 38 33 124 3 95 118 2003 US NPPb 106 t ha−1 yr−1 893 603 1159 1694 620 966 1153 1153 Root:shootc 0.318 4.224 0.456 0.642 1.063 1.063 0.456 0.403 Cropland + Mosaicd Grassland Mixed forest Woody savannahe Open shrubland f Closed shrublandg Deciduous broadleaf forest Evergreen needleleaf forest Table 2.2 in (Hurtt et al., 2001). Numerical Terradynamic Simulation Group, The University of Montana, Missoula, MT 59812, images.ntsg.umt.edu/index.php. c Table 2.2 in (Mokany et al., 2006). d Lands with a mosaic of croplands, forests, shrublands and grasslands in which no one component covers more than 60% of the landscape. e Herbaceous and other understory systems with forest canopy cover over 30 and 60%. f Woody vegetation with less than 2 m tall and with shrub cover 10 to 60%. g Woody vegetation with less than 2 m tall and with shrub cover >60%. above-ground (AG) plant construction and 44 EJ yr−1 in root construction. In addition 12/74 = 17% of AG vegetation is in remote areas, not counting the remote forested areas. Note that my use of land-cover classes and their typical root-to-shoot ratios yields an overall result (118 EJ yr−1 ) which is very similar to that derived by the Numerical Terradynamic Simulation Group (113 EJ yr−1 ). Therefore, the DOE/USDA proposal to produce 130 billion gallons of ethanol from 1400 million tonnes of biomass (Perlack et al., 2005) each year – and year-after-year –, would consume 32% of the remaining above-ground NPP in the Table 2.4 The 2003 US NPP by lumped ground cover classes Classa 1 2 3 4 5 a b Areaa 106 ha 219 123 160 252 754 2003 US NPPb 106 t ha−1 yr−1 1484.8 142.3 724.1 2030.0 2575.0 HHVc EJ yr−1 25.2 2.4 12.3 34.5 43.8 Cropland + Mosaic Pastures Remote vegetationd Foreste Roots f Derived from Table 2.2 in (Hurtt et al., 2001) and USDA classes In classes 1 − 4, only above-ground biomass is reported. Class 5 lumps all the roots. The calculations here are based on Table 2.3 with the multiplier of 2.2 to convert from carbon to biomass. c The higher heating value with 17 MJ kg−1 on the average. d Classes 4 + 5 + 6 in Table 2.3. e Classes 3 + 7 + 8 in Table 2.3. f Note that roots comprise 44/74 = 59% of NPP. Also the land cover classes here account for 97% of US land area. Slide 61: 2 Can the Earth Deliver the Biomass-for-Fuel we Demand Primary Energy Use 105 EJ/yr NPP 118 EJ/yr 43 Biomass for agrofuels 1.4 or 2.8 Gt/yr EJ/yr 100 Crude Oil 75 Cropland + Mosaic 50 Coal Pastures Current corn ethanol Forest 25 Natural Gas Perlack Report Remote vegetation 0 Nuclear Biomass Hydro –25 Roots –44 Fig. 2.20 Primary energy consumption and net primary productivity (NPP) in the US in 2003. The annual growth of all biomass in the 48 contiguous states plus the District of Columbia has been translated from gigatonnes per year to the higher heating value of this biomass growth in exajoules per year. The USDA/DOE proposal (Perlack et al., 2005) to produce 130 billion gallons of ethanol per year from 1.4 billion tonnes of biomass would consume 32% of above-ground NPP in the US at a 52% conversion efﬁciency, or 64% at the current efﬁciency of the corn-ethanol cycle (Patzek, 2006a) Sources: EIA, Numerical Terradynamic Simulation Group, and (Patzek, 2007) US, see Fig. 2.20, if one assumes a 52% energy-efﬁciency of the conversion.22 At the current 26% overall efﬁciency of the corn-ethanol cycle (Patzek, 2006a), roughly 64% of all AG NPP in the US would have to be consumed to achieve this goal with zero harvest losses.23 To use more than half of all accessible above-ground plant growth in all forests, rangeland, pastureland and agriculture in the US to produce 22 As I mentioned before, this efﬁciency is close to the theoretical thermodynamic efﬁciency of the Fischer-Tropsch process never practically achieved with coal, let alone biomass. After 87 years of research and production experience current F. T coal plants achieve a 42% efﬁciency, see, e.g., (Steynberg and Nel, 2004). 23 In forestry, roughly 1/2 of AG biomass is exported as tree logs; the rest is lost and burned. Slide 62: 44 T.W. Patzek agrofuels would be a continental-scale ecologic and economic disaster of biblical proportions.24 2.6 Conclusions I have shown that the Earth simply cannot produce the vast quantities of biomass we want to use to prolong our unsustainable lifestyles, while slowly committing suicide as a global human civilization. In passing, I have noted that the “cellulosic biomass” reﬁneries are very inefﬁcient, currently impossible to scale, and incapable of ever catching up with the runaway need to feed one billion gasoline- and diesel-powered cars and trucks. Acknowledgments This work was carefully reviewed and critiqued by Drs. John Benemann, Ignacio Chapela, John Newman, Ron Steenblik, Ron Swenson, and Dmitriy Silin, as well as my Ph.D. graduate student, Mr. Greg Croft, and my son Lucas Patzek. I am very grateful to the reviewers for their valuable suggestions, thoroughness, directness, and dry sense of humor. The opnions expressed in this work are those of the author, who is solely responsible for its content and any errors or omissions. References Anonymous 2007, Carving up the Congo, Report, Parts I – III, Greenpeace, Washington, DC, www.greenpeace.org/usa/news/rainforest-destruction-in-afri Badger, P. C. 2002, Trends in new crops and new uses, Chapter. Ethanol from Cellulose: A General Review, pp 17–21, ASHS Press, Alexandria, VA. Berner, R. A. 2001, Modeling atmospheric O2 over Phanerozoic time, Geochim. Cosmochim. Acta 65: 685–694. Berner, R. A. 2003, The long-term carbon cycle, fossil fuels and atmospheric composition, Nature 426: 323–326. Bird, R. B., Stewart, W. E., and Lightfoot, E. 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C. 2005, Biomass as feedstock for a bioenergy and bioproducts industry: The technical feasibility of a billion-ton annual supply, Joint Report, Prepared by U.S. Department of Energy, U.S. Department of Agriculture, Environmental Sciences Division, Oak Ridge National Laboratory, P.O. Box 2008, Oak Ridge, Tennessee 37831–6285, Managed by: UT-Battelle, LLC for the U.S. Department of Energy under contract DE-AC05-00OR22725 DOE/GO-102005-2135 ORNL/TM-2005/66 Slide 64: 46 T.W. Patzek Randerson, J. T., Chapin, F. S., Harden, J. W., Neff, J. C., and Harmone, M. E. 2001, Net ecosystem production: A comprehensive measure of net carbon accumulation by ecosystems, Ecological Applications 12(4): 2937–947. Reichle, D. E., O’Neill, R. V., and Harris, W. F. 1975, Unifying concepts in ecology, Chapter Principles of energy and material exchange in ecosystems, pp. 27–43, Dr. W. Junk B. V. Publishers, The Hague, The Netherlands. Ricklefs, R. E. (ed.) 1990, Ecology, W. H. 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Schmidt, A., Zschetzsche, A., and Hantsch-Linhart, W. 1993, Analyse von biogenen Brennstoffen, Report, TU Wien, Institut f¨ r Verfahrens-, Brennstoff- und Umwelttechnik, Vienna, Austria, u www.vt.tuwien.ac.at/Biobib/fuel98.html Smil, V. 1985, Carbon – Nitrogen – Sulfur – Human Interferences in Grand Biospheric Cycles, Plenum Press, New York and London. Songa, C. and Woodcock, C. E. 2003, A regional forest ecosystem carbon budget model: Impacts of forest age structure and landuse history, Ecol. Modell. 164: 33–47. Steynberg, A. P. and Nel, H. G. 2004, Clean coal conversion options using Fischer-Tropsch technology, Fuel 83(6): 765–770. Stocking, M. A. 2003, Tropical Soils and Security: The Next 50 years, Science 302(5649): 1356–1359. von Englehardt, W., Goguel, J., Hubbert, M. K., Prentice, J. E., Price, R. A., and Tr¨ mpy, R. 1975, u Earth Resources, Time, and Man - A Geoscience Perspective, Environ. Geol. 1: 193–206. Webster 1993, Webster’s Third New International Dictionary of the English Language – Unabridged, Encyclopædia Britannica, Inc., Chicago. Appendix 1: Ecosystem Deﬁnition and Properties As shown in Fig. 2.9, the autotrophic25 plants capture CO2 from the atmosphere, and water and dissolved nutrients26 from soil. Using solar light, plants convert all these chemical inputs into biomass through photosynthesis, see Fig. 2.21. Plants are food to the plant-eating heterotrophs:27 animals, fungi, and bacteria. All die in place and their bodies are recycled for nutrients. Heterotrophs consist of consumers and decomposers. Consumers eat mostly living tissues. Decomposers consume dead organic matter and mineralize28 it. 25 26 From Greek autotrophos supplying one’s own food (Webster, 1993). Water-soluble chemical compounds rich in N, P, K, Ca, Mg, S, Fe, etc. 27 Requiring complex organic compounds of nitrogen, phosphorous, sulfur, etc., and carbon (as that obtained from plant or animal matter) for metabolic synthesis (Webster, 1993). 28 For example, nitrogen can be transformed into inorganic molecules assimilable by plants, such as the aqueous ammonium or nitrate ions, as well as nitrogen dioxide, by (1) microbial ﬁxation Slide 65: 2 Can the Earth Deliver the Biomass-for-Fuel we Demand Sun O2 H2O 47 Light Reactions Photosyn thesis NADPH+ATP NADP++ADP+PI CO2 Dark Reactions CO2 Glucose Respiration H2O O2 Fig. 2.21 The light reactions use photons to strip protons from water and store energy in NADPH (nicotinamide adenine dinucleotide phosphate) and ATP (adenosine 5 -triphosphate nucleotide). Both these molecules are used to reduce CO2 and combine carbon with hydrogen and phosphate in the Calvin Cycle or dark reactions: 3CO2 + 9ATP + 6NADPH → glyceraldehyde3-phosphate +9ADP + 8PI + 6NADP+ . Here ADP is adenosine diphosphate, PI is inorganic phosphate, and NADP+ is the oxidized form of NADPH. Glyceraldehyde-3-phosphate may be converted to other carbohydrates such as metabolites (fructose-6-phosphate and glucose-1-phosphate), energy stores (sucrose or starch), or cell-wall constituents (cellulose and hemicelluloses). By respiring plants consume O2 and convert their energy stores back to CO2 and water Deﬁnition 1. An ecosystem (an earth household) is a community of living organisms that interact with their non living physical environment (habitat). Most elements of an ecosystem are thoroughly connected (Lovelock, 1979; Lovelock, 1988; Capra, 1996), but over limited spacial scales.29 In addition to solar energy and inorganic matter, the three basic structural and functional components of an ecosystem are autotrophs, heterotrophs and dead organic matter. of the atmospheric N2 and (2) by microbial mineralization of organic nitrogen in soil. Conversely, soil nitrogen is returned back to the atmosphere through microbial denitriﬁcation. The opposite process, oxidation of dissolved ammonia to nitrite and nitrate, is called nitriﬁcation. For details, see Smil (1985). 29 In order for an ecosystem to be stable and its emerging properties at a larger scale be independent of the structural details of the smaller scales, the covariances of everything must decline at least exponentially with distance scaled by a yardstick characteristic of the smaller scales. Slide 66: 48 T.W. Patzek Inputs to an ecosystem are biotic30 and abiotic: 1. Abiotic inputs are solar energy, the atmospheric gases (CO2 , O2 , N2 , NOx and SOx ), mineral nutrients in the soil, rain, surface water, and groundwater. 2. Biotic inputs are organisms that move into the ecosystem, but also organic compounds: proteins, lipids, carbohydrates, humic acid, etc. Some dead organisms are buried in swamps, lakes, shallow coastal waters, etc., see Fig. 2.15, and some nutrients are imported with ﬂoods and rain, while some are exported by rivers and wind. A vast majority of the biomass is, however, recycled within the boundaries of the mother ecosystem31 in agreement with the Second Law of thermodynamics. This way, a buffalo might eat a wolf, whose bones were incorporated as phosphorous in the prairie grass. Ecosystems change with time, organisms live and die, and move in and out. Ecosystems are subject to many disturbances: ﬂoods, ﬁre, storms, droughts, invasions, and so on. Appendix 2: Mass Balance of Carbon in an Ecosystem An eco-system is a system known to thermodynamics only if a three-dimensional surface32 fully enveloping the system’s contents is imagined for the life-span of the ecosystem. Of course, this surface may itself be time-dependent, but not here. Once there is a boundary, the carbon mass accumulation in the ecosystem is deﬁned through the carbon mass ﬂow crossing its boundary, and the interior carbon sources and sinks. The general mass-balance equation that describes all physical systems, (see, e.g., Bird et al., 1960), can be written for carbon in the following way: dc dt Rate of living carbon accumulation + =− Boundary F·ndA Net rate of ﬂow out Sources − Sinks kg C s−1 (2.4) Net rate of production inside Here F is the overall carbon ﬂux vector, n is the unit outward normal to the system boundary, and the summation (integral) is over the entire system boundary. Of, relating to, or caused by living organisms (Webster, 1993). Most ecosystems do not have distinct natural boundaries. Boundaries chosen by us in most cases are arbitrary subdivisions of a continuous gradation of communities. 32 A 3D curvilinear box extending above the tallest feature of the ecosystem, and below topsoil, river, lake and stream bottoms, etc. 31 30 Slide 67: 2 Can the Earth Deliver the Biomass-for-Fuel we Demand 49 The sources inside the system volume are the photosynthesizing autotrophs, and the sinks are the respiring autotrophs and heterotrophs, ﬁres, soil carbon oxidation, volatile hydrocarbon production, etc. The overall carbon ﬂux F is the vector sum of several different mechanisms of carbon mass exchange, such as convection with air, convection with moving heterotrophs, convection with soil-, river- and ﬂood water, convection with eroded soil, etc. Each of the particular ﬂuxes is nonzero over those parts of the system boundary where it operates and zero elsewhere. ˙ Let’s deﬁne m i , the overall outward carbon mass ﬂow rate due to a speciﬁc ﬂux i; Gross Primary Production (GPP), the sum of autotroph photosynthesis sources; Ra , the overall autotroph respiration sink; Rh , the overall heterotroph respiration sink; R f , the overall ﬁre sink; Rv , the overall volatile hydrocarbon production sink; Rs , the soil carbon oxidation sink; Rb , the carbon burial sink; etc. ˙ mi = Boundary Fi · nd A Sources Sinks (2.5) GPP = R = Ra + R h + R f + Rv + Rs + · · · = Then dc =− dt ˙ m i + GPP − i (Ra + Rh ) Ecosystem Respiration Re − (R F + Rv + Rs . . .) Non respiratory sinks of C (2.6) In order to correspond to the dominant time scale of observations, the “instantaneous” carbon mass balance equation must be further time-averaged, as denoted by the angular brackets: 1 τ2 − τ1 τ2 τ1 dC dt = − dt + i 1 τ2 − τ1 τ2 τ1 ˙ m i (t)dt+ τ2 τ2 1 1 GPP(t)dt − R(t)dt τ2 − τ1 τ1 τ2 − τ1 τ1 C(τ2 ) − C(τ1 ) dC ˙ =− = < m i > + < GPP > − < R > τ2 − τ1 dt i (2.7) Net Ecosystem Productivity < NEP > Note that in spirit, the last Eq. (2.7) is similar to Eqs. (2.1) and (2.2) in Randerson et al. (2001), which unfortunately do not distinguish between ﬂuxes and sources and sinks. Slide 68: 50 T.W. Patzek NEP is deﬁned here as the net carbon accumulation by an ecosystem, just as in Randerson et al. (2001). It explicitly incorporates all of the carbon ﬂuxes from an ecosystem, and the interior sources and sinks, including lateral transfers among ecosystems, autotrophic respiration, heterotrophic respiration, losses associated with disturbances, dissolved and particulate carbon losses, carbon burial, and volatile organic compound emissions. Now, if the time of observation is long enough, the average rate of carbon accumulation in a stable ecosystem should tend to zero because of the Second Law of thermodynamics. Global carbon burial has been about 0.1 percent of terrestrial NPP, see Fig. 2.15. Thus, on a time scale of a couple of centuries (Lugo and Brown, 1986; Berner, 2001, 2003), one may postulate that the rate of carbon accumulation is minuscule compared with the ﬂuxes, sources and sinks, and < NEP >≈ 0 (2.8) Given enough time, stable ecosystems will settle into steady states and recycle almost all carbon (and all other nutrients) in them, see Table 2.5. Table 2.5 Summary of carbon ﬂuxes in terrestrial ecosystems. Adapted from Tables 2.1 and 2.2 in (Randerson et al., 2001) and NASA MODIS data in Table 2.2 Concept Gross primary production Autotrophic respiration Net primary production Heterotrophic respiration (on land) Ecosystem respiration Non-CO2 losses Non-respiratory CO2 losses (ﬁre) Net ecosystem production a b Acronym symbol GPP Ra NPP Rh Re Rv + Rs Rf NEP Global ﬂux 110 Gt C/yr ∼1/2 of GPP ∼1/2 of. GPP 82 – 95% of NPP 91 – 97% of GPP 2.8 – 4.9 Gt C/yr 1.6 – 4.2 Gt C/yr 0 ± 2.0 Gt C/yr Deﬁnition a b GPP Ra c Ra + R h d e f Carbon uptake by plants during photosynthesis, see Table 2.2. Respiratory (CO2 ) loss by plants for construction, maintenance, or ion uptake, see Table 2.2. c Respiratory (CO2 ) loss by the heterotrophic community (herbivores, microbes, etc.). d CO, CH4 , isoprene (2-methylbuta-1,3-diene), dissolved inorganic and organic carbon, erosion, etc. These losses are 2.6–4.5% of GPP. e Average combustion ﬂux of CO2 is 1.5–3.8% of GPP Extreme events, such as the 1997–98 El Ni˜ o ﬁrestorms in Indonesia are excluded. n f Total carbon accumulation within the ecosystem: GPP - Re − R f Rv − Rs − . . .. All human crops export about 1.2–1.5 Gt C/yr from agricultural ecosystems, while crop residues contain another 1.3–1.5 Gt C/yr. Slide 69: 2 Can the Earth Deliver the Biomass-for-Fuel we Demand 51 Soils, landscapes, and plant communities evolve together through an interdependence on the difference between the rate of soil erosion and soil production (Montgomery, 2007). At steady state this difference must be zero on the average., i.e., the soil erosion rate is equal to the geologic rate of soil production and some equilibrium thickness of soil persists over long time intervals. Geological erosion rates generally increase from the gently sloping lowland landscape (<10−4 to 1 mm/yr), to moderate gradient hillslopes of soil-mantled terrain (0.001–1 mm/yr), and steep tectonically active alpine landscapes (0.1 to >10 mm/yr) (cf. Montgomery (2007) and the references therein). Rates of soil erosion under conventional agricultural practices almost uniformly exceed 0.029–0.173 mm/yr (the median and mean geological rate of soil production, respectively), according to the data compiled by Montgomery (2007) exhibiting the median and mean values > 1 mm/yr. Erosion rates on the steep mountain slopes in Indonesia easily exceed 30 mm/yr (Napitupulu and Ramu, 1982), and the humandisturbed soil can disappear there within days or months, rather than years. Rates of erosion reported under native vegetation and conventional agriculture show 1.3- to > 1000-fold increases, with the median and mean ratios of 18- and 124-fold, respectively, for the studies complied by Montgomery (2007). From my work on the tropical plantations (Patzek and Pimentel, 2006) it follows that the respective ratios are even higher in the mechanicallydisturbed hilly landscapes. For this and many other reasons, humanity’s experiment with “Green Revolution” is just a large but temporary disturbance of natural ecosystems driven by a gigantic multi-decade subsidy with old plant carbon (fossil fuels, fertilizers, and ﬁeld chemicals) into the vastly simpliﬁed, fasteroding, and – therefore – unstable agricultural systems. As such, these latter systems will never test Eq. (2.8). They will fail much sooner instead.33 In addition, a long time-average of the net carbon ﬂow rate out of the system may also be negligible, as most of it is the CO2 ﬂow rate in for photosynthesis minus the CO2 ﬂow rate out from respiration. The extreme events,34 such as ﬁres and ﬂoods, will be averaged out and in a stable ecosystem soil erosion should also be low (or the ecosystem would not survive, see Fig. 2.22). The time-averaged rate of 33 “One alternative.” Prof. Harvey Blanch notes, “is to bioengineer a low-lignin crop that does not require fertilizer, that doesn’t need much water, and that could be grown on land not suitable for food crops. The problem is that lignin is what makes the plant stalks rigid, and without it, a plant would probably be ﬂoppy and difﬁcult to harvest. And of course,” he adds, “there might be public resistance to huge plantations of a genetically-modiﬁed organism.” Global warming - Building a sustainable biofuel production system, The News Journal, College of Chemistry, University of California, Berkely, 14(1), 2006. 34 Disturoances in the ecology parlance. Slide 70: 52 T.W. Patzek Fig. 2.22 Maize crop yields decay exponentially with eroded soil for a selection of tropical soils: Yields = 4000 exp[Cumulative Erosion/r ], r = 20–300 t ha−1 . The initial yield level is set artiﬁcally to 4 tonnes of grain needed by one typical household for 1 year in the subhumid tropics. The cumulative erosion of 10 t ha−1 ≈ 1 mm of soil loss. So a loss of 2 cm of topsoil in the tropics is catastrophic. Adapted from Fig. 2.1 of Stocking (2003) volatile hydrocarbon emissions must be relatively low too, and, therefore, one may postulate that < GPP > − < R >≈ 0 (2.9) When averaged over a sufﬁciently long time, the gross ecosystem productivity is roughly equal to the total rate of carbon consumption inside the ecosystem. The orgin of this postulate is also the Second Law of thermodynamics. Appendix 3: Environmental Controls on Net Primary Productivity Net primary productivity is equal to the product of the rate of photosynthesis per unit leaf area and the total surface area of the active leaves per unit area of land, minus the rate of plant respiration per unit area of land. Given sufﬁcient plant nutrients and substrates, temperature and moisture control the rate of photosynthesis. Slide 71: 2 Can the Earth Deliver the Biomass-for-Fuel we Demand 53 Extremely cold and hot temperature limit the rate of photosynthesis. Within the range of temperatures that are tolerated, the rate of photosynthesis generally rises with temperature. Most biological metabolic activity takes place between 0 and 50◦ C. The optimal temperatures for plant productivity coincide with the 15–25◦ C optimum temperature range of photosynthesis. A growing season is the period when temperatures are sufﬁciently warm to support synthesis and a positive net primary production. Warmer temperatures support both higher rates of photosynthesis and a longer growing season, resulting in a higher net primary production – if there are sufﬁcient water and nutrients. The amount of water available to the plant will therefore limit both the rate of photosynthesis and the area of leaves that can be supported. The inﬂuence of temperature and water availability is interrelated. It is the combination of warm temperature and water supply adequate to meet the demands of transpiration that results in the highest values of primary productivity. Net primary production in ecosystems varies widely, cf. Fig. 2.7 in Cramer et al. (1995) and Table 2.6: 1. The most productive terrestrial ecosystem are tropical evergreen rainforests with high rainfall and warm temperatures. Their net primary productivity ranges from 700 to 1400 gCm−2 yr−1 . 2. Temperate mixed forests produce between 400 and 1000 gCm−2 yr−1 . 3. Temperate grassland productivity is between 200 and 500 gCm−2 yr−1 . Table 2.6 Average net primary productivity of ecosystems Ecosystem Swamp and marsh Algal bed and reef Tropical forest Estuary Temperate forest Boreal forest Savanna Cultivated land Woodland and shrubland Grassland Lake and stream Upwelling zone Continental shelf Tundra and alpine meadow Open ocean Desert scrub Rock, ice, and sand a b Valuea gCm−2 yr−1 1130 900 830 810 560 360 320 290 270 230 230 230 160 65 57 32 15 Valueb gCm−2 yr−1 2500 2000 1800 1800 1250 800 700 650 600 500 500 – 360 140 125 70 – www.vendian.org/envelope/Temporary.URL/draft-npp.html (Ricklefs, 1990). Note that Column 2 is ∼Column 1 × 2.2, corresponding to the mean molecular weight of dry biomass of 26 g/mol per 1 carbon atom, a little less than 27 g/mol in glucose starch, CH2 O − 1/6H2 O. A typical molecular composition of dry woody biomass is CH1.4 O0.6 , MW = 23 g/mol. Slide 72: 54 T.W. Patzek 4. Arctic and alpine tundra have productivities of 0 to 300 gCm−2 yr−1 . 5. Productivity of the open sea is generally low, 10 to 50 gCm−2 yr−1 . 6. Given equal nutrient supplies, productivity in the open waters of the cool temperate oceans tends to be higher than than of the tropical waters. 7. In areas of upwelling, as near the tropical coast of Peru, productivity can exceed 500 gCm−2 yr−1 . 8. Coastal ecosystem and continental shelves have higher productivity than open ocean. 9. Swamps and marshes have a net primary production of 1100 gCm−2 yr−1 or higher. 10. Estuaries and coral reefs have a net primary productivity of 900 gCm−2 yr−1 . This is caused by the inputs of nutrients from rivers and tides in estuaries, and the changing tides in coral reefs. High primary productivity results from an energy subsidy to the (generally small) ecosystem. This subsidy results from a warmer temperature, greater rainfall, circulating or moving water that carries in food or additional nutrients. In the case of agriculture, the subsidy comes from fossil fuels for cultivation and irrigation, fertilizers, and the control of pests. Sugarcane has a net productivity of 1700–2500 g m−2 yr−1 of dry stems, and hybrid corn in the US 800–1000 gm−2 yr−1 of dry grain. Glossary To be readable, many of the descriptions below are not most rigorous: Ecosystem: A system that consists of living organisms (plants, bacteria, fungi, animals) and inanimate substrates (soil, minerals, water, atmosphere, etc.), on which these organisms live. Energy: Energy is the ability of a system to lift a weight in a process that involves no heat exchange (is adiabatic). Total energy is the sum of internal, potential and kinetic energies. Energy, Free That part of internal energy of a system that can be converted into work. You can think of free energy as the amount of electricity that can be generated from something that changes from an initial to a ﬁnal state (e.g., by burning a chunk of coal in a stove and doing something with the heat of combustion). Energy, Primary: Here the heat of combustion (HHV) of a fuel (coal, crude oil, natural gas, biomass, etc.), potential energy of water behind a dam, or the amount of heat from uranium necessary to generate electricity in a nuclear power station. Higher Heating Value (HHV): HHV is determined in a sealed insulated vessel by charging it with a stoichiometric mixture of fuel and air (e.g., two moles of hydrogen and air with one mole of oxygen) at 25◦ C. When hydrogen and oxygen are combined, they create hot water vapor. Subsequently, the vessel and its content are cooled down to the original temperature and the HHV of hydrogen is determined by measuring the heat released between identical initial and ﬁnal temperature of 25◦ C. Petroleum, conventional: Petroleum, excluding lease gases and condensate, as well as tar sands, oil shales, ultra-deep offshore reservoirs, etc. Slide 73: 2 Can the Earth Deliver the Biomass-for-Fuel we Demand System: A region of the world we pick and separate from the rest of the world (the environment) with an imaginary closed boundary. We may not describe a system by what happens inside or outside of it, but only by what crosses its boundary. An open system allows for matter to cross its boundary, otherwise the system is closed. 55 Slide 74: Chapter 3 A Review of the Economic Rewards and Risks of Ethanol Production David Swenson Abstract Ethanol production doubled in a very short period of time in the U.S. due to a combination of natural disasters, political tensions, and much more demand globally from petroleum. Responses to this expansion will span many sectors of society and the economy. As the Midwest gears up to rapidly add new ethanol manufacturing plants, the existing regional economy must accommodate the changes. There are issues for decision makers regarding existing agricultural activities, transportation and storage, regional economic impacts, the likelihood of growth in particular areas and decline in others, and the longer term economic, social, and environmental sustainability. Many of these issues will have to be considered and dealt with in a simultaneous fashion in a relatively short period of time. This chapter investigates sets of structural, industrial, and regional consequences associated with ethanol plant development in the Midwest, primarily, and in the nation, secondarily. The ﬁrst section untangles the rhetoric of local and regional economic impact claims about biofuels. The second section describes the economic gains and offsets that may accrue to farmers, livestock feeding, and other agri-businesses as production of ethanol and byproducts increase. The last section discusses the near and longer term growth prospects for rural areas in the Midwest and the nation as they relate to biofuels production. Keywords Ethanol · economic impact · biofuels · farmer ownership · scale economies · storage · grain supply · rural development · cellulosic ethanol 3.1 Introduction The economic, social, political, and environmental impacts of modern ethanol production in the U.S. are highly regionalized. Current ethanol production and most new ethanol plant development in the United States are concentrated in the Corn D. Swenson Department of Economics, 177 Heady Hall, Iowa State University, Ames IA 50011 e-mail: dswenson@iastate.edu D. Pimentel (ed.), Biofuels, Solar and Wind as Renewable Energy Systems, C Springer Science+Business Media B.V. 2008 57 Slide 75: 58 D. Swenson Belt states of Iowa, Illinois, Indiana, Minnesota, and Nebraska. Those states alone produced nearly 62 percent of the nation’s corn in 2006. Not surprisingly, those same states account for about two-thirds of actual or planned ethanol production capacity. Ethanol production and plant development took on an added urgency in the fall of 2005 after hurricanes Katrina and Rita crippled domestic oil production capacity in the Gulf of Mexico. Those events, coupled with heightened uncertainty about both near-term and long-term oil supplies in light of other international issues, fueled massive amounts of rhetorical, political, and ﬁnancial resources in support of biofuels production and energy independence. The growth in U.S. ethanol production has been dramatic: In 2005, 1.6 billion bushels of corn were converted to ethanol, about 12.1 percent of the total corn supply. By the end of 2007 it is estimated that 3.2 billion bushels will be used for that purpose, about a quarter of the nation’s corn supply, and an increase of just over 100 percent in only two years (USDA 2007). That much corn will make enough ethanol to account for 3.9 percent of the nation’s total demand for motor gasoline that year (EIA 2007). Expansion in ethanol production from corn through the rest of this decade is expected to top out at from 4.0 billion bushels by 2010 (USDA 2007) to 4.3 billion bushels (FAPRI 2007), though some analysts can envision sets of policy and market considerations that might push production higher (Tokgoz et al. 2007). Responses to this expansion in ethanol production will span many sectors of society and the economy. Already, the expansion in production capacity has driven up corn prices sharply from recent historical levels, which in turn has driven up the number of acres planted in corn: 2007 corn acres nationally are 19 percent higher than 2006. But given a generally ﬁxed supply of arable farmland, there are consequences to this expansion: soybean plantings declined by 15 percent and cotton by 28 percent (USDA June 2007). Over the past two decades, national farm commodity production has been a relatively stable, slowly-adjusting mix of crops and livestock with very distinct regional advantages and production concentrations. The rapid rise in ethanol production from corn, however, likens to dropping a large rock in a calm pond – there are ripples extending in all directions that affect crop production, animal production, food production, and, ultimately, the well-being of households. As the Midwest gears up to rapidly add new ethanol manufacturing plants, the existing regional economy must accommodate the changes. There are issues for decision makers regarding existing agricultural activities, transportation and storage, regional economic impacts, the likelihood of growth in particular areas and decline in others, and the longer term economic, social, and environmental sustainability. Many of these issues will have to be considered and dealt with in a simultaneous fashion in a relatively short period of time. This chapter investigates sets of structural, industrial, and regional consequences associated with ethanol plant development in the Midwest, primarily, and in the nation, secondarily. The ﬁrst section untangles the rhetoric of local and regional economic impact claims about biofuels. The second section describes the economic gains and offsets that may accrue to farmers, livestock feeding, and other Slide 76: 3 A Review of the Economic Rewards and Risks of Ethanol Production 59 agri-businesses as production of ethanol and byproducts increase. The last section discusses the near and longer term growth prospects for rural areas in the Midwest and the nation as they relate to biofuels production. 3.2 Measuring and Mismeasuring Biofuels Economic Impacts It is important to sort out the rhetoric of claimed economic beneﬁts to be expected from biofuels development in the Midwest and the nation because there are tremendous amounts of public money at stake. In the very early stages of this modern boom in ethanol plant construction, politicians, farm commodity groups, and economic developers hailed the emerging industry as the right and proper evolution of modern agricultural production capacities coupled inexorably with technological breakthroughs and long overdue changes in the nation’s energy policies. Amidst this enthusiasm, biofuels trade associations and some agricultural commodity groups reported in various venues that scores of thousands of jobs have been created across the Corn Belt and the nation. Some politicians and government agency representatives parroted those reports uncritically; Midwestern state governments began to speciﬁcally and energetically apply government agency services in support of the boom, along with offering lucrative tax credits and incentives to promote even faster growth; land-grant universities promoted their vital scientiﬁc contributions in this coming energy revolution; cities and counties scrambled to be the site of a modern ethanol factory, to be on the plus side of economic trends for a change given the historical deterioration of rural Midwestern economies and communities; and some leaders in Midwestern states began to envision a social and economic resurgence in rural areas. Profound expectations like the aforementioned demand careful scrutiny, especially when massive amounts of national, state, and local government subsidy are at stake. The place to begin is with the measurement of net economic gain attributable to this run-up in ethanol production in the U.S. and the identiﬁcation of who beneﬁts. Those aggressively promoting private and public investment in more biofuels processing capacities range from farm commodity groups, farm state politicians, some environmental organizations, automobile manufacturers, to both liberal and conservative political orientations. There are wide ranges of economic activity attributed to biofuels production. The nation’s production of ethanol creates jobs at the ethanol plants, boosts the demand for critical mechanical, technical, and service inputs, and helps to improve the prices received by input commodity providers, namely corn producers. Beyond that, few of the conclusions about the economic impacts of biofuels production appear to be based on rigorous, enterprise or industry level research, however (Swenson 2006). Much is of a very rudimentary level using broad assumptions about ethanol industry activity and applying, uncritically and often inappropriately, national economic impact ratios to deduce the size of economic activity attributable to ethanol production. The estimates either at the local level or at the national level are quite diverse and often incredible. Slide 77: 60 D. Swenson As examples, at the national level, an Urbanchuck (2005) report for the Renewable Fuels Association used US Bureau of Economic Analysis factors to conclude that 114,844 jobs in the national economy depended indirectly on the operation of all ethanol plants and the purchases that are made by workers (and this did not include ethanol plant employment). Earlier in the decade, when the industry was even smaller, Novack (2002) of the Federal Reserve Bank of Kansas City was more upbeat about the job total and reported in a widely read periodical that “. . . the [ethanol] industry added nearly 200,000 jobs to the U.S. economy.” This is a curious claim given that the U.S. Department of Commerce’s industrial census for that same year (2002) indicated the ethyl-alcohol industry had just 2,200 jobs. How the author got from 2,200 jobs to 200,000 is not revealed, but the writer went on to predict that “an additional 214,000 jobs [would] be created through the economy over the next decade.” Last, as just one example of comments made by many farm state politicians, former South Dakota U.S. Senator Thomas Daschle concluded in a national and widely reprinted publication that the production of 3.1 billion gallons of ethanol in the U.S. created 200,000 jobs (Daschle 2006). These three examples are emblematic of the rhetoric underscoring ethanol production expansion and public policy development in the U.S. The ﬁrst was made by a consultancy with long-standing ties with the Renewable Fuels Association, a trade group that aggressively promotes corn ethanol policies and serves as the primary information source for information on renewable fuels opportunities and capacities in the U.S. The second claim came from a writer from the nation’s respected public banking regulatory and ﬁnancial research sector. In this case the Kansas City Federal Reserve Bank also has a specialization in rural development economic studies and affairs; hence, an assumption of rigor and credibility. The third job claim came from a respected and long-time political leader and strong advocate for alternative energy development. Given the implied authority of these three sources it is important to investigate the source of their numerical enthusiasms. A good example for understanding the basis for the robust, yet quite misleading, job claims can be found in recent work sponsored by the Iowa Renewable Fuels Association. 3.2.1 Deconstructing Ethanol Job Impact Claims in the Midwest An Urbanchuck (2007) report for the Iowa Renewable Fuels Association (IRFA) concluded that Iowa’s ethanol industry had created 46,938 jobs and contributed $7.315 billion in state domestic product. Research at Iowa State University (Swenson 2007b) concluded, in contrast, that the state’s 28 ethanol producers in processing 600 million bushels of corn into approximately 1.65 billion gallons of ethanol created from 4,100 to 4,700 net new jobs in the Iowa economy through 2005. The public university statistics are a tenth of those produced by the trade group. The following exercise explains most of the differences. Figure 3.1 displays the type and number of jobs the IRFA research credited to lowa. First, from the original number of 46,938 jobs are subtracted the 19,733 jobs linked to capital development and construction. There are several good reasons for Slide 78: 3 A Review of the Economic Rewards and Risks of Ethanol Production Construction 19,733 61 Corn production 18,398 Chemicals, maintenance, etc., 3,231 All Utilities Transportation 2,591 1,442 Worker spending 1,192 Refined petroleum 351 Fig. 3.1 Iowa renewable fuels association estimates of ethanol job impacts in Iowa for 2005 doing this: Those are not net new permanent jobs – the jobs were all ready in the larger regional economy as there is a generally ﬁxed rate of capital formation in the U.S. linked to the availability of investment resources and the overall pace and pattern of capital growth; according to U.S. Bureau of Economic Analysis statistics, the overall national rate of investment in the chemical manufacturing industry where ethanol is located is actually less than the average for all manufacturing for the 2000–2005 period; there is a ﬁnite number of plants that can and will be built given this state’s current and likely future supply of corn and the rate of national absorption of ethanol; and the capital development that those construction workers are contributing to serves signiﬁcantly as substitutes for energy-related and other forms of industrial development in Iowa, the greater region, and in the nation. Eliminating the existing and spatially temporary construction jobs leaves us 27,205 jobs to further parse. Next, a full two-thirds of the purported non-construction ethanol impact jobs were already in the economy whether there was or there was not an ethanol industry. The IRFA study used a set of ﬁnal demand multipliers to estimate the remaining ethanol job and product impacts (BEA 1997). Final demand means that either the industry is producing for ﬁnal consumption by households and institutional users within the region or it is producing for consumption by entities external to the region of production. The fundamental assumption in the use of a ﬁnal demand multiplier and its interpretation, however, is that expansion in ethanol production creates, concomitantly and at ﬁxed rates, expansions in all inter-industrial relations that industry has with all of its inputs suppliers. So the use of a ﬁnal demand multiplier for a particular industry, like the organic chemical industry where ethanol production is located assumes that as that industry expands production, there are ﬁxed-ratio expansions in all industries that provide its intermediate inputs. Slide 79: 62 D. Swenson There is a fundamental ﬂaw here because there is no real change in the overall demand for corn in the short run, just a shift in corn deliveries destined for local processing instead of for export. As a consequence, the application of a ﬁnal demand multiplier to the corn sector is completely spurious. Those jobs already existed and would have existed had there not been an expansion in Iowa ethanol facilities. The ethanol plant did not create the corn production jobs or all of the corn industry’s up-stream supply linkages. To claim them as ostensibly having been created by the emerging ethanol industry is misleading. To reiterate: ethanol production is not creating more farmers. So from the 27,205 total jobs attributed to Iowa’s ethanol industry operations in the RFA report we must next subtract the 18,398 jobs linked to its existing corn production sector. That leaves 8,807 jobs to investigate. Several other items of critical inputs into production into this industry that are listed in the IRFA study after the already discounted corn values must be scrutinized. First, and importantly, the Iowa ethanol industry requires a large amount of natural gas, electricity, and water. The job gains attributable in that study to these three industries combined for 2,591 of the remaining 8,807 potential ethanol economic impact jobs. Those utility suppliers, however, are massive, declining cost industries in which the average costs of delivering their respective commodities up to capacity decline sharply. An industry that is an extremely heavy, and therefore comparatively easy to supply, user of a particular commodity is delivered that commodity at a substantially reduced price due to strong distributional efﬁciencies. Large users of utilities do not stimulate average job multiplier effects – they stimulate much lower, marginal effects and as a consequence are charged rates that are signiﬁcantly lower than those charged to smaller users. This is a fundamental ﬂaw in ﬁxed-ratio impact analysis employed by the authors of the study and one of the reasons that experienced analysts conduct additional secondary research before reporting a statistic. As part of the research conducted at Iowa State University on the potential economic impacts of a biofuels ethanol plant, water, natural gas distributors, and rural electric cooperative professionals were contacted to ascertain the potential new job requirements from a large, single industry increase in demand of their respective commodities in amounts indicative of a modern 50 million gallon per year (MGY) ethanol plant. In all instances, the job requirements reported by those professionals was a tenth or less than the amount assumed in the multiplier-driven modeling systems that are commonly used (Swenson and Eathington 2006). Based on that research and on fundamental scale economy dynamics, it would not be unreasonable to assume that the marginal job gains from all new utility related activities were no greater than 25 percent of the reported values, the much lower estimates of the utility professionals notwithstanding. If that were so, and there is strong economic and practical evidence that it is, the utility job impacts could reasonably be reduced to 648 jobs leaving a total of 6,864 jobs on the operational side of ethanol and other corn processing production in Iowa. Next to scrutinize is the reasonableness of the transportation assumptions creating 1,442 jobs. Iowa’s corn historically was hauled to a mill, to a livestock feeder, or exported out of state. After processing in an ethanol reﬁnery, the amount of Slide 80: 3 A Review of the Economic Rewards and Risks of Ethanol Production 63 weight that must be hauled is roughly the same as it had been when the corn was simply exported, although the nature of the haulage is changed. We can allow for a modicum of new rail capacity, new rail transport needs, and some shifting in local transportation to account for these changes; although, like the corn statistic at the start of this section, we have to conclude that nearly all of the overall transportation had already existed in the region. Consequently, it is not unreasonable to allow for only a 25 percent bump in net new transportation jobs to the region (considering of course a substantial realignment from grain hoppers to ethanol tankers and other hauling substitutes). That would lower the 1,442 transportation jobs to 361 net new transportation jobs, thus leaving 5,782 corn processing jobs in Iowa to consider. There are several categories of inputs that are not controvertible and would be expected to in fact be new regional indirect industrial demand linked linearly to ethanol plant operations. New ethanol plants will require substantial maintenance and repair services; they will help to stimulate demand for a variety of ﬁnancial business services, to include banking, accounting, insurance, and other important activities; and they do require a new schedule of industrial chemical inputs into the production process, primarily yeasts, enzymes, and denaturants. For the time being, we can conclude that those inputs and their concomitant output and job multipliers are reasonable. There is a fundamental question, though, about the likelihood of the bump in petroleum reﬁnery inputs that the IRFA report claims. In all, when one looks at a modern ethanol plant’s production recipe, one does not identify a set of reﬁned petroleum product inputs (Tiffany and Eidman 2003). Their energy demands are met overwhelmingly by natural gas and electricity. The organic chemicals industry, the industry that manufactures such diverse commodities as acetone, nail polish, and tear gas along with dozens of others, however, does have strong linkages to reﬁned petroleum products. The assumption that a modern Iowa corn ethanol dry mill operation buys $84.4 million in reﬁned petroleum products from state suppliers as stated in the study is, however, not reasonable. It is especially dubious because Iowa’s reﬁneries made just $48.7 million in total sales across the whole state of Iowa and only needed 13 jobs to make those sales. It seems quite appropriate, then to reject the assertion that 351 reﬁnery related jobs were created in Iowa. After all adjustments, the impact estimate has now been reduced to 5,431 total Iowa jobs that produce ethanol and other processed corn commodities, supplied non-corn inputs, or otherwise produced goods and services for the households that are supported by all of these enterprises. The Renewable Fuels Association of Iowa report (Urbanchuck 2007) indicated that the operational side of ethanol production in Iowa “. . .support[ed] 27,200 jobs.” After systematically deconstructing the authors’ procedures and assumptions, however, it is more likely that somewhere around 5,431 total jobs in Iowa can be attributed to ethanol and to all other non-fuel, corn processing production that were also counted in that analysis. That adjusted amount is less than 20 percent of the claimed operational amount and 11.6 percent of the original grand total that included the construction jobs. It is not unreasonable to conclude that the magnitude of misstatement at the national level is often analogous to the Iowa example. Slide 81: 64 D. Swenson 3.2.2 The Policy and Practical Implications of Bloated Economic Impact Claims The foregoing assessment assists in understanding the basic job growth potential of modern ethanol production and the possible magnitude of error common in estimating that potential. The gap between perception and reality is profound and procedurally troublesome because it has implications for public policy development. Modern industrial development beneﬁts strongly from federal, state, and local government underwriting. New ethanol plants across the U.S. are reaping large amounts of risk-reducing tax credits, subsidies, and other kinds of public support. According to one recent study (Koplow 2007), U.S. subsidies in support of ethanol production ranged from $1.42 to $1.84 per gallon in 2006 considering all capital development, credits, and other support. Using the same criteria for comparison that study concluded that subsidies for petroleum averaged just 2.4 percent of those amounts (Brasher July 2007). In Iowa, newer plants are demanding and receiving up to 20 year local property tax abatements, along with several other very valuable state tax breaks under its High Quality Job Creation Program, programs to spur capital development, and transportation assistance. Local, state, and national public policies, incentives, and subsidies are currently allocated based on an expectation of net gains to regional economies. The IRFA study and others like it entice conclusions about the economic gains to regions that are unwarranted, however. Across the nation there is evidence of confusion and a fusion of the statistics that are used for promotion, which one must necessarily look at with a grain of salt, and of statistics that are used to justify sound public decision making, which are supposed to be based on sound scientiﬁc, economic, and policy research. If public resources are allocated on the basis of misleading or exaggerated expectations of economic gain that will not materialize, then public resources will have been squandered and the competing alternative uses to which those public resources could have been put will have been thwarted. And if so, society suffers. 3.3 Ethanol Production Economic Opportunities and Offsets In a mature and relatively stable commodity production and distribution system, large changes in one segment of that system have consequences for other aspects of agriculture, non-agriculture industries, the public, and households. Initially it is important to note that the placement of a modern biofuels plant in a rural economy will result in an expansion of net regional industrial production. In the short run there is a positive economic impact to be expected. The rapid run-up in ethanol plant development in the 2005 through 2007 period, however, has also had consequences in many other aspects of agriculture, the impacts of which are just starting to be understood. This section works through some of the regional economic opportunities and offsets that must be considered as this industry matures in the Midwest. Slide 82: 3 A Review of the Economic Rewards and Risks of Ethanol Production 65 3.3.1 The Incidences and Economic Beneﬁts of Farmer Ownership are Waning The majority of ethanol plants in Iowa, South Dakota, and Minnesota in the ﬁrst part of this decade were considered to be “farmer” or otherwise cooperatively or locally owned. The structure of this relationship was such that corn producers as investors linked themselves to a value added production process for their commodity (Gallagher 2005). The reason for this vertical conﬁguration was that transportation costs from some of the nation’s best corn production areas ate away at much of the proﬁts to be made from farming. The greater the production costs of shipping corn for export, for example, to the barge terminals on the Mississippi River in Minnesota, Iowa, and Illinois, the lower the price received locally. Areas with a substantial commodity price basis penalty due to transport costs had strong incentives to convert grain to more proﬁtable uses. Livestock feeding is one value added opportunity, and ethanol production is another. A local ethanol plant allowed area farmers to receive a nominally higher price for their corn as it was not sold with the implied shipping penalty. Most new plants are not in any meaningful sense farmer or even locally owned (Lavigne 2007). Still, there is a strong preference in the Midwest for promoting local ownership of industrial stock (Morris 2007). States like Iowa, the Dakotas, and Minnesota have, to differing degrees enacted programs and policies to promote combinations of local, often-times small or rural investors in emerging enterprises like wind energy and biofuels. The policy and development argument is that local investors will rely on local banks along with ﬁnancial and legal expertise will be more likely to contract for construction and input services with local suppliers, and most of all will be likely to convert their returns on investment to local consumption and additional local investment. While local or farmer ownership was the early model for ethanol plant development, as this industry began to rapidly grow, equity investments were sought and received from all kinds of investors from all over the country. Research at Iowa State University (Swenson and Eathington 2006) indicated that, given a 50 MGY ethanol plant, the total added job impacts grew by 29 jobs for every 25 percent that the plant is owned by local residents. In short, local ownership coupled with large returns on investment locally yielded greater main street sales in the plant communities. Those enhancements to local economic impacts were calculated based on the very robust returns received by investors in 2005 and would not be appropriate in the current market where returns are much more constrained. Importantly, those robust returns were also calculated without measuring the opportunity cost of the locally-supplied investment capital. The opportunity cost would be the normal next best alternative to which this investment money would have been put in that regional investment environment. The net return in excess of the opportunity cost is an unknown as we have no way of knowing exactly how regional investors had hitherto used their savings. Slide 83: 66 D. Swenson There are, therefore, three considerations that must temper the expectation of localized economic impacts from high levels of regional ownership. The value of alternative uses of that investment capital is not known, but one would assume that the normal investors’ returns on all savings would have at least matched the national rate of return. Second, many farmer investors have borrowed against existing assets to invest in biofuels production. That action shifts net gains away from the now mortgaged enterprise, farming, to the new enterprise. That investment option has been widely reported, but the magnitude of it cannot be measured. Last, an increasing number of investors are not farmer-investors, and whether they reside regionally or not, there is no reason to expect those kinds of investors to behave, in the aggregate, any differently than all other investors (Lavigne 2007). Hence, for them, there is no discernible local impact to be assumed. By the middle of 2007, growth in ethanol production capacity outstripped the national rate of absorption of ethanol and prices moderated considerably leading biofuels researchers to forecast constraints on the proﬁtability in many of the plants, especially the older, smaller, and less efﬁcient operations (Tokgoz et al. 2007). Consequently, one would expect that many plants are not paying substantial dividends as before, and that means the overall beneﬁts of farmer or local ownership are expected to erode. 3.3.2 Higher Returns to Corn Producers and Land Owners Plus Higher Land Rents Corn producers ﬁrst promoted ethanol as a mechanism for localized gains in corn prices. The closer a corn farmer was to an ethanol plant, the better the net return on the corn as the comparatively high cost of shipping to alternative buyers was minimized. The farther a farmer was away from a plant, the less of an implied price bump (McNew and Grifﬁth 2005). As the pace of ethanol plant expansion increased through the 2006 production year, however, corn prices nationwide, not just locally, began to climb. Figure 3.2 shows the nominal (not adjusted for inﬂation) average annual price of corn per bushel over the past several years and as projected through futures. While corn prices demonstrate some strong ﬂuctuations, they averaged near $2.00 for much of the previous decade. In 2006, however, average prices rose sharply as more and more plants began to process ethanol, as demonstrated in Figure 3.2. Accordingly, the average price received nationwide rose by 58 percent over the previous year, though there is the expectation of strong localized volatility in corn prices over time as corn supplies and demand adjust (Hart 2007). Corn farmers, however, did not see their net receipts increase by 58 percent over those two years, and in fact the U.S. BEA noted that Iowa farm earnings in 2006 were actually 5.3 percent lower than the year previous (BEA 2007) despite the corn price run-up. First, like all producers and consumers in the U.S., higher energy prices have affected farmers’ bottom lines. Modern corn farming is energy intensive requiring large amounts of distillates for tractors, fertilizers derived in the main from natural gas, and propane for drying grain. So the same high oil prices boosting ethanol demand, and consequently, the demand and price received by farmers for Slide 84: 3 A Review of the Economic Rewards and Risks of Ethanol Production $3.50 $3.00 $2.50 $2.00 $1.50 $1.00 $0.50 $1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 FAPRI U.S. and world agricultural outlook, 2007 67 Fig. 3.2 U.S. corn prices per Bushel their corn, is also boosting variable production costs on the farm. Second, as market prices increase, the total amount of government payments to corn farmers decrease, which assuredly is good news for taxpayers but still must be counted when compiling the net change in corn farmer returns and, by extension, the well being of rural economies (Westcott 2007). In all, as price increases the ﬁnancial position of corn farmers improves, but the exact amount of improvement must be calculated net of subsidy reductions and the changes in all other ﬁxed and variable costs of production changes. Price driven gains to farmers have two very important outcomes regionally. First, they eventually help bolster the overall proﬁtability of farming as an enterprise, which in turn is realized in higher amounts of on-farm capital and other investment along with boosted farm family spending. Second, sustained higher prices must increase the value of farm land. Over time, farmers who are landowners will realize price-induced capital gains on their land investments. For farmers that must rent their land, however, they will realize higher land use costs, which in turn will limit their net gains on production. In Iowa, according to the 2002 Census of Agriculture, 51 percent of the land in farms was rented. Higher corn prices will therefore result in increased land rent costs for 51 percent of Iowa corn crop production. 3.3.3 Higher Feed and Input Costs for Other Corn Consumers Most Americans do not eat much corn. They do, on the other hand, eat a tremendous amount of products that are directly or indirectly derived from corn. Nearly all pork, Slide 85: 68 D. Swenson beef, dairy, chicken, turkey, and egg products in the U.S. rely strongly on corn as a feedstock. Also, Americans have increasingly come to rely on high fructose corn syrups (HFCS) as a sugar substitute in many foods, beverages, and confections. It is apparent that there is strong demand for corn as a critical input into food production in the U.S. Table 3.1 demonstrates the uses of corn historically. In 2000 about 11.3 percent of all corn was made directly into food or high fructose corn syrup. Over 50 percent, however, was a feed to livestock, 16.7 percent was exported, and only 5.4 percent was used for ethanol. By 2005, the amount of feed demanded had increased to 6.1 billion bushels, but ethanol’s demand for corn had increased by more than 150 percent. As a consequence of the increased demand for ethanol, the projection for 2010 has the amount of corn available for feed as eight percent lower than in 2005. At that time ethanol is expected to consume 30 percent of the nation’s corn supply, up 25 percentage points in just a decade. The high reliance on corn inputs by the livestock sector is ostensibly offset by the production of distillers’ grains at the ethanol plants. Distillers’ grains are the high protein residue left after the ethanol fermentation process is completed. Distillers’ grains can be fed in varying degrees to livestock, ranging from 30 to 40 percent of diet to feeder cattle down to 10–20 percent for dairy cows, swine, or poultry. No matter the supply and price of distillers’ grains and the mix of rations employed, feeders will still have to include some corn input costs in the mix. American cattle producers appear to be cautious about the rapid growth in the ethanol industry and have recently argued against an expansion in federal ethanol production subsidies beyond current levels (NCBA 2007), with increased corn prices as the rationale. Higher feed prices have several likely expected outcomes that may reduce meat and poultry supply. First, livestock producer net returns will shrink; this is especially the case for those that are located at some distance from ethanol plants and who had historically depended on Midwestern corn supplies. In some cases, less proﬁtable operations will cease production entirely. In other instances, producers will not ﬁnish livestock as long – the point at which additional feed yields an optimal return will move towards a smaller animal. Hence, animals will be marketed at a lighter weight. Table 3.1 Historical and projected uses of corn 2000 Corn Supply (Millions of Bushels) Ethanol Feed Food HFCS Other Seed Exports Percent of supply 2005 Percent of supply 2010 Percent of supply 11,639.42 100.0 627.59 5,842.09 780.24 529.75 185 19.30 1,941.35 5.4 50.2 6.7 4.6 1.6 0.2 16.7 13,237.00 100.0 1,603.00 6,140.83 829.90 528.60 190.20 20.17 2,147.34 12.1 46.4 6.3 4.0 1.4 0.2 16.2 14,266.60 100.0 4,307.65 5,657.81 861.69 530.38 196.52 23.33 1,885.72 30.2 39.7 6.0 3.7 1.4 0.2 13.2 FAPRI U.S. and world agriculture outlook, 2007. Slide 86: 3 A Review of the Economic Rewards and Risks of Ethanol Production 69 Finally, all consumer prices will increase as consumers absorb the higher costs associated with a lower meat and poultry supply. In all other instances, say for the production of HFCS and other corn to food products, prices will likely be passed on to consumers or otherwise result in lower returns to manufacturing producers (Westcott 2007). In the longer term, expansion in ethanol production may lead to further concentration and vertical integration in the U.S. meat production sector. The dominant business model for poultry and meat production has a prominent ﬁrm like Tyson Foods or Smithﬁeld Foods involved signiﬁcantly with all aspects of breeding, production, processing, and distribution. As modern ethanol plants produce immense amounts of distillers’ grains that are mainly suitable as cattle feed, it is possible that future ethanol plants will include very large integrated cattle feeding operations in order to efﬁciently feed distillers grains and to capture additional efﬁciencies by using animal waste as a source of fuel. Spatial shifts in meat production are another possible outcome. Areas of the Midwest that have the highest concentration of corn production also have some of the nation’s greatest concentrations of swine and poultry production because of very strong production efﬁciencies to be achieved from locating amidst high feed supplies. Iowa, as an example, ranks ﬁrst nationally in swine and in egg production, and those animal concentrations are centered in the best corn growing areas. Cattle on feed, in large measure, are located much further to the west and southwest. Paradoxically, the animals that are least tolerant of distillers’ grains and can only consume it in smaller amounts are found in higher numbers in the areas of the U.S. where there are comparatively high concentrations of ethanol plants, and the animals that are most tolerant are in comparatively lower numbers. It remains to be seen whether production advantages accumulate to the beef industry because it can more readily incorporate distillers’ grains as feed and whether those advantages will work at the expense of poultry and swine production. 3.3.4 Grain Storage, Processing, and Distribution Systems Will Change The nation’s grain storage and transportation infrastructure developed over the years in direct response to the historical pace and pattern of crop production in the U.S. As Midwestern states have most of the nation’s corn producing capacity, there are extensive systems for storage, marketing, and distributing that bounty. The nation’s infrastructure for moving corn includes the inbound systems, the storage systems, grain processing systems, and the outbound systems. The nation’s capacity in all aspects of managing its grain supply has developed over a long period of time and, as these are all highly capital intensive systems, that capacity closely matches production. There are several issues affecting this complicated sector of the economy that must be taken into account as the ethanol industry develops (Ginder 2007). Ethanol plants are able to store anywhere from 10 to 25 days worth of corn. Corn that is delivered directly to the ethanol plant from farm storage, however, is corn that Slide 87: 70 D. Swenson is not conveyed through local grain elevator systems or moved outbound via rail as historically had been the situation. So in the initial stages of ethanol plant development, gains to farmers and the expansion of ethanol production must be assessed in light of a reduction in gross receipts and reduced efﬁciencies on investments in all grain handling systems. As the industry matures and as competition for corn requires greater grain origination and distribution skills and efﬁciencies, the nation’s elevator systems may come to play an integral role in moving corn into ethanol plants, but the extent and effectiveness of the sector remains to be demonstrated. In the near term, the rapid diversion of grain stocks into ethanol plants has impinged on the proﬁtability of traditional grain handlers. The rail transportation rolling stock that evolved to move corn is ill-suited to moving either ethanol or the byproducts of ethanol. Ethanol is primarily transported in truck and rail tankers, and cannot be transported by pipeline. Its primary byproduct is distillers’ grains, which in either wet or dried form needs special rail stock as well. Furthermore, planned improvements and expansions on the Mississippi River and Illinois River locks and dams have been justiﬁed based on controversial expectations of strong growth in corn exports out of the Midwest (WSTB 2004). The expansion of ethanol production interferes with that justiﬁcation in the long run, and in the short run makes the existing barge and terminal systems in the interior of the country less efﬁcient and, therefore, less proﬁtable. Corn acre plantings in 2007 are estimated at 19 percent higher than 2006, and soybean plantings are down by 15 percent. Each acre of corn produces from two to three times the bushels per acre as soybeans, the primary crop sacriﬁced for expanded corn acres. As the nation’s grain storage capacity is closely matched to grain production historical development, this rapid rise in corn supply will rapidly exhaust the nation’s existing on-farm and elevator storage capacity. Storage capacity is very expensive, and it remains to be seen exactly where the economic incentives will accrue that will induce capital investment in this area. The risk, of course, is that expansion in grain storage will become potentially excess capacity if and when the nation shifts towards cellulosic ethanol production. 3.3.5 Spatial Changes in Crop Production Which crop can be produced on which acre of land most proﬁtably depends on many factors, but when the price of a commodity rises sharply, as has been the recent experience with corn in the U.S., land that had been primarily suitable for one mix of crops might now be suitable for a different mix. Corn acreage increased in 45 of the lower 48 states between 2006 and 2007 due primarily to strong futures prices during the crop planning season of post harvest 2006 and planting time in 2007. The states of Indiana, Illinois, Minnesota, California, and North Dakota posted record corn plantings. The amount of greatest gain was in Illinois at 1.9 million more acres. A grain producing state with the strongest shift is North Dakota with nearly a 48 percent rise in corn plantings. Their increase came at the expense of a 7 percent reduction in all wheat planting and a 21 percent Slide 88: 3 A Review of the Economic Rewards and Risks of Ethanol Production 71 reduction in soybean acres. Kansas soybean plantings were down by 24 percent, Nebraska’s by 21 percent, Indiana’s by 19 percent, and South Dakota’s by 16.5 percent. (NASS 2007). Increased plantings of corn will affect the aforementioned storage issue: corn produces signiﬁcantly more bushels per acre than either soybeans or wheat. In addition, large shifts in production will have up-stream impacts on normal regional uses of agricultural commodities. Existing processors of oil seeds for food, feed, or other uses will have sharply increased input costs due to the supply reductions. In the longer run, some commodity needs such as soybeans will necessarily be met by increased imports (Westcott 2007). The large shift in corn acres also places stress on the nation’s corn-inputs system. Corn requires fertilizers that derive mainly from natural gas, petroleum distillates for machinery, and large amounts of propane for drying corn. In all, a strong positive shift in corn production in the U.S. increases the demand for a wide array of energy inputs, which in turn drive up the prices charged to other users of those same inputs. Finally and importantly, there are important environmental issues associated with corn production. The crop’s need for high amounts of petroleum based and chemical inputs degrades groundwater and shallow aquifers. Dominant corn tilling practices also result in soil runoff, siltation of streams and rivers, and ultimately the creation of hypoxia zones in the Gulf of Mexico due to, primarily, ag-originated nutrient runoff into that area. These all entail external economic costs that are not borne by the industry or its beneﬁciaries, but by society at large. There is pressure to expand the nation’s land in production. There are two sources: existing pasture land and land currently enrolled in the Conservation Reserve Program (CRP). In both instances, long term land use preferences and national policy combined to remove vulnerable and marginal land from crop production. The conversion of these acres may exacerbate a wide array of environmental issues, to include increased soil erosion, surface water degradation, and soil nutrient depletion. 3.3.6 The Biofuels Industry will Obtain Scale Economies Some early ethanol plants produced just 10–20 million gallons yearly (MGY) of ethanol. Over time, ethanol plant sizes increased as investment capital became more available, as public subsidies helped to underwrite and offset risk, and as ethanol prices stabilized and demand demonstrated positive growth. Like many capital intensive industries, there are strong internal economies of scale opportunities. Economies of scale occur as a ﬁrm is able to, through more efﬁcient utilization of its capital stock, procurement of inputs, and labor, achieve lower average costs of production per unit of output. An obvious demonstration of scale economies presents itself readily in the ethanol industry itself. As is demonstrated in Figure 3.3, a 50 million gallon per year (MGY) ethanol plant in Iowa requires 36 jobs. A 100 MGY per year plant only requires 46 jobs. The plant increases its output by 100 percent, but its job needs only go up by 28.5 percent. Similarly, the plants will achieve strong efﬁciencies in Slide 89: 72 D. Swenson 124 98 Ethanol Plant All Other 36 46 50 MGY 100 MGY Fig. 3.3 Ethanol plant job impacts by plant capacity in millions of gallons per year (MGY) the use of storage systems, grain moving and handling infrastructure, its land, much of its technical inputs, and larger bulk purchases of its required inputs. As the industry shifts, as ﬁrms become, on the average, larger and more efﬁcient, larger and better operated ﬁrms, usually those that were built most recently will have higher returns per unit of production when compared to smaller and less efﬁcient plants. In consequence there is the expectation that in the very near future several of the nation’s smaller, typically locally owned ethanol plants will become less proﬁtable and will likely be forced out of business (Miranowski 2006). 3.4 Bioenergy Promotion and the Overall Sustainability of Rural Economies In October of 2006 a joint U.S. Department of Energy and U.S. Department of Agriculture conference was held in St. Louis entitled “Advanced Renewable Energy: a Rural Renaissance.” New York Senator Hillary Clinton that year noted in a press release that “We can create a rural renaissance and restore the promise of Main Street. . .” in part by “. . . investing in renewable energy . . . .” (Clinton 2006). Along similar lines, U.S. Senators Norm Coleman of Minnesota and Mark Prior of Arkansas jointly proposed a Rural Renaissance II program in the U.S. Senate that would provide low-interest loans along with grants to rural areas to develop infrastructure and to entice investment in renewable fuels and energy sources (U.S. Senate 2005). The head of the United Nation’s Food and Agriculture Organization, Slide 90: 3 A Review of the Economic Rewards and Risks of Ethanol Production 73 Alexander Mueller, concluded in 2007 that properly promoting biofuels could be an “important tool for improving the well-being of rural people if governments take into account environmental and food security concerns.” (FAO Newsroom 2007). In each of these instances there is the assumption that the production of renewable energy from wind, corn, and biomass feedstocks will rejuvenate rural areas. Those assumptions are, however, lacking signiﬁcant substantiating evidence in the near term. For example, wind energy, which is expanding smartly in several places in the Midwest and Plains areas, is disproportionately controlled by existing, regionally dominant investor-owned utility systems. Those companies negotiate land rents for their structures, but otherwise their overall economic impact to regional economies is quite limited – once the machines are up and running, they do not require signiﬁcant regionally supplied inputs. The rural economic development potential of cellulosic systems is a complete unknown. Scientists and engineers can agree on many of the technical details and distributional requirements. Technical agreement notwithstanding, economics, however, require that the price of fuel must increase drastically before biomass can be efﬁciently and competitively processed. The only realistic contemporary laboratory for gauging the revitalization potential of modern biofuels is the current expansion in corn ethanol production in the U.S. and to a lesser extent biodiesel production from oil seeds (Tokgoz et al. 2007). And the market attributes of both of those examples are distorted via the range of subsidies underwriting the current pace of growth. There are heady expectations for growth, and some recent research (Ugarte et al. 2006) has projected that the attainment of several biofuels production goals in the U.S. will by 2030 create as many as 2.4 million new production related jobs in the U.S. were the nation to produce 60 million gallons of biofuels, many of which could accrue to rural areas. That research is probably much too enthusiastic about the potential: much of it presupposes yet to be proven technical, distributional, investment, and policy developments that would allow for the optimization of production in attaining that optimistic goal. It also projects a future national industrial structure based primarily on the contemporary economy, a dicey prospect in economic modeling. The structure of the national economy in 2030 will be very different from the structure at present. 3.4.1 Putting Biofuels Job Change and Growth into Perspective in the Near Term The interior economy of the U.S., to include its more rural areas, has not grown at anywhere near the pace as the remainder of the U.S. We also know that manufacturing in the interior of the U.S. has been hard-hit over the past decade. Ethanol production from corn is a form of chemical manufacturing. When we look at the overall value of manufacturing to any economy, two factors are paramount: the number of jobs created and, of course, the associated earnings that workers convert Slide 91: 74 D. Swenson to household consumption. Per unit of output, ethanol requires relatively few jobs as compared to the average manufacturing ﬁrm. The jobs produced, however, are good jobs when measured by wage and salary. There have been very strong declines in manufacturing jobs during the present decade. Nationally, between 2000 and 2005 the nation lost nearly 3 million manufacturing positions, about 18 percent were in non-metropolitan areas of the nation, areas that did not have a central city of 50,000 or more. The chemical manufacturing industry, of which ethanol production is a subset, lost almost 100,000 jobs over the same time period. In 2005 the average earnings of a U.S. manufacturing job considering all wages, salaries, and beneﬁts was $60,100. In the chemical manufacturing sector it was $69,150. The ﬁrm and job growth directly associated with ethanol production in the U.S. can be readily estimated even though current detailed U.S. statistics are not available. In 2005, just over 1.6 billion bushels of corn were converted into ethanol. Assuming that those plants generated at a maximum 2.7 gallons of ethanol per bushel (EEOE 2007), that their average size at that time nationally was 65 million gallons per year (MGY), that they operated at 115 percent of average capacity, and that each plant averaged 38 jobs, then the U.S. ethanol industry directly required 78 plants and 2,910 jobs to process 1.6 billion bushels of corn. Average pay at new U.S. ethanol plants ranged from $45,000 to $55,000 per year – substantially less than either the U.S. manufacturing average or the average for chemical manufacturing, but substantially more than the nonfarm earnings average in most rural areas. Were the industry to grow to process just over 4.3 billion bushels of corn annually by 2010, and assuming that plants were, on average producing 2.7 gallons of ethanol per bushel of corn, were rated at 85 MGY in average capacity, produced at 120 percent of rated capacity, and had 47 jobs per plant, then the U.S. ethanol industry would require 165 plants and 7,716 jobs in 2010 as shown in Table 3.2. If the rural areas of the U.S. lost some 540,000 manufacturing jobs between 2000 and 2005, it is impossible to conclude that just from corn ethanol the addition of 7,716 jobs will yield a rural renaissance. Figure 6.4, compares just the expected gains in ethanol plant jobs through the end of this decade nationally to the erosions in just chemical manufacturing jobs in the U.S. during the ﬁrst half of the decade. Finally, for distributional perspective, if it is assumed that two thirds of the future corn ethanol production capacity were concentrated in Iowa, Indiana, Illinois, Nebraska, and Minnesota, then there would be, on average, one plant per just over four counties, which would work out to slightly fewer than 11.5 new manufacturing jobs per county. Table 3.2 U.S. ethanol plants and jobs Corn bushels in millions 2005 2010 1,603 4,307 plants 78 165 jobs 2,964 7,716 Slide 92: 3 A Review of the Economic Rewards and Risks of Ethanol Production Ethanol (Corn), 4,806 75 Organic chemicals, –99,717 2000 to 2005 2005 to 2010 Fig. 3.4 Organic chemical manufacturing job change compared to expected ethanol job growth 3.4.2 The Longer Term Prospects for Rural Areas from Biofuels Development A hallmark of modern agribusiness and modern manufacturing is the persistent substitution of capital for labor. In 1970 the average farm worker in Iowa tended 200 acres of crop land. In 2005 the average Iowa farm worker tended 300 acres of crop land. The prospect of increased biofuels production presupposes an extension if not an acceleration in the uses of mechanical and chemical inputs into agricultural production as farmers shift production to accommodate the corn ethanol industry’s rapid expansion of late. Simultaneously, the corn ethanol industry itself will expand preferring to develop highly efﬁcient production systems closer to the 100 MGY per year range and larger, which also will require much less labor per gallon of production than is currently the industry average. Both of these assumptions do not portend a rural economic recovery, but rather a continuation if not an acceleration of the fundamental factors undermining most rural areas in the interior of the country: limited and specialized labor demands in only a few dominant industries that are increasingly capital intensive; and production systems that require, over time, fewer and fewer regionally supplied intermediate labor inputs. The longer term technical and policy outlook contains an expectation of ethanol production deriving signiﬁcantly from cellulosic stocks, to include ultimately acres of crop land that are dedicated to perennial energy production. If such a situation were to eventuate, then there indeed may be the potential for meaningful expansion in the value of productivity in many places of the U.S. that heretofore had not prospered. Before those unhatched chickens can be counted, however, there are several very important factors that will have to be resolved. First and foremost, given current technology, cellulosic ethanol production, even under ideal conditions, is not cost effective. Slide 93: 76 D. Swenson The infrastructure needs for harvesting, converting, separating, transporting, and ultimately processing cellulosic feedstocks currently do not exist and can only be imagined. The production and distributional efﬁciencies at the plant and spatially are signiﬁcantly unknown. The overall labor requirements of processing cellulosic feedstocks is not well understood in light of the current trends in the ratios of labor to all crop acres. Shifts from one form of production, as in the current corn system, to another, such as what might eventuate from energy crop production will require a reallocation of labor and machinery, but not necessarily changes that will indirectly stimulate regional growth, especially in rural households. The distribution of crop production and processing capacity relative to regional demand will likely favor development closer to built up areas with high demand potential to minimize transport cost and maximize returns. More remote, yet potentially productive, areas of the U.S. may realize long delays in the timing of biofuels development due to distance, infrastructure, and other constraints. Global volatility in oil prices may not stimulate the pace and pattern of investment expected to produce expected future levels of biofuels. The nation’s absorption of ethanol as a fuel source will have to increase dramatically. And ﬁnally, an energy policy and a rural development promise that depends on rain has inherent volatility. There are many important considerations associated with biofuels production and development in the United States that were not dealt with in detail in this chapter. Enterprise-level analysis of the overall costs of operation helps policy makers and decision makers understand the production characteristics of corn and alternative ethanol production and the effects of both external and internal production factors in determining the proﬁtability of ethanol (Tiffany and Eidman 2003). The scope and costs of ethanol subsidies are neither detailed nor assessed here, but it must be recognized that the combined public costs of ethanol production as measured in total or on a per gallon basis is high and promises to grow. Last this analysis does not look at the overall efﬁcacy of this form of energy development vis a vis all others. It is very difﬁcult for many economists to discern net national gains to be derived from the current biofuels policies, and in light of that we see the rationale for ethanol promotion and biofuels development shifting from economics and economic welfare to one of “enhanced national security ” (Brown 2007). There are tangible regional economic and environmental aspects to the current debate on the development of biofuels in the U.S. Some are treating the topic in a race-to-the-moon manner with a promise of technological determinism that will, ultimately, lead to substantial social payoffs and an ultimate rationality to the process. In the meantime, however, public decision makers are charged with maximizing social gains, minimizing the undesirable consequences of public action, and assuring the nation through sound policy research that the economic beneﬁts to be achieved from the nation’s biofuels initiatives do indeed outweigh the economic, social, and environmental costs of implementing them and are, on net, better than the alternatives. To date, there is precious little evidence that is so. Slide 94: 3 A Review of the Economic Rewards and Risks of Ethanol Production 77 References Brasher, P. (July 15, 2007). The end of the biofuels money train? The Des Moines Register. 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Center for Agriculture and Rural Development, Iowa State University. Retrieved from http://www.card.iastate.edu/publications/DBS/PDFFiles/07sr101.pdf Ugarte, D., English, B., Jensen, K., Hellwinkel, C., Menard, J., Wilson, B. (2006). Economic and agricultural impacts of ethanol and biodiesel expansion. Agricultural Economics Study Report, University of Tennessee. Retrieved from http://www.ethanol-gec.org/information/ Ethanolagimpacts.pdf Urbanchuck, J. (January 2005). Contribution of the ethanol industry to the economy of the United States. Renewable Fuels Association. Retrieved from http://www.ethanolrfa.org/objects/ documents/576/economic contribution 2006.pdf Urbanchuck, J. (February 2007). Contribution of the biofuels industry to the economy of Iowa. Iowa Renewable Fuels Association. Retrieved from http://www.iowarfa.org/PDF/2006 %20Iowa%20Biofuels%20Economic%20Impact.pdf USDA. (February 2007). Agricultural Projections to 2016. U.S. Department of Agriculture, Ofﬁce of the Chief Economist. OCE-2007-1. Retrieved from www.ers.usda.gov/publications/oce071/ USDA. (June 2007). U.S. farmers plant largest corn crop in 63 years. U.S. Department of Agriculture Newsroom. Retrieved from http://www.nass.usda.gov/Newsroom/2007/06 29 2007.asp S. 1253 (June 15, 2005). Rural renaissance II act of 2005. Senate of the United States, 109th Congress. Retrieved from http://thomas.loc.gov/home/multicongress/multicongress.html Westcott, P. (May 2007). Ethanol expansion in the U.S.: How will the agriculture sector adjust? Economic Research Service, U.S. Department of Agriculture. Retrieved from http://www.ers.usda.gov/Publications/FDS/2007/05May/FDS07D01/fds07D01.pdf WSTB (Water and Science Technology Board) (2004). Review of the U.S. Army Corps of Engineers restructured upper Mississippi River-Illinois waterway feasibility study. National Academy of Sciences. Washington, D.S. Retrieved from http://books.nap.edu/catalog. php?record id=10873#orgs Slide 96: Chapter 4 Subsidies to Ethanol in the United States Doug Koplow and Ronald Steenblik Abstract Ethanol, or ethyl alcohol used for motor fuel, has long been used as a transport fuel. In recent years, however, it has been promoted as a means to pursue a multitude of public policy goals: reduce petroleum imports; improve vehicle emissions and reduce emissions of greenhouse gases; and stimulate rural development. Annual production of ethanol for fuel in the United States has trebled since 1999 and is expected to reach almost 7 billion gallons in 2007. This growth in production has been accompanied by billions of dollars of investment in transport and distribution infrastructure. Market factors, such as rising prices for petroleum products and state bans on methyl tertiary butyl ether (MTBE), a blending agent for which ethanol is one of the few readily available substitutes, drove some of this increase. But the main driving factor has been government support, provided at every point in the supply chain and from the federal to the local level. This chapter reviews the major policy developments affecting the fuel-ethanol industry of the United States since the late 1970s, quantiﬁes their value to the industry, and evaluates the efﬁcacy of ethanol subsidization in achieving greenhouse gas reduction goals. We conclude that not only is total support for ethanol already substantial — $5.8–7.0 billion in 2006 — and set to rise quickly, even under existing policy settings, but its cost effectiveness is low, especially as a means to reduce greenhouse gas emissions. Keywords Agriculture · biofuel · corn · energy · ethanol · policy · renewable energy · subsidies · support · United States D. Koplow Earth Track, Inc., 2067 Massachusetts Avenue, 4th Floor, Cambridge, MA 02140 e-mail: dkoplow@earthtrack.net R. Steenblik At the time of article submission, Director of Research for the Global Subsidies Initiative of the International Institute for Sustainable Development, Maison Internationalle de l’Environment 2, 9, chemin de Balexert, 1219 Chˆ telaine Gen` ve, Switzerland a e D. Pimentel (ed.), Biofuels, Solar and Wind as Renewable Energy Systems, C Springer Science+Business Media B.V. 2008 79 Slide 97: 80 D. Koplow, R. Steenblik Acronyms & abbreviations AFV: bgpy: mgpy: CAFE: CBERA: CO2 : CRS: E10: E85: EIA: EPA: EPACT05: FFV: GHG: GJ: GSI: IRS: JCT: MPS: MTBE: NAFTA: OECD: OTA: RFA: RFS: USDA: VEETC: alternative fuel vehicle billion U.S. gallons per year million U.S. gallons per year corporate average fuel economy Caribbean Basin Economic Recovery Act carbon dioxide Congressional Research Service a blended fuel comprised of 10% ethanol and 90% gasoline a blended fuel comprised of 85% ethanol and 15% gasoline U.S. Energy Information Administration U.S. Environmental Protection Agency Energy Policy Act of 2005 ﬂexible-fuel vehicle greenhouse gas gigajoule (109 joules) Global Subsidies Initiative Internal Revenue Service Joint Committee on Taxation (of the U.S. Congress) market price support methyl tertiary-butyl ether North American Free Trade Agreement Organisation for Economic Co-operation and Development Ofﬁce of Technology Assessment Renewable Fuels Association Renewable Fuels Standard U.S. Department of Agriculture Volumetric Ethanol Excise Tax Credit 4.1 Introduction The modern U.S. ethanol industry was born subsidized. The Energy Tax Act of 1978 introduced the ﬁrst major federal subsidy for ethanol, a 4 cents-per-gallon reduction in the federal excise tax on gasohol, or E10 (a blend of 10% ethanol and 90% gasoline). In that same year, the ﬁrst commercial ethanol production capacity came online. Between 1980 and 1990, production capacity more than quintupled, ending the decade at around 900 million gallons per year (mgpy). Despite a slower period of growth from the late 1980s through the mid-1990s, production capacity has grown in recent years at a very fast pace over most of the last decade. According to the Renewable Fuels Association (RFA) the main ethanol trade group, production capacity increased from 1.7 billion gallons per year (bgpy) in 1999 to 7.3 bgpy at the end of 2007 (RFA, 2007a). An additional 6.2 bgpy of capacity were under Slide 98: 4 Subsidies to Ethanol in the United States 81 construction, the vast majority of which will rely on corn (RFA, 2007b).1 Meanwhile, the supply side of the ethanol market is evolving towards ever larger plants, with the largest having annual capacities approaching 300 mgpy (Planet Ark, 2006). This trend will have important effects both on feedstock supply and on the market power of different portions of the supply chain. Conversion into ethanol serves as an increasingly important outlet for the industry’s main feedstock, corn. Estimates of the share of U.S. corn production used for ethanol vary, but most place it above 20% in 2007, and likely to rise above 30% within the next few years.2 Despite rapid growth in demand and diversion of corn into fuel, ethanol consumption for 2006 (5.4 bgpy) supplied less than 4% of the fuel used by gasoline-powered vehicles in that year (Fig. 4.1).3 8.0 7.0 Billions of gallons per year 6.0 5.0 4.0 3.0 2.0 1.0 0.0 2007e 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Capacity* Production Fig. 4.1 Fuel-ethanol production capacity1 and output2 in the United States, 1981 through 2007 1 Data for 2007 are authors’ estimates. Capacity data prior to 1999 are not available. 2 Capacity represents an estimated mid-year value, obtained by taking the geometric mean of the values reported at the beginning of the year shown and the value at beginning of the following year. Sources: • 1981–2005: Energy Information Administration, Annual Energy Review 2006, Report No. DOE/EIA-0384(2006), Table 10.3, “Ethanol and Biodiesel Overview, 1981–2006”, Retrieved December 7, 2007 from; http://www.eia.doe.gov/emeu/aer/renew.html; • 2006: Renewable Fuels Association; “Industry Statistics”, Retrieved December 7, 2007, from http://ethanolrfa.org/ industry/statistics/. 1 Sugar from cane or beets, which is an important feedstock in ethanol production in regions such as Brazil and the European Union, has so far played a very small role within the United States. This is largely due to import quotas that make sugar too expensive as a feedstock. 2 See FAPRI, (2007, February), p. 11; USDA (2007, February), p. 39. 3 Ethanol consumption data from RFA (2007c); US gasoline consumption data from EIA (2007b). Slide 99: 82 D. Koplow, R. Steenblik Industry promotion of expanded purchase mandates and continued protection from imports demonstrate that producers are counting on the government to help keep production viable. Both policies were being considered by Congress in the autumn of 2007. Even more aggressive policy interventions have also been proposed, such as setting a ﬂoor price for oil in order to protect the domestic ethanol industry from low oil prices that would render ethanol uncompetitive (see, e.g., Lugar and Khosla, 2006). Clearly, in order to understand the industry, one has to understand the roll of government incentives. This analysis draws heavily on two in-depth studies conducted for the Global Subsidies Initiative (GSI) of the International Institute for Sustainable Development (Koplow, 2006; 2007) which in turn form part of a multi-country effort by the GSI to more thoroughly characterize and quantify subsidies to biofuels production, distribution and consumption.4 This chapter ﬁrst describes the evolution of government support for ethanol, focusing on the major federal programs. Thereafter follows a more detailed discussion of federal and state support policies, arranged by their point of initial economic incidence. Virtually every production stage of ethanol is subsidized somewhere in the country; in many locations, producers can tap into multiple subsidies at once. Liquid biofuels have been subsidized largely on the premise that they are domestic substitutes for imported oil; that they reduce greenhouse gas (GHG) emissions; and that they encourage rural development. Critics of subsidization have argued that the production process of these fuels is itself fossil-fuel-intensive, obviating many of the beneﬁts of growing the energy resource; and that there are less expensive options for both GHG mitigation and rural development. Although the most recent work (Farrell et al., 2006a; Hill et al., 2006; U.S. EPA, 2007a) suggests some net fossil fuel displacement when biofuels replace petroleum products, the gains remain moderate, especially for corn-based ethanol. Others strongly contest these conclusions (e.g., Patzek, 2004; Pimentel and Patzek, 2005). Importantly, as additional analysis on modeling life-cycle impacts expands the parameters of assessment to include nitrous oxide emissions from fertilization and associated land-use changes from increased biofuel production, the net beneﬁts of using ethanol produced from dedicated starch crops are looking less positive. The second part of this chapter provides a variety of quantitative metrics on subsidy magnitude to illustrate how much support is being provided, not only per unit of biofuel produced, but also in terms of greenhouse gas (GHG) reductions. These values are intended to help in evaluating whether other options to diversify transport fuels or mitigate climate change might be more cost-effective. 4.2 Evolution of Federal Policies Supporting Liquid Biofuels Subsidization of ethanol production at the federal level began with the Energy Tax Act of 1978. That Act granted a 4 cents-per-gallon reduction in the federal motor fuels excise tax for gasohol, a blend of 10% ethanol and 90% gasoline, also called 4 A complete list of the GSI’s studies can be found at http://www.globalsubsidies.org. Slide 100: 4 Subsidies to Ethanol in the United States 83 E10. This rate translates to 40 cents per gallon of pure ethanol at the time, and is equivalent to about $1.00 per gallon in 2007 dollars. The excise tax subsidy rate was adjusted frequently over the ensuing 25 years, until it was replaced by the Volumetric Ethanol Excise Tax Credit (VEETC) in 2004. VEETC is ﬁnanced by general revenues, rather than through reduced collections for highway funding as occurred with the original exemption. The US Congress introduced additional measures to support the ethanol industry in 1980. The Energy Security Act of 1980 initiated federally insured loans for ethanol producers, and from 1980–86 alcohol production facilities could access taxexempt industrial development bonds (Gielecki et al., 2001). Also in 1980, Congress levied a supplemental import tariff of 50 cents per gallon on foreign-produced ethanol (RFA, 2005), which was increased to 60 cents in 1984 (Gielecki et al., 2001) and now stands at 54 cents. Several states also started to subsidize ethanol around this time. Minnesota introduced a 40 cents per gallon ethanol blenders’ credit in 1980 (phased out in 1997), as did North Dakota (Sullivan, 2006). A tally of state measures carried out by the Congressional Research Service two decades ago (CRS, 1986) identiﬁed incentives in place in 29 states. By 1986, state excise-tax exemptions alone were costing state treasuries over $450 million per year (in 2007 dollars) in foregone tax receipts. In 1988, federal legislation began addressing the consumption side of the alternative fuels market. The Alternative Motor Fuels Act passed that year provided credits to automakers in meeting their Corporate Average Fuel Economy (CAFE) standards when they produced cars capable of being fueled by alternative fuels (Dufﬁeld and Collins, 2006).5 Earning these credits did not require that the vehicles actually run on the alternative fuels, and because so few vehicles have (somewhat less than one percent of their mileage, according to a 2002 Report to Congress), the rule has been estimated to have increased domestic oil demand by 80,000 barrels a day (MacKenzie et al., 2005). Environmental concerns have also helped improve the market position of biofuels. The Clean Air Act Amendments of 1990 mandated changes to the composition of gasoline in an effort to address two speciﬁc air-pollution problems. Reformulated gasoline was designed to help reduce ozone-forming hydrocarbons, as well as certain air toxins in motor-vehicle emissions, and was prescribed for areas of the country suffering the most-severe ozone problems. Oxygenated fuels were intended for use in the winter, in certain metropolitan and high-pollution areas, in order to reduce emissions of carbon monoxide. An oxygen-increasing additive, or oxygenate, was required to be added to these types of gasoline reformulations. However, the Amendments did not specify any particular oxygenate (of which there are several) for achieving these goals (Liban, 1997). Mandates to use ethanol for at least 30% of the oxygenates needed to meet these requirements were promulgated by the U.S. Environmental Protection Agency (EPA) in 1994 with the strong support of the 5 The Energy Policy Act of 1992 (EPACT92) formally established E85 as an alternative transportation fuel. In addition, it established alternative-fueled-vehicle mandates for government and state motor ﬂeets, policies that have indirectly encouraged demand for ethanol fuels over time (EIA, 2005a; Schnepf, 2007). Slide 101: 84 D. Koplow, R. Steenblik ethanol industry, but they were overturned in a court challenge a year later (Johnson and Libecap, 2001). MTBE (methyl tertiary butyl ether), a petroleum-derived additive, emerged as the oxygenate of choice, primarily because the oil industry already had more than a decade of experience using it as an octane enhancer. Then, in 2004, concerns over the carcinogenicity of MTBE and contamination of groundwater from leaky storage tanks led several key states, starting with California, New York and Connecticut, to ban the additive (Yacobucci, 2006). By early 2006, nineteen other states had banned or limited the use of MTBE. The demise of MTBE was then accelerated by the Energy Policy Act of 2005 (EPACT05). In addition to not granting MTBE producers liability protection, Congress decided that the oxygenate mandates had yielded mediocre results, and so ended them. Effective 6 May 2006, non-oxygenated reformulated gasoline could be sold in most parts of the country (Yacobucci, 2006). With MTBE effectively no longer an option, ethanol remains as the main surviving competing fuel additive for increasing octane, a position that has helped further boost demand for the fuel.6 More signiﬁcantly, EPACT05 also included the ﬁrst federal purchase mandates for liquid biofuels. Referred to as the “Renewable Fuels Standard” (RFS), it ﬁxed minimum consumption levels of particular speciﬁed fuels for each year, with the mandated level rising over time. Most of the mandated volumes under present law are expected to be fulﬁlled by ethanol from corn. 4.3 Current Policies Supporting Ethanol Using a standard economic classiﬁcation scheme for industry support, we provide an overview of the many types of incentives now in place to support the ethanol industry. As we were able to identify more than 200 support measures beneﬁtting ethanol nationwide in 2006 (some of which also cover biodiesel, which is not discussed here), this section provides illustrations rather than a catalog. 4.3.1 Volume-Linked Support Volume-linked support takes two main forms. The ﬁrst, market price support, includes interventions such as import tariffs or purchase mandates that are linked to fuel volumes but operate by raising the price received by commodity producers above what it would be in the absence of such interventions. The second includes direct payments to producers that are linked to their levels of production. In the United States, output-related subsidies for ethanol are generally linked to gallons of fuel produced or blended. 6 Gallagher et al. (2001, p. 3) projected that the MTBE ban alone could double demand for ethanol within 10 years. Slide 102: 4 Subsidies to Ethanol in the United States 85 4.3.1.1 Market Price Support Associated with Tariffs and Mandates Market price support (MPS) refers to ﬁnancial transfers to producers from consumers arising from policy measures that support production by creating a gap between domestic market prices and border prices of the commodity (OECD, 2001). It can be considered the residual support element resulting from the interaction of any number of policies. Three policies play a signiﬁcant role in supporting market prices for biofuels in the United States: tariffs, blending mandates, and tax credits and exemptions (de Gorter and Just, 2007). Ideally, MPS is measured by comparing actual prices obtained in a market with an appropriate reference price. Because the nature of the information on tax credits is much more concrete than that available on prices, for the purpose of this exercise we treat tax credits separately from the effects of tariffs and blending mandates. These latter two are described brieﬂy below. Tariffs — Imported fuel ethanol is currently subject to both the normal ad valorem tariff and a speciﬁc-rate tariff. The applied MFN (most-favored nation) tariff on imports of undenatured ethyl alcohol (80% volume alcohol or higher) is 2.5%, and on denatured ethyl alcohol it is 1.9%. The speciﬁc-rate tariff is 54 cents per gallon. Hartley (2006) notes that the supplemental tariff is punitive, since it is applied volumetrically to the full mixture (i.e., including the denaturant), and is actually higher than the domestic subsidy it supposedly offsets. Not all ethanol imported to the United States is subject to these tariffs, however.7 Canada and Mexico — the United States’ partners in the North American Free Trade Agreement (NAFTA) — for example, can export ethanol to the United States dutyfree. Countries that are covered by the Caribbean Basin Economic Recovery Act (CBERA) can export an unlimited amount of ethanol to the United States duty-free if it is made predominantly from local feedstocks, or a volume equivalent of up to seven percent of U.S. fuel-ethanol consumption if it is made mainly from feedstocks grown outside of the region (Etter and Millman, 2007). Renewable fuels standards — As noted above, federal RFS targets of 4 bgpy in 2006, rising to 7.5 bgpy by 2012, were introduced by EPACT. Post-2012 increases are meant to occur at the same growth rate as for gasoline demand. Higher credits (equal to 2.5 times those for sugar- or starch-based ethanol) are available for cellulosic ethanol until 2012, after which 250 mgpy of cellulosic ethanol usage becomes mandatory (Dufﬁeld and Collins, 2006). Biodiesel is included at a higher credit rate as well (1.5 times that of corn ethanol) because of its higher heat rate (EPA, 2006b). 7 Moreover, because of a loophole called the “manufacturer’s duty drawback”, even the amount of duty actually paid on ethanol imported from countries such as Brazil and China is uncertain. The World Bank (Kojima et al., 2007) points out that an oil marketer can import ethanol as a blending component of gasoline, and obtain a refund (“draw back”) on the duty paid if it exports a like-commodity within two years of paying the initial duty. Since jet fuel is considered a likecommodity, and counts as an export when sold for use in aircraft that depart the United States for a foreign country, this has allowed some oil marketers to count such jet-fuel exports against ethanol imports and recover the duty paid on ethanol. Slide 103: 86 D. Koplow, R. Steenblik Several states have issued mandates of their own; they are often more stringent than the federal one. Minnesota had already established a renewable fuels mandate prior to the federal RFS; it requires that gasoline sold in the state must contain 20% ethanol by 2013. However, many other states have become active as well. In 2006, Iowa set a target to replace 25% of all petroleum used in the formulation of gasoline with biofuels (biodiesel or ethanol). Hawaii wants 10% of highway fuel use to be provided by alternative fuels by 2010; 15% by 2015; and 20% by 2020. A few other states have set more modest requirements, some of which (as for Montana and Louisiana) are contingent on production of ethanol within these states reaching certain minimum levels. The combined effects of tariffs in the presence of renewable fuel standards — The main effect of a tariff is to protect domestic markets from competition from lower-priced imports, thus allowing domestic prices to rise higher than they would otherwise. When only a tariff is in place, competition from foreign suppliers of ethanol will be reduced, but domestic manufacturers must still compete with nonethanol alternatives, notably gasoline.8 Mandating a minimum market share for a good also normally drives up its price. The size of the impact will depend on a variety of factors, including how large the mandated purchases are relative to what consumption would have been otherwise; the degree to which output of the good increases as prices rise; and whether competition from imports is allowed. With a mandate but no tariff, the amount of ethanol sold domestically would possibly be higher than otherwise, but its price would be constrained by foreign sources. A mandate plus a tariff both raises the threshold price at which foreign-sourced ethanol becomes competitive, and protects domestic suppliers from being undercut by the price of gasoline. A number of parties have tried to estimate how much the RFS mandates alone, or in combination with import tariffs, increase domestic prices of biofuels. Several (e.g., EPA, 2006b; Urbanchuk, 2003) reach the conclusion that increases in wholesale (also known as “rack”) prices would be more than offset by government subsidies, resulting in declines in pump prices. The results of both of these studies are of course sensitive to the degree to which state and federal subsidies to ethanol would be passed on to consumers, rather than absorbed into operating margins and proﬁts of ethanol market participants.9 Others have looked mainly at producer prices. Elobeid and Tokgoz (2006) (henceforth “E&T”), analyzed the impact of liberalizing ethanol trade between the United States and Brazil using a multi-market international ethanol model calibrated on 2005 market data and policies, taking the United States’ renewable fuel standard 8 The price ceiling for all ethanol would be set by the energy-equivalent price of gasoline, as adjusted by any additional value of ethanol as an additive (e.g., to raise octane levels). Foreign suppliers of ethanol in that case would also be price takers, and the main difference for lower-cost foreign supplies between the situation with and without the tariff would be the market share they could capture from domestic producers, especially in coastal-state markets. 9 For a more detailed discussion of price formation and the economic incidence of subsidies in the ethanol market see Bullock (2007). Slide 104: 4 Subsidies to Ethanol in the United States 87 and Brazil’s blending mandates as givens.10 Were trade barriers alone to be removed (retaining the existing renewable fuel mandate of 7.5 billion gallons per year, as well as the VEETC), they estimate the average U.S. ethanol prices from 2006 to 2015 would fall by 13.6%, or $0.27 per gallon. These results provide a rough indication of the degree to which the import tariff, in the presence of the existing (EPACT05established) renewable fuels standard, increases the cost of meeting that standard. Should the import tariff remain in place while a higher RFS is implemented (as are proposed in pending energy legislation), the MPS would be expected to rise signiﬁcantly.11 Estimating market price support for a commodity ideally involves calculating the gap between the average annual unit value, or price, of the good (usually measured at the factory gate) with a reference price, usually either an average (pre-tariff) unit import price or the export price.12 Since such data are not readily available for the U.S. market, we have used the E&T results to obtain a rough estimate of market price support exclusive of the effect of the VEETC, the subsidy value of which we treat separately.13 Applying the E&T’s price mark-up to domestically-produced ethanol generates an estimate of the contribution of the tariff to MPS of $1.3 billion in 2006, rising to more than $3 billion per year as domestic production grows. 4.3.1.2 Tax Credits and Exemptions The federal Volumetric Ethanol Excise Tax Credit (VEETC), enacted in 2004 by the Jumpstart Our Business Strength (JOBS) Act, constitutes the single largest subsidy to ethanol. It provides a credit against income tax of 51 cents per gallon of ethanol blended into motor fuel. It is awarded without limit, and regardless of the price of gasoline, to every gallon of ethanol — domestic or imported — blended in the marketplace. Moreover, it is not subject to corporate income tax, which means its Note that neither Elobeid and Tokgoz, nor any other researchers, have incorporated state-level renewable-fuel mandates into their models. Such state-level mandates, if they are both enforced and more stringent than the federal one, can cause additional price distortions. 11 More recently, Westhoff (2007) simulated the effects on ethanol production and prices of expanding the mandated level of biofuel use in 2015 from 7.8 bgpy (the baseline) to 15 bgpy under a range of possible future petroleum prices scenarios. Current agricultural policies and the VEETC and ethanol tariff were assumed to remain unchanged. Compared with the baseline, he found that plant (i.e., producer) prices for ethanol in the 2015/16 marketing year would be on average 16 percent ($0.25 per gallon) higher. Considering the results of this study with the E&T results suggests that both the tariff and the RFS raise prices, and that the two effects are mutually supporting rather than additive. 12 A complicating factor is that ethanol can be both a complement to gasoline when it is used as an additive, and a substitute for it when used as an extender. This makes estimating the appropriate reference price more difﬁcult. 13 Removal of both the import tariff and ethanol volumetric excise tax credit would generate even larger declines in domestic prices (between $0.29 and $0.36 per gallon, per Elobeid and Tokgoz (2006) and Kruse et al. (2007)). However, the tax credit subsidies are captured directly in our totals, while the MPS from the tariffs and RFS are not. 10 Slide 105: 88 D. Koplow, R. Steenblik value to recipients is greater than if it were a simple grant, or a price beneﬁt provided through an exception from an excise tax (Box 4.1). Box 4.1 The beneﬁt of tax exemption for the VEETC Tax breaks allow larger than normal deductions from taxable income or reductions in taxes due. A side-effect of the reduced tax payments is that the remaining revenues of the enterprise rise. Although the tax burden will remain lower than before the tax break, a portion of the beneﬁt is lost to the recipient because there is some tax due on the increase in earnings. For example, under standard rules if a ﬁrm gets a $1 production tax credit (PTC), their taxes paid go down by $1, but their bottom line — which is taxable — rises by that same $1 amount. If they pay taxes at a 30% rate, they would see their taxes rise by 30 cents, leaving them with only 70 cents of the original PTC. To generate $1 in after-tax value to a ﬁrm, a revenue-based subsidy would need to be higher than $1 — basically $1/(1-marginal tax rate), or $1.43 in this example. This higher value is referred to as the outlay equivalent value of tax breaks. It was routinely reported in US tax expenditure budgets until a couple of years ago. The question of whether a tax subsidy is exempt from taxation matters quite a bit to evaluating the distortions in energy markets from government programs. Because the VEETC is an excise tax credit rather than a production tax credit it falls into a gray area of the tax code. This ambiguity illustrates how tiny changes in the interpretation of the tax code can increase the value of subsidies to the ethanol industry by billions of dollars per year. From a technical perspective, Section 87 of the tax code speciﬁcally requires that tax credits for biofuels under Section 40 (the income tax credits) be included in taxable income, rendering their outlay equivalent value identical to the revenue loss. The language on the VEETC is not clear, however. Section 6426 of the Internal Revenue Code, which describes the VEETC, makes numerous cross-references to Section 40, mostly for deﬁnitional issues. There is no mention of Section 87. In January of 2005, the Internal Revenue Service issued a guidance document on implementation issues related to the VEETC (IRS, 2005). Because this guidance was silent on the tax treatment of the credits, a consortium of industry groups ﬁled comments requesting a clariﬁcation on the issue (Herman, 2005). The wording of their request indicates their inclination to treat the VEETC as not includible in taxable income until clearly instructed otherwise: One of the major questions facing our members is whether any part of the new excise tax credit for alcohol fuel mixtures is taxable, and whether there are any circumstances in which the excise tax credit or refund (payment) must be reported as part of gross income. (Herman, 2005) Sources within both the Joint Committee on Taxation of the U.S. Congress (JCT) and the U.S. Department of Treasury have conﬁrmed that, as of Slide 106: 4 Subsidies to Ethanol in the United States 89 September 2007 at least, there had been no technical corrections in how the excise tax credits are treated by the Internal Revenue Service (IRS), implying that the credits are still excludible from taxable income. The incremental beneﬁt of this exemption was roughly $1.2 billion for ethanol in 2006 on top of a direct revenue loss of $2.8 billion. The incremental subsidy from this tax loophole, supposedly a policy accident, has become the third-largest subsidy to ethanol. By 2015, even if there is no increase in the RFS, the VEETC will generate subsidies of $6.3 billion per year on a revenue loss basis and $8.9 billion per year on an outlay-equivalent basis. In addition to the federal VEETC, several states provide reductions or exemptions for ethanol from motor fuel excise or sales taxes. The largest subsidies from these programs appear to be in Hawaii, Illinois, Indiana, and Iowa. With ethanol blends of 10% or less widely used in the country, reduced fuel taxes on E10 are becoming increasingly uncommon. Many still provide reduced rates for E85, however, and these can be fairly large per gallon. Based on the states we quantiﬁed, the average exemption for E85 was 11.5 cents per gallon; the median exemption was 7 cents per gallon. For now, the amount of ethanol consumed in E85 is small — less than 15 million gallons in 2006 according to the EIA. This is equivalent to roughly 17.4 million gallons of E85, assuming an 85% blend rate.14 The largest revenue losses tend to come from states that exempt particular fuel blends from sales taxes on fuels. The standard reporting of fuel tax rates provides greater clarity on deviations in excise tax rates than for fuel sales taxes. This may be one explanation for the political preference to subsidize via the sales tax. State motor-fuel tax preferences, along with state-level mandates, seem to exert a big inﬂuence on where U.S.-produced ethanol ends up being sold. 4.3.2 Payments Based on Current Output Production payments or tax credits to producers of ethanol have been on offer by the federal government and many states. These programs are normally structured to provide a pre-speciﬁed payment or tax credits for each unit (usually gallon) of output a plant produces. Supplier refunds also exist in a number of places, and operate in a similar manner. At the federal level, the Small Producer Tax Credit, introduced in 1990, grants ethanol and biodiesel plants that produce less than 60 mgpy a 10-cents-per-gallon income-tax credit on the ﬁrst 15 million gallons they produce (a maximum of $1.5 million per plant each year). Using industry data on plant nameplate capacity, we 14 The actual blend rate is anyone’s guess. States such as Minnesota allow winter blends as low as 60 percent ethanol to count as E85. Lower blend rates would drive up the overall subsidy costs of E85 within a state. Slide 107: 90 D. Koplow, R. Steenblik estimate the revenue loss from this provision to be over $100 million per year for ethanol. However, newer plants tend to be larger and we expect that by the end of 2009 less than 60% of the nation’s ethanol plants will meet the 60 mgpy cutoff. Subsidies likely will not fall, however. When a similar situation occurred only ﬁve years ago (at which point less than 40% of the plants fell under the then 30 mgpy limit), Congress simply increased the limit. Output-linked payments via the USDA’s Bioenergy Program until recently paid an additional bounty per gallon of ethanol or biodiesel produced, with higher bounties for new production. These operated through grants rather than tax credits, but were otherwise fairly similar in structure and impact. Several states also provide production payments or tax credits for producers. Some of the programs require eligible plants to pre-qualify with the government before they can claim a credit. Some cap the total payouts (or allowable tax credits) per year to all plants. This means that the early plants may absorb the entire available funds, or that the actual per-gallon subsidy received is well below the rate nominally noted in the statute. 4.3.3 Subsidies to Factors of Production Value-adding factors in biofuel production include capital, labor, land and other natural resources. Surprisingly, even labor related to biofuels production does not escape subsidization. The state of Washington, for example, allows labor employed to build biofuels production capacity, or to make biodiesel or biodiesel feedstock, to pay a reduced rate on the state’s business and occupation tax.15 4.3.3.1 Support for Capital Used in Manufacturing Biofuels Scores of incentive programs have been targeted at reducing the capital cost of ethanol plants. Many of these are speciﬁc to ethanol (or ethanol and biodiesel), though others are open to a broader variety of alternative fuels. Government subsidies are often directed to encourage capital formation in a speciﬁc segment of the supply chain. Generic Subsidies to Capital The ethanol sector beneﬁts from a number of important general subsidies to capital formation. Though available to a wide variety of sectors, these policies can nonetheless distort energy markets. All of them subsidize capital-intensive energy production more heavily than less capital-intensive methods. As a result, they tend to diminish the value of energy conservation relative to supply expansions. In addition, 15 Rates on manufacturing of ethanol and biodiesel fuel are the lowest of all categories, and less than one-third the normal rate on manufacturing activities. See WA DOR (2007). Slide 108: 4 Subsidies to Ethanol in the United States 91 the small print in how they are deﬁned can generate differential subsidies by sector. Depreciation governs the process by which investments into long-lived equipment can be deducted from taxable income. The theoretical goal of depreciation is to match the cost of an asset with the period over which it will produce income, generating an accurate picture of the economics of an industry. Politically, however, depreciation schedules have become another lever used by Congress to subsidize targeted groups. Federal legislation regularly reclassiﬁes speciﬁc industries, or shortens the period over which capital investments can be deducted from taxable income for particular sectors. This generates more rapid tax deductions. Due to the time value of money, rapid tax reductions are more valuable than those occurring slowly over time. Production equipment for ethanol (and biodiesel) is classiﬁed as waste reduction and resource recovery plant (Class 49.5) under the Modiﬁed Accelerated Cost Recovery System (MACRS).16 This grouping includes “assets used in the conversion of refuse or other solid waste or biomass to heat or to a solid, liquid, or gaseous fuel,” and allows full deduction of plant equipment in only seven years. An additional beneﬁt comes in the form of the highly accelerated 200% declining balance method that can be used for Class 49.5, and that further front-loads deductions into the ﬁrst years of plant operation. With over $18 billion invested in ethanol production capacity since 2000 alone, this can constitute a fairly large subsidy. Note that our estimates incorporate only investments into plant capacity. For simplicity, we have not made similar calculations for investments in distribution infrastructure. These investments include terminals, retail facilities, tank trucks, rail cars and barges. During this same period, the ethanol industry’s estimated additional spending on infrastructure assets was roughly $1 billion.17 Subsidies for Speciﬁc Production-Related Capital In addition to general subsidies to capital that beneﬁt multiple sectors of the economy, a number of subsidies target biofuel capital directly. Capital grants are used in many states and help ﬁnance production facilities, refueling or blending infrastructure, or the purchase of more expensive alternative fueled vehicles. Partial government funding of demonstration projects in the ethanol sector is common. The Energy Policy Act of 2005, for example, provided earmarked funds for a number of large biofuel-demonstration projects. Credit subsidies, such as loans, guarantees, and access to tax-exempt debt, are common methods to subsidize the development of ethanol production and 16 Choosing the proper grouping is not always easy. This classiﬁcation reﬂects input from Mark Laser at Dartmouth University, who noted that based on his reading of the IRS classiﬁcations, and “discussions with colleagues from NREL and Princeton,” class 49.5 seemed the proper ﬁt (Laser, 2006). 17 Earth Track estimates based on data in EPA (2006a). Slide 109: 92 D. Koplow, R. Steenblik infrastructure. Title XVII of EPACT, for example, will guarantee up to 80% of the cost of selected new plants. Liquid biofuels comprised $2.5 billion of the initial round of requests for federal guarantees (DOE, 2007a), and the largest share (6 of 16) of projects chosen by the DOE to submit ﬁnal funding proposals (DOE, 2007b). Program structures such as this leave little investment risk borne by investors and increase the chances of both poor project selection and of loan defaults. Many of the ethanol loan guarantees issued in the 1980s defaulted. Some states (e.g., Delaware’s Green Energy Fund) provide direct credit subsidies that are open to ethanol production facilities. Others apply their limited allowances to issue tax-exempt bonds to ethanol projects. Hawaii has authorized $50 million of tax-exempt bonds to fund a bagasse-fed ethanol plant, for example. Nebraska has authorized public power districts to build ethanol plants, and to use tax-exempt municipal bonds to ﬁnance their construction.18 New Jersey is another example, having approved $84 million in tax-exempt ﬁnancing for a privately-owned ethanol plant. Special tax exemptions for purchasing biofuels-related equipment are also common. Generally, the tax exemptions are not contingent on production levels. For example, Montana exempts all equipment and tools used to produce ethanol from grain from property taxes for a period of 10 years. In Oregon, ethanol plants pay a reduced rate (50% of statute) on the assessed value of their plant for a period of ﬁve years. These policies reduce the private cost to build a biofuels facility. Subsidy Stacking Subsidy stacking refers to a practice whereby a single plant will tap into multiple subsidy programs. This is common during the construction of a new plant, but unfortunately is often quite difﬁcult to see when surveying subsidies. One $71-million, 20-million-gallon-per-year ethanol plant being built in Harrison County, Ohio, for example, has been able to line up government-intermediated credit or grants from seven different federal and state sources, covering 60% of the plant’s capital.19 Regulatory Exemptions The waiver of regulatory requirements normally applied to similar industrial developments, but from which ethanol has been exempted, also provide a beneﬁt equivalent to a subsidy. These exemptions can sometimes be quite surprising given ethanol’s claim to be an environmentally-friendly fuel. For example, Minnesota 18 The subsidies associated with this power may not always be direct. The Nebraska Public Power District, for example, can provide coal and operate coal-ﬁred boilers for ethanol plant operators (Dostal, 2006). 19 Project Brieﬁng: Harrison Ethanol On Site/Off Site Rail (2006, January 10). Retrieved December 8, 2007, www.dot.state.oh.us/OHIORAIL/Project%20Brieﬁngs/January%202006/ 0603%20Harrison%20Ethanol%20-%20brieﬁng.htm. See also www.ethanolproducer.com/article. jsp?article id=1910. Slide 110: 4 Subsidies to Ethanol in the United States 93 exempts ethanol plants (though not biodiesel) with a production capacity of less than 125 mgpy from conducting an environmental impact assessment so long as the plant will be located outside of the seven-county metropolitan area.20 Less stringent regulation of pollutants from the biofuels sector can also provide a beneﬁt to the industry, by reducing its capital or operating costs. In April 2007, the EPA reclassiﬁed ethanol fuel plants from their former grouping as “chemical process plants” into a less-regulated grouping in which ﬁrms producing ethanol for human consumption had been operating. The Agency characterized the change as one of providing “equal treatment” for all corn milling facilities (EPA, 2007b). However, the change also increased the allowable air emissions from fuel ethanol facilities substantially — from 100 tons per year to 250 tons. In addition, fugitive emissions (i.e., not from the plant stack) no longer have to be tallied in the emissions total. Finally, the plants have less stringent air permitting requirements in that they no longer have to install the Best Available Control Technology (BACT). Even an industry trade magazine (Ebert, 2007) notes that [r]egardless of the legislative tributaries that many producers will have to navigate, barring litigation, most facilities will be able to take advantage of the new rule to expand and ramp up production, to build new plants with greater capacities or to potentially switch to a different power source, such as coal. The majority of ethanol produced in the country is for fuel purposes, not human consumption.21 4.3.3.2 Policies Affecting the Cost of Intermediate Inputs: Subsidies for Feedstocks Government policies in the United States support the use of key biofuel feedstocks indirectly, through farm subsidies. Because of the United States’ dominance in the global markets for corn and soybeans, federal subsidies provided to those crops during the nine years following the passage of the 1996 Farm Bill kept their farmgate prices artiﬁcially low — by an average of, respectively, 23% below and 15% below average farm production costs, according to Starmer and Wise (2007). Market prices were depressed by somewhat less than the unit value of the subsidies, though the speciﬁcs varied according to market conditions. Adding to the complexity, corn and soybean markets are linked at several points. For one, the crops are often grown on the same land, in rotation. Second, they both yield competing products, such as vegetable oils and protein feeds (in the case of corn, as a byproduct of producing ethanol). These interactions complicate the way in which subsidies operate across the biodiesel and ethanol sectors. Corn has historically been one of the most heavily subsidized crops within the United States. The Environmental Working Group (EWG), which tracks farm See MN Statutes 2007, section 116D.04, Subd.2a. Two inquiries to the EPA’s manager for this rule seeking information on cost savings to industry from the change went unanswered. 21 20 Slide 111: 94 D. Koplow, R. Steenblik subsidy payments, estimates that corn subsidies totaled nearly $42 billion between 1995 and 2004 from 12 federal programs,22 reaching a high of $9.4 billion per year in 2005 (Environmental Working Group, 2006; Campbell, 2006). In 2006, corn did not qualify for ﬁrst installments on counter-cyclical payments because the effective prices for corn exceeded its respective target price (USDA, 2006). Nonetheless, corn growers continued to receive ﬁxed annual payments on their 2006 harvest. Pro-rating these values to ethanol, based on the share of supply diverted to fuel production, generates an estimate of expenditure on corn subsidies associated with ethanol production of nearly $500 million for 2006, despite the sharp decline in counter-cyclical support. As ethanol production continues to consume a larger share of the domestic corn crop, its absolute (but not per-gallon) share of corn subsidies will rise accordingly. The linkages between energy and agricultural policy are also having effects on the environment. Already, rapid growth in demand for biofuel feedstocks, particularly corn and soybeans, is changing cropping patterns in the Midwest, leading to more frequent planting of corn in crop rotations, an increase in corn acreage at the expense of wheat, and the ploughing up of grasslands (GAO, 2007). This trend is worrying, as a growing body of evidence suggests that greater carbon sequestration can be achieved through protecting natural ecosystems than by substituting biofuels for petroleum (Righelato and Spracklen, 2007). US corn production remains chemical-intensive. Moreover, both corn and soybeans, like all row crops, typically experience higher rates of erosion than crops like wheat. Corn production is often water-intensive as well, a problem that is being exacerbated by current trends in corn-based ethanol plants. These are expanding westward, into areas more dependent on irrigation than corn produced in the Central Midwest. Some of that expansion is into counties served by the heavily overpumped23 Ogallala Aquifer. In addition to corn production, the ethanol plants themselves also require signiﬁcant volumes of water (Zeman, 2006; National Research Council, 2007). 4.3.4 Support for R&D on the Production Side Federal spending on biofuels R&D hovered between $50 and $100 million a year between 1978 and 1998 (Gielecki et al., 2001). The U.S. Ofﬁce of Technology Assessment reported that direct research on ethanol within the DOE was less than $15 million per year between 1978 and 1980 (OTA, 1979). It is notable that the federal government started the Bioenergy Feedstock Development Program at Oak 22 These included production ﬂexibility; loan deﬁciency; market loss assistance; direct payments; market gains farm; advance deﬁciency; deﬁciency; counter-cyclical payment; market gains warehouse; commodity certiﬁcates; farm storage; and warehouse storage. EWG data deduct negative payments or federal recaptured amounts from the total. See http://www.ewg.org/farm for more details. 23 See USGS (2003). Slide 112: 4 Subsidies to Ethanol in the United States 95 Ridge National Laboratory nearly 30 years ago to focus on new crops and cropping systems for energy production (Schnepf, 2007). The program continues to operate in a similar form today.24 Ethanol-related R&D is estimated to reach $400 million per year annually by 2009 (Koplow, 2007), mainly related to cellulosic ethanol. 4.3.5 Subsidies Related to Consumption Numerous federal and state subsidies support investment in infrastructure used to transport, store, distribute and dispense ethanol. A separate set of policies underwrites the purchase or conversion of vehicles capable of using alternative fuels. 4.3.5.1 Subsidies to Capital Related to Fuel Distribution and Disbursement Getting ethanol from the reﬁnery to the fuel pump requires considerable infrastructure, separate from that used to distribute gasoline. Pure ethanol attracts moisture, which means that it cannot be transported through pipelines built to carry only petroleum products. High ethanol blends, like E85, also have to be segregated and stored in corrosion-resistant tanks, and pumped through equipment with appropriate seals and gaskets. All such investment is expensive. Since 2004, the federal government and many states have started to offer ﬁnancial incentives to help defray some of those costs. Under EPACT, a refueling station can obtain a tax credit that covers 30% of eligible costs of depreciable property (i.e., excluding land) for installing tanks and equipment for E85. This is capped at $30,000 per taxable year per location, and is estimated to cost the U.S. Treasury $15–30 million per year. At least 15 states also provide assistance to establish new E85 facilities at retail gasoline outlets, as well as to support other ethanol distribution infrastructure. The Illinois E85 Clean Energy Infrastructure Development Program, for example, provides grants worth up to 50% of the total cost for converting an existing facility (up to a maximum of $2,000 per site) to E85 operation, or for the construction of a new refueling facility (maximum grant of up to $40,000 per facility). Florida recently created a credit against the state sales and use tax, available for costs incurred between 1 July 2006 and 30 June 2010, covering 75% of all costs associated with retroﬁtting gasoline refueling station pumps to handle ethanol; equipment for blends as low as E10 can qualify. 4.3.5.2 Support for Vehicles Capable of Running on Ethanol The emergence of ethanol FFVs on the market provided a means for federal and state agencies to meet federal requirements for alternative fuel vehicles (AFVs) established in the Energy Policy Act of 1992. These requirements stipulated that 24 http://bioenergy.ornl.gov/ Slide 113: 96 D. Koplow, R. Steenblik certain government entities purchase AFVs for speciﬁed fractions (75% in the case of new light-duty vehicles) of their ﬂeets when purchasing new vehicles. One result of this requirement was that, over time, the federal government acquired signiﬁcant numbers of ethanol FFVs. Support for privately owned FFVs is also provided by several states in the form of rebates and tax credits for purchasing AFVs, or reductions on license fees and vehicle taxes, some of which apply to ethanol FFVs. The individual states, and even some municipalities, have also provided regulatory incentives that favor AFVs. These include: the right to drive in high-occupancy vehicle (HOV) lanes, no matter how few the number of occupants in the vehicle (Arizona, California, Georgia, Utah and Virginia); the right to park in areas designated for carpool operators (Arizona); and exemptions from emissions testing (Missouri and Nevada) or certain motor-vehicle inspection programs (Ohio). Because every state develops its own deﬁnition of what exact vehicles types may participate in their AFV incentives, it is difﬁcult to evaluate how many of these incentives apply to ethanol-powered vehicles. 4.4 Aggregate Support to Ethanol To develop a better sense of how all of the individual subsidy programs affect the overall environment for ethanol, we have compiled a number of aggregate measures of support. The aggregate data provide important insights into a variety of policy questions, ranging from the ﬁnancial cost of the support policies to taxpayers and consumers, to estimates of the costs of achieving particular policy goals. Among arguments put forth in support of biofuel subsidies are that they help the country to diversify from fossil fuels in general, and petroleum in particular; and that they have a better environmental proﬁle than fossil fuels. Quantiﬁcation is often difﬁcult either because the subsidy’s course of action is indirect (e.g., mandated use of ethanol) or because data on the magnitude of support (especially at the state level, or with tax breaks or credit enhancements) are difﬁcult to locate. As a result, there are inevitable gaps in our subsidy tallies. Despite not counting everything, however, the subsidy picture is striking. We estimate that total support for ethanol was $5.8 billion to $7.0 billion in 2006 and, assuming no change in the RFS, will rise sharply to $11 billion by 2008 and $14 billion by 2014 (Table 4.1). The VEETC at present is the single largest ethanol subsidy and the difference between the high and low estimate is primarily associated with the incremental beneﬁt blenders receive from the VEETC being excludible from income taxes (Box 4.1). We believe the high estimate is a more accurate representation of government support to ethanol than is the low estimate. Subsidies from the VTEEC were $3–4 billion in 2006, and are projected to total $34 to $48 billion over the 2006–12 period. Total undiscounted subsidies to ethanol from 2006–2012 are estimated to fall within the range of $68 billion to $82 billion. Implementation of a higher RFS (e.g., 36 bgpy by 2022) would increase total subsidies by tens of billions of dollars per year above these levels. Slide 114: 4 Subsidies to Ethanol in the United States Table 4.1 Estimated total support for ethanol Element Market Price Support Output-linked Support1 Volumetric Excise Tax Credit (low) Volumetric Excise Tax Credit (high) USDA Bioenergy Program Reductions in state motor fuel taxes State production, blender, retailer incentives Federal small producer tax credit Factors of Production – Capital Excess of accelerated over cost depreciation Federal grants, demonstration projects, R&D2 Credit subsidies Deferral of gain on sale of farm reﬁneries to coops Factors of Production – Labour Feedstock Production (biofuels fraction) Consumption Credits for clean fuel refueling infrastructure State vehicle purchase incentives AFV CAFE loophole Total support3 Low estimate High estimate 2006 1,390 2,810 4,010 80 390 120 110 170 110 110 10 NC 510 2007 1,690 3,380 4,820 Ended in ‘06 410 NQ 150 220 290 110 20 NC 640 2008 2,280 4,380 6,260 – 440 NQ 170 680 350 110 20 NC 740 Total, 2006–12 17,450 33,750 48,220 80 3,210 120 1,100 3,250 2,140 880 130 NC 5,010 97 10 NQ NQ 5,820 7,020 30 NQ NQ 6,940 8,390 20 NQ NQ 9,200 11,070 140 NQ NQ 67,260 81,720 1 Primary difference between high and low estimates is inclusion of outlay equivalent value for the volumetric excise tax credits. A gap in statutory language allows the credits to be excluded from taxable income, greatly increasing their value to recipients. 2 Values shown reﬂect half of authorized spending levels where funds have not be appropriated. This reﬂects the reality that not all authorized spending is actually disbursed. 3 Total values reﬂect gross outlays; they have not been converted to net present values. This follows the general costing approach used by the Joint Committee on Taxation. 4 Totals may not add due to rounding. 5 NC = Subsidies were quantiﬁed but not counted because provision was generally applicable across the economy. NQ = Subsidies exist that were not quantiﬁed. Source: Koplow (2007). Market price support, related to the combination of high barriers to imports and domestic purchase mandates, comprises the second largest subsidy to ethanol, at $1.3 billion in 2006, rising to more than $3 billion per year by 2010. Should the RFS be increased to 36 or 60 bgpy as is being considered, market price support would become the largest subsidy element, surpassing even the VEETC. Feedstock support also remains important, despite falling countercyclical payments, as direct Slide 115: 98 D. Koplow, R. Steenblik payments remain high and ethanol is absorbing an ever-higher share of the total corn crop. Based on 2004–2005 patterns of fuel consumption we estimate state sales and excise tax exemptions for biofuels to generate a subsidy to ethanol of approximately $400 million in 2006. Fuel taxes change regularly. In any given quarter, at least a few states will change their rates. Similarly, different sources for this information also disagree. While many states provide generous exemptions for E85, sales information are hard to come by, making revenue-loss calculations difﬁcult. We have prorated national E85 sales data (also a few years old) by the state share of E85 refueling stations. This approach enables us to generate a rough estimate, despite the limitation of implicitly assuming that all pumps dispense the same amount of fuel per year. Rising demand; large new incentives, such as a full exemption from state taxes for E85 in New York; larger credits in Iowa; and rapidly growing sales of both ethanol blends and E85 suggest subsidies in 2007 and 2008 will be substantially higher. State policies beyond reductions in motor-fuel taxation were quantiﬁed only for 2006, based on Koplow (2006). Had these many state supports been catalogued and quantiﬁed, the magnitude of state and county supports would be much larger than what is shown in the table. 4.4.1 Subsidy per Unit Energy Output and as a Share of Retail Price Estimates of total support provide only a ﬁrst-level indication of the potential market distortion that the subsidies may cause. Large subsidies, spread across a very large market, can have less of an effect on market structure than much smaller aggregate subsidies focused on a small market segment. As shown in Table 4.2, Table 4.2 Subsidy-intensity values for ethanol 2006 Subsidy per gallon of pure ethanol Subsidy per GGE of fuel1 Subsidy per MMBtu Subsidy per GJ Subsidy as share of retail price2 Estimated retail price ($/gallon of pure ethanol) 1 2007 1.05–1.25 1.40–1.70 12.45–15.05 11.80–14.25 46–56% 2.25 2008 1.05–1.30 1.45–1.75 12.70–15.30 12.05–14.50 55–66% 1.95 Average 2006–12 1.00–1.25 1.40–1.70 12.15–14.75 11.50–13.95 50–66% 2.05 1.05–1.25 1.45–1.75 12.55–15.15 11.90–14.35 39–47% 2.70 GGE values adjust the differential heat rates in biofuels so they are comparable to a gallon of pure gasoline. This provides a normalized way to compare the subsidy values to the retail price of gasoline. 2 Retail price projections are for E100 and B100 as estimated in Westhoff and Brown (2007) for 2006–12; and FAPRI (February 2007) for 2013–16. Source: Koplow (2007). Slide 116: 4 Subsidies to Ethanol in the United States 99 subsidies on a volumetric basis are $1–$1.30 per gallon of ethanol, and roughly $1.40–$1.70 per gallon of gasoline equivalent (GGE). The average subsidy per gigajoule (GJ) of ethanol energy produced is between $11 and $14 during the 2006–12 period. Subsidies per unit energy produced via ethanol subsidies top $11 per GJ in all years, reaching as high as $14.50 per GJ in 2008. For the 2006–12 period, subsidies to ethanol will be equal to half or more of its projected retail price. Actual price drops for ethanol during the summer of 2007 have brought prices well below the values shown in our calculations. As of October 2007, ethanol subsidies were equal to as much as 80% of the fuel’s then spot-market price of roughly $1.60 per gallon (Kment, 2007; Shirek, 2007). 4.4.2 Subsidies per Unit Greenhouse Gas Displaced A common claim by biofuels supporters is that ethanol will play an important role in facilitating the transition to a society with a low carbon footprint. To test how efﬁcient existing policies are in getting us there, we examine the subsidy cost per metric ton of CO2 -equivalent displaced, and then compare this cost with the value of carbon offsets on the world’s two major climate exchanges in Chicago (CCX) and Europe (ECX). The results are shown in Table 4.3. The GHG displacement factors show a large variation across data sources. This is likely due to the complexity of the systems being modeled, but the variation forms a critical policy issue. As Kammen et al. (2007: 4) note: the indirect impacts of biofuel production, and in particular the destruction of natural habitats (e.g. rainforests, savannah, or in some cases the exploitation of ‘marginal’ lands which are in active use, even at reduced productivity, by a range of communities, often poorer households and individuals) to expand agricultural land, may have larger environmental impacts than the direct effects. The indirect GHG emissions of biofuels produced from productive land that could otherwise support food production may be larger than the emissions from an equal amount of fossil fuels. For corn ethanol, researchers cannot even agree on the direction of impact. Thus, at one end of the displacement factors, GHG emissions rise rather than fall from its production. This would imply very large subsidies per metric ton of extra CO2 equivalent emitted ($600 per metric ton in the case of corn ethanol). The best possible case for corn-based ethanol uses the lower bound subsidy estimate and divides it by the most favorable studies showing GHG reductions over the ethanol fuel cycle. Even here, subsidies per metric ton displaced are around $300.25 Based on historical prices for carbon offsets, this same investment could This value is lower than in our October 2006 study due to the use of a more favorable upper-end displacement value (a scenario with natural gas-ﬁred plant capacity and avoided drying costs by direct use of wet distillers grain byproducts) based on new work by Wang et al. (2007). This scenario performs well above the average corn-ethanol plant of the future, also modeled in that same paper. 25 Slide 117: 100 D. Koplow, R. Steenblik Table 4.3 Subsidy cost per unit of CO2 equivalent displaced 2006 2007 2008 Average 2006–12 295 (585) 110 195 (24%) 39% 77% 114% 11–21 4–7 84–167 31–56 27.3 3.6 Subsidy cost ($) per metric tonne CO2 equivalent displaced Low estimate 305 300 High estimate1 (600) (595) Cellulosic hypothetical case – low 110 110 Cellulosic hypothetical case – high 200 200 GHG displacement factors Displacement factor – worst1&2 Displacement factor – best Displacement factor – cellulosic worst Displacement factor – cellulosic best3 (24%) 39% 77% 114% (24%) 39% 77% 114% 310 (605) 115 205 (24%) 39% 77% 114% 11–23 4–8 81–160 30–54 26.9 3.8 Number of tonnes of carbon offsets subsidies could purchase European Climate Exchange4 12–24 11–22 ECX – cellulosic 5–8 4–7 Chicago Climate Exchange4 130–256 80–157 CCX – cellulosic 48–86 29–53 Cost of CO2 -equivalent futures contracts5 ECX – Average prices paid for settlements during year noted CCX – Historical average prices paid for settlements during year 1 24.9 2.3 26.7 3.8 Negative values occur when the speciﬁc life cycle modeling scenarios estimate that GHG emissions from the biofuels production chain exceed those of the conventional gasoline or diesel they are replacing. This is fairly common with models that more centrally integrate the land use change impacts of the biofuels production system. 2 Displacement factors represent the high and low values in the range from a variety of studies: Farrell et al. (2006b); Farrell et al. (2007); Hill et al. (2006); EPA (2007a); Wang et al. (2007) and Zah et al. (2007). The most favorable values included generally represent speciﬁc technologies rather than the average expected performance of either the current or future batch of plants. 3 Values above 100% denote net sequestration beneﬁts from the biofuel scenario (in this case, closed-loop poplar farming). It is not clear that the same high level of displacement would be maintained once the production base scaled up to meet the needs of the transportation sector. 4 Although the subsidies pay for increased GHG emissions in the ethanol and biodiesel examples, subsidy reform would still free up public money that could be used to purchase low cost carbon offsets on the exchanges. The number of offsets is shown here. 5 CO2 futures contract data from European and Chicago exchanges, compiled as of October 2007. Prices represent historical averages of daily transactional data for contracts in the year in question. Markets are not interchangeable; higher prices in Europe reﬂect tighter constraints. have purchased 80–130 times as much displacement on the CCX, the most appropriate benchmark for the U.S. carbon market. Even on the more expensive ECX, the subsidies could have purchased 11 metric tons of offsets. We considered also a hypothetical case assuming the same levels of government support for ethanol, but a closed-loop production system based on short-rotation poplar (Populus sp.) as a cellulosic feedstock. Such a production system is believed to generate net sequestration (hence its 114% displacement value). Whether the Slide 118: 4 Subsidies to Ethanol in the United States 101 impacts would really be so low once actual crops are produced on a large scale, move outside of their optimal range, and possibly require irrigation, is an open question. The hypothetical cellulosic-ethanol case provides better tradeoffs than for corn ethanol — $110–204 per metric ton of CO2 -equivalent displaced — but the subsidies are still high: these funds could have purchased 4–8 times the offsets on the EXC or 30–85 times on the CCX. 4.4.3 Comparisons with Other Countries The United States is by no means the only country that subsidizes ethanol production and consumption. Ethanol was heavily subsidized early in the development of Brazil’s industry (from 1976 through 1998; see Boddey, 1993); although production is no longer directly subsidized, domestic consumption is still favored through Table 4.4 Total support estimates (TSEs) and energy and CO2 metrics for ethanol in selected OECD countries in 2006 OECD economy TSE (109 US$) 5.8–7.0 1.6 0.15 0.044 >0.001 US$ per GJ US$ per litre of gasoline equivalent1 0.38–0.46 1.40 0.65 0.50 0.90 US$ per metric ton of avoided CO2 -equivalent2 305–600 700–5500 250–1700 300–630 330–380 United States3 EU4 Canada5 Australia6 Switzerland7 12–14 40 20 16 28 1 Per litre of gasoline equivalent (LGE) values adjust the differential heat rates in biofuels so they are comparable to a litre of pure gasoline. This provides a normalized way to compare the subsidy values to the retail price of gasoline. 2 Displacement factors represent the high and low values in the range from a variety of studies (e.g., Farrell et al. (2006); Farrell and Sperling, et al. (2007); Hill et al. (2006); EPA (2007a); Wang et al. (2007) and Zah et al. (2007) comparing the life-cycle emissions of greenhouse gases with that of unleaded gasoline. The most favorable values included generally represent speciﬁc technologies rather than the average expected performance of either the current or future batch of plants. The number in parentheses indicates that subsidies are actually generating extra GHGs. 3 The primary difference between the high and low estimates in the ﬁrst three columns relates to whether the volumetric excise-tax credits are counted in revenue-loss or outlay-equivalent terms. A gap in statutory language allows the credits to be excluded from taxable income, greatly increasing their value to recipients. 4 The range in the ﬁnal column reﬂects differences in displacement rates between ethanol produced from sugarbeets and ethanol produced from rye. 5 The range in the ﬁnal column reﬂects differences in displacement rates between ethanol produced from C-molasses and ethanol produced from grains. 6 The range in the ﬁnal column reﬂects differences in displacement rates between ethanol produced from waste wheat starch and ethanol produced from maize. 7 The range in the ﬁnal column reﬂects uncertainty in the displacement rates for ethanol produced as a by-product of cellulose production. Sources: • Australia: Quirke et al. (2008); • United States: Koplow (2007); • Other OECD economies: Steenblik (2007). Slide 119: 102 D. Koplow, R. Steenblik much lower fuel-excise taxes than those applied to gasoline, and by rules preventing private ownership of diesel-powered cars. More recently, several OECD member economies have started offering reduced excise-tax rates on ethanol used as fuel, and in some cases ﬁnancial assistance for ethanol-manufacturing plants. Compared with these other countries, the United States still leads in terms of absolute support provided, though per gigajoule or litre of gasoline equivalent its subsidization rate is substantially lower than those of the EU and Switzerland, which apply much higher fuel taxes to gasoline (Table 4.4). Measured in terms of dollars per metric ton of avoided CO2 -equivalent emissions, however, the United States falls within the range of values measured for most other OECD member economies, which in all cases are orders of magnitude higher than the prices of CO2 -equivalent offsets on the major climate exchanges, as well as current estimates of the social cost of a metric ton of CO2 emitted (see, e.g., IPCC, 2007). 4.5 Pending Legislation Despite a growing awareness of both the ﬁscal and environmental concerns about biofuels, legislative support has not abated. As of October 2007, the most “aggressive” proposed reforms (both contained in the tax section of the 2007 Farm Bill) involve reducing the excise tax credit by 5 cents per gallon (less than 10%) once the existing mandate is reached. None of the major bills would phase out the tax credits under high oil prices (when biofuels are more competitive) or remove an existing loophole that allows claimants to exclude the tax credits from their taxable income, further increasing the cost of the provision. Several major bills under consideration by Congress, including a large proposed Energy Bill and the 2007 Farm Bill, seek to increase levels of support for biofuels, particularly ethanol. By increasing the national mandatory consumption requirement (the Renewable Fuels Standard), for example, lawmakers hope to reduce risks to the industry of a sustained market downturn. The Energy Bill under debate in December 2007 (H.R. 6) would mandate 36 billion gallons per year by 2022. Senate Bill 23 includes a 60 billion gallon per year target by 2030. The costs of these rules are likely to be extremely large. The Energy Information Administration recently estimated that the incremental cost of a 25% renewable fuels mandate (on par with 60 billion gallons per year of biofuels) would $130 billion per year within the fuels sector alone. This translates to a cost per metric ton of CO2 -equivalent reduced of more than $115, or roughly 30 times the current cost of a carbon offset on the Chicago Climate Exchange. Costs of vehicle infrastructure and increased food prices would be extra. While the speciﬁcs of the mandates vary, most do not take into account life-cycle environmental impacts of biofuel production chains. As a result, they may encourage expensive fuels that actually worsen GHG emissions. In addition, none provide a neutral framework within which alternative ways to wean the country from imported oil and reduce greenhouse emissions can compete on a level playing ﬁeld. Such alternatives include improvements in vehicle efﬁciency, improved maintenance and tires, and hybrid and plug-in hybrid drive trains. Slide 120: 4 Subsidies to Ethanol in the United States 103 To further boost ethanol consumption, proposals are also being considered to increase the allowable limits for ethanol blends in gasoline for unmodiﬁed engines (currently 10%) and improve distribution infrastructure for E85. Some proposals seek to diversify the current industry by creating speciﬁc incentives for ethanol derived from feedstocks other than corn starch, expanding support for cellulosic ethanol and widening the deﬁnition of “advanced biofuels” (a definition that in some bills put before Congress would include fossil-derived fuels, and in many includes fuels derived from sugar and sorghum). As such, the new legislation compounds the current distortions to crop markets with a host of new programs to underwrite production, harvesting, storage, and the transport of cellulosic feedstocks. Some legislation makes compliance with the Renewable Fuels Standard contingent on lowering the greenhouse gas proﬁle of biofuels (difﬁcult to verify given problems with existing life cycle models). However, none would similarly restrict access to the excise tax credits. 4.6 Conclusions A rapidly-expanding production base, combined with a proliferation of policy incentives, has generated a growing level of public subsidization for the ethanol industry. Many of the existing subsidies scale linearly with production capacity or consumption levels, and the resulting rate of growth in the subsidy payments can be quite large. In addition, the subsidies do not decline as the price of gasoline rises, as is the case for some subsidies beneﬁting petroleum and natural gas, and for some ethanol-support programs elsewhere, such as Canada (Steenblik, 2007). Although the spiraling costs of the VEETC in particular have led to discussions and proposals for subsidy phase-outs when oil prices are high (Bantz, 2006), there are currently no constraints in place. At some point, the expiration of existing incentives may temper the growth in subsidization, but that point is still quite a few years off. Strong political support has maintained the key subsidies to ethanol for nearly 30 years, and we anticipate that those forces will remain. In the near term, we expect subsidy levels to rise sharply. Of particular interest are higher renewable fuel mandates and the rate of growth of 85% ethanol blends (E85), for which there are a number of large state subsidies that currently apply to only a small base. Our analysis illustrates not only that subsidies to ethanol are pervasive and large, but that they are not a particularly efﬁcient means to achieve many of the policy objectives for which they have been justiﬁed. These subsidies are the result of many independent decisions at different levels of government, resulting in policies that are often poorly coordinated and targeted. Hundreds of government programs have been created to support virtually every stage of production and consumption relating to ethanol, from the growing of the crops that are used for feedstock to the vehicles that consume the biofuels. In many locations, producers have been able to tap into multiple sources of subsidies. Slide 121: 104 D. Koplow, R. Steenblik Because the bulk of subsidies are tied to output and output is increasing at doubledigit rates of growth, the cost of these programs will continue to climb. Production is subsidized at the federal level even though consumption of it is mandated through the RFS. Ethanol production is supported on the grounds that it helps wean the United States from imported petroleum, but special loopholes in vehicle efﬁciency standards for ﬂexible fuel vehicles (including those that run on high ethanol blends) result in higher oil imports (MacKenzie et al., 2005). The maintenance of a high tariff on imported ethanol (2.5% plus 54 cents per gallon), in particular, sits at odds with the professed policy of the U.S. government to encourage the substitution of gasoline by ethanol. The absolute value of the subsidies is not the only, and perhaps not the main, indicator of the market-distorting potential of a set of support policies. Subsidies as a share of market price were above 40% as of mid-2006, for example, which is high in comparison with other fuels. Such high rates of subsidization might be considered reasonable if the industry was new, and ethanol was being made on a small-scale, experimental basis using advanced technologies. But that is not the case: the vast majority of subsidized production relies on mature technologies that, notwithstanding progressive improvements, have been around for decades. Ethanol also has some greenhouse gas and local-pollution beneﬁts. But the cost of obtaining a unit of CO2 -equivalent reduction through subsidies to the fuel is extremely high: we calculate that it comes to nearly $300 per metric ton of CO2 removed for corn-based ethanol, even when assuming an efﬁcient plant using lowcarbon fuels for processing. Yet even under such best-case scenario assumptions for GHG reductions from corn-based ethanol, one could have achieved far more reductions for the same amount of money by simply purchasing the reductions in the marketplace. The cost per metric ton of reductions achieved through public support of corn-based ethanol already programmed over the next several years could purchase more than 10 times the offsets on the European Climate Exchange, or nearly 90 times the offsets on the Chicago Climate Exchange. Most importantly, the U.S. government has neglected what should be its core role: to adopt a neutral strategy equally accessible to all potential options to reduce the country’s reliance on imported oil. Such a strategy would not favor ethanol, but would encourage a range of potential solutions such as more efﬁcient vehicles, better ﬂeet maintenance, and alternative drive-trains such as plug-in hybrids. Similarly, the government has yet to indicate an exit strategy to wean the ethanol industry from protection and subsidies. Indeed, as is often the case with subsidies, current legislative proposals appear to entrench existing arrangements. These will ensure that the biofuel industry remains a signiﬁcant drain on U.S. taxpayers for decades to come; and that improvements in transport-fuel options will be both slower and more expensive than would occur with a technology-neutral approach. Acknowledgments The authors gratefully acknowledge the research assistance provided by Tara Laan of the Global Subsidies Initiative, and to the peer reviewers of the two GSI studies on which this article is based. Slide 122: 4 Subsidies to Ethanol in the United States 105 References Bantz, S., Union of Concerned Scientists (2006, October 2). E-mail communication with Doug Koplow Boddey, R.M. (1993). Green energy from sugar cane. Chemistry and Industry, 17, 355–358 Bullock, D.S. (2007, November). Ethanol policy and ethanol politics. 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Of particular importance to society’s past and future is that depletion is overtaking technology in many ways, so that the enormous wealth made possible by cheap petroleum is very unlikely to continue very far into the future. What this means principally is that investments will increasingly have to be made into simply getting the energy that today we take for granted, the net economic effect being the gradual squeezing out of discretionary investments and consumption. While there are certainly partial “supply-side” solutions to these issues, principally through a focus on certain types of solar power, the magnitude of the problem will be enormous because of the scale required, the declining net energy supplies available for investment and the relatively low net energy yields of the alternatives. Given that this issue is likely to be far more immediate, and perhaps more important, than even the serious issue of global warming it is remarkable how little attention we have paid to understanding it or its consequences. Keywords Energy · oil · energy return on investment · investments · U.S. economy C.A.S. Hall State University of New York, College of Environmental Science and Forestry, Syracuse, New York 13210, e-mail: chall@esf.edu R. Powers State University of New York, College of Environmental Science and Forestry, Syracuse, New York 13210 W. Schoenberg State University of New York, College of Environmental Science and Forestry, Syracuse, New York 13210 D. Pimentel (ed.), Biofuels, Solar and Wind as Renewable Energy Systems, C Springer Science+Business Media B.V. 2008 109 Slide 127: 110 C.A.S. Hall et al. 5.1 Introduction The enormous expansion of the human population and the economies of the United States and many other nations in the past 100 years have been accompanied by, and allowed by, a commensurate expansion in the use of fossil (old) fuels, meaning coal, oil and natural gas. To many energy analysts that expansion of cheap fuel energy has been the principal enabler of economic expansion, far more important than business acumen, economic policy or ideology although they too may be important (e.g. Soddy 1926, Tryon 1927, Cottrell 1955, Boulding 1966, Georgescu Roegan 1971, Odum 1971, Daly 1977, Herendeen and Bullard 1975, Hannon 1981, Kummel 1982, Kummel 1989, Jorgenson 1984 and 1988, Hall 1991, Hall et al. 1986 (and others), Cleveland 1991, Dung 1992, Ayers 1996, Cleveland and Ruth 1997, Hall 2000). While we are used to thinking about the economy in monetary terms, those of us trained in the natural sciences consider it equally valid to think about the economy and economics from the perspective of the energy required to make it run. When one spends a dollar, we do not think just about the dollar bill leaving our wallet and passing to some one else’s. Rather, we think that to enable that transaction, that is to generate the good or service being purchased, an average of about 8,000 kilojoules of energy (equal to roughly the amount of oil that would ﬁll a coffee cup) must be extracted from the Earth and turned into roughly a half kilogram of carbon dioxide (U.S. Statistical Review, various years). Take the money out of the economy and it could continue to function through barter, albeit in an extremely awkward, limited and inefﬁcient way. Take the energy out and the economy would immediately contract immensely or stop. Cuba found this out in 1991 when the Soviet Union, facing its own oil production and political problems at that time, cut off Cuba’s subsidized oil supply. Both Cuba’s energy use and its GDP declined immediately by about one third, all groceries disappeared from market shelves within a week and the average Cuban lost 20 pounds (Quinn 2006). Cuba subsequently learned to live, in some ways well, on about half the oil as previously, but the impacts were enormous. While the United States has become more efﬁcient in using energy in recent decades, most of this is due to using higher quality fuels, exporting heavy industry and switching what we call economic activity (e.g. Kaufmann 2004). Many other countries, including efﬁciency leader Japan, are becoming substantially less efﬁcient (Hall and Ko, 2007, LeClerc and Hall 2007, Smil 2007, personal communication). 5.2 The Age of Petroleum The economy of the United States and the world is still based principally on “conventional” petroleum, meaning oil, gas and natural gas liquids (Fig. 5.1). Conventional means those fuels derived from geologic deposits, usually found and exploited using drill bit technology, and that move to the surface because of their own pressure or with pumping or additional pressure supplied by injecting natural gas, water or occasionally other substances into the reservoir. Unconventional petroleum includes Slide 128: 5 Peak Oil, EROI, Investments and the Economy in an Uncertain Future 111 Fig. 5.1 Pattern of energy use for the world (Source Jean Laherrere, with permission) shale oil, tar sands and other bitumens usually mined as solids and also coal bed and certain other methane deposits. For the economies of both the U.S. and the world nearly two thirds of our energy comes from conventional petroleum, about 40 percent from conventional liquid petroleum and another 20–25 percent from gaseous petroleum (EIA 2007; Fig. 5.1). Coal, and natural gas provide most of the rest of the energy that we use. Hydroelectric power and wood together are renewable energies generated from current solar input and provide about ﬁve percent of the energy that the US uses. “New renewables” including windmills and photovoltaics, provide less than one percent, and are not growing as rapidly in magnitude globally (although they are as a percent of their own contribution) as petroleum. Thus the annual increase in oil and gas use is much greater than the new quantities coming from the new renewables, at least to date. All of these proportions have not changed very much since the 1970s in the United States or the world. We believe it most accurate to consider the times that we live in as the age of petroleum, for petroleum is the foundation of our economies and our lives. Just look around. Petroleum is especially important because of its magnitude of current use, because it has important and unique qualitative attributes leading to high economic utility that include very high energy density and transportability (Cleveland 2005), and because its future supply is worrisome. The issue is not the point at which oil actually runs out but rather the relation between supply and potential demand. Barring a massive worldwide recession demand will continue to increase as human populations, petroleum-based agriculture and economies (especially Asian) continue to grow. Petroleum supplies have been growing most years since 1900 at two or three Slide 129: 112 C.A.S. Hall et al. percent per year, a trend that most investigators think cannot continue (e.g. Campbell and Laherrere 1998, Heinberg 2003). Peak oil, that is the time at which an oil ﬁeld, a nation or the entire world reaches its maximum oil production and then declines, is not some abstract issue debated by theoretical scientists or worried citizens but an actuality that occurred in the United States in 1970 and in some 60 (of 80) other oil-producing nations since (Hubbert 1974, Strahan 2007, Energyﬁles 2007). Several prominent geologists have suggested that it may have occurred already for the world, although that is not clear yet (e.g. Deffeyes 2005, see EIA 2007, IEA 2007). With global demand showing no sign of abating at some time it will not be possible to continue to increase petroleum supplies, especially oil globally and natural gas in North America, or even to maintain current levels of supply, regardless of technology or price. At this point we will enter the second half of the age of oil (Campbell 2005). The ﬁrst half was one of year by year growth, the second half will be of continued importance but year by year decline in supply, with possibly an “undulating plateau” at the top and some help from still-abundant natural gas outside North America separating the two halves and buffering the impact somewhat for a decade or so. We are of the opinion that it will not be possible to ﬁll in the growing gap between supply and demand of conventional oil with e.g. liquid biomass alternatives on the scale required (Hall et al. in review), and even were that possible that the investments and time required to do so would mean that we needed to get started some decades ago (Hirsch et al. 2005). When the decline in global oil production begins we will see the “end of cheap oil” and a very different economic climate. The very large use of fossil fuels in the United States means that each of us has the equivalent of 60–80 hard working laborers to “hew our wood and haul our water” as well as to grow, transport and cook our food, make, transport and import our consumer goods, provide sophisticated medical and health services, visit our relatives and take vacations in far away or even relatively near by places. Simply to grow our food requires the energy of about a gallon of oil per person per day, and if a North American takes a hot shower in the morning he or she will have already used far more energy than probably two thirds of the Earth’s human population use in an entire day. Oil is especially important for the transportation of ourselves and of our goods and services, and gas for heating, cooking, some industries and as a feedstock for fertilizers and plastics. 5.3 How much Oil will we be able to Extract? So the next important question is how much oil and gas are left in the world? The answer is a lot, although probably not a lot relative to our increasing needs, and maybe not a lot that we can afford to exploit with a large ﬁnancial and, especially, energy proﬁt. We will probably always have enough oil to oil our bicycle chains. The question is whether we will have anything like the quantity that we use now at the prices that allow the things we are used to having. Usually the issue of how much oil remains is not developed from the perspective of “when will we run out” Slide 130: 5 Peak Oil, EROI, Investments and the Economy in an Uncertain Future 113 but rather “when will we reach ‘peak oil’ globally”. World wide we have consumed a little over one trillion barrels of oil. The current debate is fundamentally about whether there are 1, 2 or even 3.5 trillion barrels of economically extractable oil left to consume. Fundamental to this debate, yet mostly ignored, is an understanding of the capital, operating and environmental costs, in terms of money and energy, to ﬁnd, extract and use whatever new sources of oil remain to be discovered, and to generate whatever alternatives we might choose to develop. Thus the investment issues, in terms of both money and energy, will become ever more important. There are two distinct camps for this issue. One camp, which we call the “technological cornucopians”, led principally by economists such as Michael Lynch (e.g. Lynch 1996, Adelman and Lynch 1997), believes that market forces and technology will continue to supply (at a price) more or less whatever oil we need for the indeﬁnite future. They focus on the fact that we now are able to extract only some 35 percent of the oil from an oil ﬁeld, that large areas of the world (deep ocean, Greenland, Antarctica) have not been explored and may have substantial supplies of oil, and that substitutes, such as oil shale and tar sands, abound. They are buoyed by the failure of many earlier predictions of the demise or peak of oil, two recent and prestigious analyses by the U.S. Geological Survey and the Cambridge Energy Research Associates that tend to suggest that remaining extractable oil is near the high end given above, the recent discovery of the deepwater Jack 2 well in the Gulf of Mexico and the development of the Alberta Tar Sands, which are said to contain more oil than remains even in Saudi Arabia. They have a strong faith in technology to increase massively the proportion of oil that can be extracted from a given oil ﬁeld, believe that many additional ﬁelds await additional exploration, and believe there are good substitutes for oil. A second camp, which we can call the “peak oilers”, is composed principally of scientists from a diversity of ﬁelds inspired by the pioneering work of M. King Hubbert (e.g. 1969; 1974), a few very knowledgeable and articulate politicians such as US Representative Roscoe Bartlett of Maryland, many private citizens from all walks of life and, increasingly, some members of the investment community. All believe that there remains only about one additional trillion barrels of extractable conventional oil and that the global peak – or perhaps a “bumpy plateau”, in extraction will occur soon, or, perhaps, has already occurred. The arguments of these people and their organization, the Association for the Study of Peak Oil (ASPO), spearheaded by the analyses and writings of geologists Colin Campbell and Jean Laherrere, are supported by the many other geologists who more or less agree with them, the many peaks that have already occurred for many dozens of oil-producing countries, the recent collapse of production from some of our most important oil ﬁelds and the dismal record of oil discovery since the 1960s – so that we now extract and use four or ﬁve barrels of oil for each new barrel discovered (Fig. 5.2). They also believe that essentially all regions of the Earth favourable for oil production have been well explored for oil, so that there are few surprises left except perhaps in regions that will be nearly impossible to exploit. There are several issues that tend to muddy the water around the issue of peak oil. First of all, some people do, and some do not, include natural gas liquids or Slide 131: 114 C.A.S. Hall et al. Fig. 5.2 Rate of the ﬁnding of oil (where revisions and extensions have been added into the year of initial strike) and of consumption (Source ASPO website) condensate (liquid hydrocarbons that condense out of natural gas when it is held in surface tanks). These can be reﬁned readily into motor fuel and other uses so that many investigators think they should simply be lumped with oil, which most usually they are. Since a peak in global natural gas production is thought to be one or two decades after a peak in global oil, inclusion of natural gas liquids extends the time or duration of whatever oil peak may occur (Fig. 5.3). Consequently, if indeed peak oil has occurred, a peak in liquid petroleum fuels might still be before us. A second Fig. 5.3 Conventional oil use data and projections with the inclusion of non-conventional liquid fuels (Source ASPO website) Slide 132: 5 Peak Oil, EROI, Investments and the Economy in an Uncertain Future 115 main issue is “how much oil is likely ever to be produced” vs. “when will global production peak, or at least cease growing?” In theory the issues are linked, perhaps tightly, but it is probably far more important to focus on the peak production rate rather than the total quantity that we will ever extract. In terms of ultimate economic impact, and probably prices, the most important issue is almost certainly the ratio between the production rate and its increase or decrease, and the consumption rate and its increase or decrease. Both the production and the consumption of oil and also natural gas have been growing at roughly two percent a year up through at least 2006. The great expansion of the economies of China and India, which at this time show no evidence of a slowdown, have recently more than compensated for some reduced use in other parts of the world. Nevertheless the growth rate of the human population has been even greater so that “per capita peak oil” probably occurred in 1978 (Duncan 2000). What the future holds may have more to do with the consumption rate than the production rate. If and when peak petroleum extraction occurs it is likely to increase prices which should bring an economic slowdown which should decrease oil use which might decrease prices and . . . the chickens and eggs can keep going for some time. That is why many peak oilers speak of “a bumpy plateau”. However if potential demand keeps growing then the difference between a steady or declining supply and an increasing demand presumably would continue upward pressures on price. The rates of oil and gas production (more accurately extraction) and the onset of peak oil are dependent upon many interacting factors, including geological, economic and political. The geological restrictions are the most absolute and depend on the number and physical capacity of the world’s operating wells. In most ﬁelds the oil does not exist in the familiar liquid state but in what is more akin to a complex oil-soaked brick. The rate at which oil can ﬂow through these “aquifers” depends principally upon the physical properties of the oil itself and of the geological substrate, but also upon the pressure behind the oil that is provided initially by the gas in the well. Then, as the ﬁeld matures, the pressure necessary to force the oil through the substrate to the collecting wells is supplied increasingly by pumping more gas or water into the structure. As with water wells the more rapidly the oil is extracted the more likely the substrate will become compacted, restricting future yields. Detergents, CO2 and steam can increase yields but too-rapid extraction can cause compaction of the “aquifer” or fragmentation of ﬂows which reduce yields. So our physical capacity to produce oil depends upon our ability to keep ﬁnding large oil ﬁelds in regions that we can reasonably access, our willingness to invest in exploration and development, and our willingness to not produce too quickly. The usual economic argument is that if supply is reduced relative to demand then the price will increase which will then signal oil companies to drill more, leading to the discovery of more oil and then additional supply. Although that sounds logical the results from the oil industry might not be in accordance to that logic as the empirical record shows that the rate at which oil and gas is found has little to do with the rate of drilling (Fig. 5.4). It is thought that at this time we are producing oil globally pretty nearly to our present capacity, although future depletion or new ﬁelds can change that. Finally, Slide 133: 116 C.A.S. Hall et al. Fig. 5.4 Annual rates of total drilling for and production of oil and gas in the US, 1949–2005 (R2 of the two = 0.005; source: U.S. EIA and N. D. Gagnon). Since drilling and other exploration activities are energy intensive, other things being equal EROI is lower when drilling rates are high output can be limited or (at least in the past) enhanced for political reasons – which are even more difﬁcult to predict than the geological restrictions. Empirically there is a fair amount of evidence from post peak countries, such as the U.S., that the physical limitations become important when about half of the ultimately-recoverable oil has been extracted. But why should that be? In the US it certainly was not due to a lack of investment, since most geologists believe that the US had been over drilled. We probably will not know until we have much more data, and much of the data are closely guarded industry or state secrets. According to one analyst if one looks at all of the 60 or so post peak oil-producing countries the peak occurs on average when about 54 percent of the total extractable oil in place has been extracted (Energyﬁles.com 2007). Finally oil-producing nations often have high population and economic growth, and are using an increasing proportion of their own production (Hallock et al. 2004). The United States clearly has experienced “peak oil”. In a way this is quite remarkable, because as the price of oil increased by a factor of ten, from 3.50 to 35 dollars a barrel during the 1970s, a huge amount of capital was invested in US oil discovery and production efforts so that the drilling rate increase from 120 million feet per year in 1970 to 400 million feet in 1985. Nevertheless the production of crude oil decreased during the same period from the peak of 3.52 billion barrels a year in 1970 to 3.27 in 1985 and has continued to decline to 1.89 in 2005 even Slide 134: 5 Peak Oil, EROI, Investments and the Economy in an Uncertain Future 117 with the addition of Alaskan production. Natural gas production has also peaked and declined, although less regularly (This is included in Fig. 5.4). Thus despite advancement of petroleum discovery and production technology, and despite very signiﬁcant investment, U.S. production has continued its downward trend since 1970. The technological optimists are correct in saying that advancing technology is important. But there are two fundamental and contradictory forces operating here, technological advances and depletion. In the US oil industry it is clear that depletion is trumping technological progress, as oil production is declining and oil is becoming much more expensive to produce. 5.4 Decreasing Energy Return on Investment Energy return on investment (EROI or EROEI) is simply the energy that one obtains from an activity compared to the energy it took to generate that energy. The procedures are generally straightforward, although rather too dependent upon assumptions made as to the boundaries, and when the numerator and denominator are derived in the same units, as they should, it does not matter if the units are barrels (of oil) per barrel, Kcals per Kcal or MJoules per Mjoule as the results are in a unitless ratio. The running average EROI for the ﬁnding and production of US domestic oil has dropped from greater than 100 kilojoule returned per kilojoule invested in the 1930s to about thirty to one in the 1970s to between 11 and 18 to one today. This is a consequence of the decreasing energy returns as oil reservoirs are increasingly depleted and as there are increases in the energy costs as exploration and development are shifted increasingly deeper and offshore (Cleveland et al. 1984, Hall et al. 1986, Cleveland 2005). Even that ratio reﬂects mostly pumping out oil ﬁelds that are half a century or more old since we are ﬁnding few signiﬁcant new ﬁelds. (In other words we can say that new oil is becoming increasingly more costly, in terms of dollars and energy, to ﬁnd and extract). The increasing energy cost of a marginal barrel of oil or gas is one of the factors behind their increasing dollar cost, although if one corrects for general inﬂation the price of oil has increased only a moderate amount until 2007. The same pattern of declining energy return on energy investment appears to be true for global petroleum production. Getting such information is very difﬁcult, but with help from the superb database of the John H. Herold Company, several of their personnel, and graduate student and sometime Herold employee Nate Gagnon we were able to generate an approximate value for global EROI for ﬁnding new oil and natural gas (considered together). Our preliminary results indicate that the EROI for global oil and gas (at least for that which was publically traded) was roughly 26:1 in 1992, increased to about 35:1 in 1999, and since has fallen to approximately 19:1 in 2005. The apparent increase in EROI during the late 1990s is during a period when drilling effort was relatively low and may reﬂect the effects of reduced drilling effort as was seen for oil and gas in the United States (e.g. Fig. 5.4). If the rate of decline continues linearly for several decades then it would take the energy in a barrel of oil to get a new barrel of oil. While we do not know whether that extrapolation is Slide 135: 118 C.A.S. Hall et al. accurate, essentially all EROI studies of our principal fossil fuels do indicate that their EROI is declining over time, and that EROI declines especially rapidly with increased exploitation (e.g. drilling) rates. This decline appears to be reﬂected in economic results. In November of 2004 The New York Times reported that for the previous three years oil exploration companies worldwide had spent more money in exploration than they had recovered in the dollar value of reserves found. Thus even though the EROI of global oil and gas is still about 18:1 as of 2006, this ratio is for all exploration and production activities. It is possible that the energy break even point has been approached or even reached for ﬁnding new oil. Whether we have reached this point or not the concept of EROI declining toward 1:1 makes irrelevant the reports of several oil analysts who believe that we may have substantially more oil left in the world, because it does not make sense to extract oil, at least for a fuel, when it requires more energy for the extraction than is found in the oil extracted. How well we weather this coming storm will depend in large part on how we manage our investments now. From the perspective of energy there are three general types of investments that we make in society. The ﬁrst is investments into getting energy itself, the second is investments for maintenance of, and replacing, existing infrastructure, and the third is discretionary expansion. In other words before we can think about expanding the economy we must ﬁrst make the investments into getting the energy necessary to operate the existing economy, and into maintaining the infrastructure that we have, at least unless we wish to accept the entropy-driven degradation of what we already have. Investors must accept the fact that the required investments into the second and especially the ﬁrst category are likely to increasingly limit what is available for the third. In other words the dollar and energy investments needed to get the energy needed to allow the rest of the economy to operate and grow have been very small historically, but this is likely to change dramatically. This is true whether we seek to continue our reliance on ever-scarcer petroleum or whether we attempt to develop some alternative. Technological improvements, if indeed they are possible, are extremely unlikely to bring back the low investments in energy that we have grown accustomed to. The main problem that we face is a consequence of the “best ﬁrst” principle. This is, quite simply, the characteristic of humans to use the highest quality resources ﬁrst, be they timber, ﬁsh, soil, copper ore or, of relevance here, fossil fuels. This is because economic incentives are to exploit the highest quality, least cost (both in terms of energy and dollars) resources ﬁrst, as was noted 200 years ago by economist David Ricardo (e.g. 1891). We have been exploiting fossil fuels for a long time. The peak in ﬁnding oil was in the 1930s for the United States and in the 1960s for the world, and both have declined enormously since then. An even greater decline has taken place in the efﬁciency with which we ﬁnd oil, that is the amount of energy that we ﬁnd relative to the energy we invest in seeking and exploiting it. As a consequence of the decreasing energy returns as oil depletion increases, and of the increasing energy costs as exploration and development shifted increasingly deeper offshore or into increasingly hostile environments, the energy return on investment (EROI) for US domestic oil has declined to perhaps 15 to one today, even though that contemporary ratio reﬂects mostly pumping out oil ﬁelds that are half a century or Slide 136: 5 Peak Oil, EROI, Investments and the Economy in an Uncertain Future 119 older. In other words we can say that new oil is becoming increasingly more costly, in terms of energy (and consequently dollars), to ﬁnd and extract. The alternatives to oil available to us today are characterized by even lower EROIs, limiting their economic effectiveness. It is critical for CEOs and government ofﬁcials to understand that the best oil and gas are simply gone, and there is no easy replacement. That pattern of exploiting and depleting the best resources ﬁrst also is occurring for natural gas. Natural gas was once considered a dangerous waste product of oil development and was burned or ﬂared at the well head. But during the middle years of the last century large gas pipeline systems were developed in the U.S. and Europe that enabled gas to be sent to myriad users who increasingly discovered its qualities of ease of use and cleanliness, including its relatively low carbon dioxide emissions, at least relative to coal. US natural gas originally came from large ﬁelds in Louisiana, Texas and Oklahoma. Its production has moved increasingly to smaller ﬁelds distributed throughout Appalachia and, increasingly, the Rockies. As the largest ﬁelds that traditionally supplied the country peaked and declined a national peak in production occurred in 1973, and then as “unconventional” ﬁelds were developed a second, somewhat smaller peak occurred in 2001. Gas production has fallen by about 6 percent from that peak, and many investigators predict a “natural gas cliff” as traditional ﬁelds are exhausted and as it is increasingly difﬁcult to bring smaller unconventional ﬁelds on line to replace the depleted giants. There had been an encouragement of electricity production from natural gas because it is relatively clean, but a large loss of petrochemical companies from the US because of the increasing price. 5.5 The Balloon Graph We pay for imported oil in energy as well as dollars, for it takes energy to grow, manufacture or harvest what we sell abroad to gain the foreign exchange with which we buy fuel, (or we must in the future if we pay with debt today). In 1970 we gained roughly 30 megajoules for each megajoule used to make the crops, jet airplanes and so on that we exported (Hall et al. 1986). But as the price of imported oil increased, the EROI of the imported oil declined. By 1974 that ratio had dropped to nine to one, and by 1980 to three to one. The subsequent decline in the price of oil, aided by the inﬂation of the export products traded, eventually returned the energy terms of trade to something like it was in 1970, at least until the price of oil started to increase again after 2000. A rough estimate of the quantity and EROI of various major fuels in the U.S., including possible alternatives, is given in Fig. 5.5. An obvious aspect of that graph is that qualitatively and quantitatively alternatives to fossil fuel have a very long way to go to ﬁll the shoes of fossil fuels. This is especially true when one considers the additional qualities of oil and gas, including energy density, ease of transport and ease of use. The implications of all this is that if we are to supply into the future the amount of petroleum that the US consumed in the ﬁrst half of this decade it will require Slide 137: 120 C.A.S. Hall et al. Fig. 5.5 “Balloon graph” representing quality (y graph) and quantity (x graph) of the United States economy for various fuels at various times. Arrows connect fuels from various times (i.e. domestic oil in 1930, 1970, 2005), and the size of the “balloon” represents part of the uncertainty associated with EROI estimates (Source: US EIA, Cutler Cleveland and C. Hall’s own EROI work in preparation) Source: US EIA, Cleveland et al. 1984, Cleveland 2005, Hall various including 1986 and http://www.theoildrum.com/node/3786. enormous investments in either additional unconventional sources, in import facilities or as payments to foreign suppliers. That will mean a diversion of investment capital and of money more generally from other uses into getting the same amount of energy just to run the existing economy. In other words investments, from a national perspective, will be needed increasingly just to run what we have, not to generate real new growth. If we do not make these investments our energy supplies will falter or we will be tremendously beholden to foreigners, and if we do the returns may be small to the nation, although of course if the price of energy increases greatly the returns to the individual investor may be large. Another implication is if this issue is as important as we believe it is then we must pay much more attention to the quality of the data we are getting about energy costs of all things we do, including getting energy. Finally the failure of increased drilling to return more fuel (Fig. 5.4) calls into question the basic economic assumption that scarcity-generated higher prices will resolve that scarcity by encouraging more production. Indeed scarcity encourages more exploration and development activity, but that activity does not necessarily generate more resources. It will also encourage the development of alternative liquid fuels, but their EROIs are generally very low (Fig. 5.5). Slide 138: 5 Peak Oil, EROI, Investments and the Economy in an Uncertain Future 121 5.6 Economic Impacts of Peak Oil and Decreasing EROI Whether global peak oil has occurred already or will not occur for some years or, conceivably, decades, its economic implications will be enormous because we have no possible substitute on the scale required and because alternatives will require enormous investments in money and energy when both are likely to be in short supply. Despite the projected impact on our economic and business life within relatively few years or at most decades, neither government nor the business community is in any way prepared to deal with either the impacts of these changes or the new thinking needed for investment strategies. The reasons are myriad but include: the disinterest of the media, the failure of government to fund good analytic work on the various energy options, the erosion of good energy record keeping at the department of commerce, and the lack of really good options. The second point perhaps is debatable but we stand on that statement because of the top ten or so energy analysts that we are familiar with none are supported by government, or generally any, funding. There are not even targeted programs in NSF or the Department of Energy where one might apply if one wishes to undertake good objective, peer reviewed EROI analyses. Consequently much of what is written about energy is woefully misinformed or simply advocacy by various groups that hope to proﬁt from various perceived alternatives. It is not unlikely that issues pertaining to the end of cheap petroleum will be the most important challenge that Western society has ever faced, especially when considered within the context of our need to deal with climate change and other environmental issues related to energy. Any business leaders who do not understand the inevitability, seriousness and implications of the end of cheap oil, or who make poor decisions in an attempt to alleviate its impact, are likely to be tremendously and negatively impacted as a result. At the same time the investment decisions we will make in the next decades will determine whether civilization is to make it through the transition away from petroleum or not. What would be the impacts of a large increase in the energy and dollar cost of getting our petroleum, or of any restriction in its availability? While it is extremely difﬁcult to make any hard predictions, we do have the record of the impacts of the large oil price increases of the 1970s as a possible guide. These “oil shocks” had very serious impacts on our economy which we have examined empirically in past publications (e.g. Hall et al. 1986). Many economists then and now did not think that even large increases in the price of energy would affect the economy dramatically because energy costs were but three to six percent of GDP. But by 1980, following the two “oil price shocks” of the 1970s, energy costs had increased dramatically until they were 14 percent of GDP. Actual shortages would have even greater impacts, if for example sufﬁcient petroleum to run our industries or businesses were not available at any price. Other impacts included, and would include, an enhancement of our trade imbalances as more income is diverted overseas, adding to the foreign holdings of our debt and a decrease in discretionary disposable income as more money is diverted to access energy, whether via higher prices, more petroleum exploration or low EROI alternative fuels. This in turn would affect those Slide 139: 122 C.A.S. Hall et al. sectors of the economy that are not essential. Consumer discretionary spending would probably fall dramatically, greatly effecting non-essential businesses such as tourism. 5.7 The “Cheese Slicer” Model We have attempted to put together a conceptual and computer model to help us understand what might be the most basic implications of changing EROI on the economic activity of the United States. The model was conceptualized when we examined how the U.S. economy responded to the “oil shocks” of the 1970s. The underlying foundation is the reality that the economy as a whole requires energy (and other natural resources derived from nature) to run, and without these most basic components it will cease to function. The other premise of this model is that the economy as a whole is faced with choices in how to allocate its output in order to maintain itself and to do other things. Essentially the economy (and the collective decision makers in that economy) has opportunity costs associated with each decision it makes. Figure 5.6 shows our basic conceptual model parameterized for 1970, before the oil shocks of that decade. The large square represents the structure of the economy as a whole, which we put inside a symbol of the Earth biosphere/geosphere to reﬂect the fact that the economy must operate within the biosphere (e.g. Hall et al. 2001). In addition, of course, the economy must get energy and raw materials from outside the economy, at least as narrowly perceived, that is from nature (i.e. the biosphere/geosphere). The output of the economy, normally considered GDP, is represented by the large arrow coming out of the right side, where the depth of the arrow represents 100 percent of GDP. For the sake of developing our concept we think of the economy, for the moment, as an enormous dairy industry and cheese as the product coming out of the right hand side, moving towards the right. This output (i.e. the entire arrow) could be represented as either money or embodied energy. We use the former in this analysis (as almost all of the relevant data is recorded in monetary, not energy, units), but it is probably not terribly different from using energy outputs. So, our most important question is “how do we slice the cheese”, that is how do we, and how will we divide up the output of the economy, or said differently, in what way can the output of the economy be divided up with the least objectionable opportunity cost. Most economists might answer “according to what the market decides,” that is according to consumer tastes and buying habits. But we want to think about it a little differently because we think things might be profoundly different in the future. Most generally the output of the model (and the economy) has two destinations: investment or consumption. These could be divided further into private vs. government investments and consumptions, or we could add in debt service, exports and imports, and so on. We choose not to do this, at least initially, although we are co-developing a much more complicated model of the economy with the Millennium Institute called T-21 North America. (e.g. Millennium Institute 2007). Our Slide 140: 5 Peak Oil, EROI, Investments and the Economy in an Uncertain Future 123 Fig. 5.6 The “Cheese slicer” diagrammatic model, which is a basic representation the fate of the output of the U.S. economy, 1970. The box in the middle represents the U.S. economy, the input arrow from the left represents the energy needed to run the economy, the large arrow on the right of the box represents the output of the model (i.e. GDP) which is then subdivided as represented by the output arrows going to the right—i.e. ﬁrst into investments (into getting energy, maintenance and then discretionary) and then into consumption (either the basic required for minimal food, shelter and clothing or discretionary). In other words the economic output is “sliced” into different uses according to the requirements and desires of that economy/society. Data principally from the U.S. Department of Commerce. Extrapolations via the Millennium Institute’s T-21 model courtesy of Andrea Bassi) next question is “investment or consumption of/for what?” To do this we ask about what we must spend our money/energy on, that is on the required expenditures (without which the economy would cease to function). These include the investments in maintaining societal infrastructure (i.e. repairing and rebuilding bridges, roads, machines, factories, vehicles – represented by the top middle arrow feeding back from output of the economy back to the economy itself), and some kind of minimal food, shelter and clothing for the population (represented by the bottom rightward pointing arrow) required to maintain all individuals in society at the level of the Federal minimum standard of living). Another, and very important, essential need, the one of greatest interest to us here, is the investments into, or payments for, energy (i.e. the amount of diverted economic output that is used to secure and purchase our imported oil) that is required for the energy needed for the economy to operate at any particular level. This energy is absolutely critical for the economy to operate and must be paid for through proper payments and investments – which Slide 141: 124 C.A.S. Hall et al. we consider together as investments to get energy. No investment in energy, no economic output. While there may be other critical inputs from nature (water, minerals etc.) or society (educated workforce etc.) we ignore these for the moment as they are unlikely to be as volatile as energy. This “Energy Investment” feedback is represented by the top-most arrow from the output of the economy back upstream to the “workgate” symbol (Odum 1971). The width of this line represents the investment of energy into getting more energy. Of critical interest here is that as the EROI of our economy’s total combined fuel source declines then more and more of the output of the economy must be shunted back to getting the energy required to run the economy if the economy is to remain the same size. Once these necessities are taken care of then what is left is considered the discretionary output of the economy. This can be either discretionary consumption (a vacation or a fancier meal, car or house than needed, represented by the upper right pointing arrow in the diagrams) or discretionary investment (i.e. building a new tourist destination in Florida or the Caribbean, represented as the lowest of the top arrows feeding back into the economy. During the last 100 years the enormous wealth generated by the United States economy has meant that we have had an enormous amount of discretionary income. This is in large part because the energy investments represented in Fig. 5.6 have been relatively small. It turns out that the needed information to construct the above division of the economy is reasonably easy to come by for the U.S. economy, at least if we are willing to make a few major assumptions and accept a fairly large margin of error. Inﬂation-corrected GDP, i.e. the size of the output of the economy, is published routinely by the U.S. Department of Commerce. The total investments for maintenance in the U.S. economy are available as “Deprecation of Fixed Capital”, U.S. Department of Commerce, various years). The minimum needed for food, shelter and clothing is available as “Personal Consumption Expenditures” (or the minimum of that required to be above poverty) which we selected from the U.S. Department of Commerce for various years). The investment into energy acquisition is the sum of all of the capital costs in all of the energy producing sectors of the U.S. plus expenditures for purchased foreign fuel. Empirical values for these components of the economy are plotted in Figs. 5.6–5.10. When these three requirements for maintaining the economy: investments and payments for energy, maintenance of infrastructure and maintenance of people are subtracted from the total GDP then what is left is discretionary income. We simulated two basic data streams: the U.S. economy from 1949 to 2005 (representing the growth prior to the “oil crises” of 1973 and 1979, the impact of the oil crisis and the recovery from that, which had occurred by the mid-1990s. Then we projected this data stream into the future by extrapolating the data used prior to 2005 along with the assumption that the EROI for society declined from an average of roughly 20:1 in 2005 to 5:1 in 2040. This is an arbitrary scenario but may represent what we have in store for us as we enter the “second half of the age of oil”, i.e. a time of declining availability and rising price so that more and more of society’s output needs to be diverted into the top arrow of e.g. Fig. 5.6. Slide 142: 5 Peak Oil, EROI, Investments and the Economy in an Uncertain Future 125 Fig. 5.7 Same as Fig. 5.6 but for 1980, following large increases in the price of oil. Note change in discretionary investments Fig. 5.8 Same as Fig. 5.6 but for 2007, following large decreases then small increases in the price of oil. Note change in discretionary investments Slide 143: 126 C.A.S. Hall et al. Fig. 5.9 Same as Fig. 5.6 but for 2030, with a projection into the future with the assumption that the EROI declines from 20:1 (on average) to 10:1 Fig. 5.10 Same as Fig. 5.6 but for 2050, but a projection into the future with the assumption that the EROI declines to 5:1 Slide 144: 5 Peak Oil, EROI, Investments and the Economy in an Uncertain Future 127 5.8 Results of Simulation The results of our simulation suggest that discretionary income, including both discretionary investments and discretionary consumption, will move from the present 50 or so percent in 2005 to about 10 percent by 2050, or whenever (or if) the composite EROI of all of our fuels reaches about 5:1 (Figs. 5.9–5.10). 5.9 Discussion Individual businesses would be affected by having their fuel costs increase and, for many, a reduction in demand for their products. This simultaneous inﬂation and recession happened in the 1970s and is projected to happen into the future as EROI for primary fuels declines. The “stagﬂation” that occurred in the 1970s was not supposed to happen according to an economic theory called the Phillips curve. But an energy-based explanation is easy (e.g. Hall 1992). As more money was diverted to getting the energy necessary to run the rest of the economy disposable income, and hence demand for many non-essential goods and services, declined, leading to economic stagnation. Meanwhile the increased cost for energy led to inﬂation, as there was no additional production that occurred from this greater expenditure. Although unemployment increased overall during the 1970s it was not as much as demand decreased, as labor at the margin became relatively useful compared to increasingly-expensive energy. Individual sectors might be much more impacted as happened in 2005, for example, with many Louisiana petrochemical companies that were forced to close or move overseas when the price of natural gas increased. On the other hand alternate energy businesses, from forestry operations and woodcutting to solar devices, might do very well. When the price of oil increases it does not seem to be in the national or in corporate interest to invest in more energy-intensive consumption, as Ford Motor Company seems to be ﬁnding out with its large emphasis on large SUVs and pickup trucks. We are likely to have over invested already in the number of remote second homes, cruise ships, and Caribbean semi-luxury hotels, so that it may not a particularly good idea to do more of that now. This is due to the “Cancun effect” – that such hotels require the existence of large amounts of disposable income from the US middle class and cheap energy. That disposable income may have to be shifted into the energy sector with less of an opportunity cost to the economy as a whole. Investors who understand the changing rules of the investment game are likely to do much better in the long run. So what can the scientist say to the investor? The options are not easy. As noted above worldwide investments in seeking oil have had very low monetary returns in recent years. Investments in many alternatives may not fare much better. Ethanol from corn projects were once ﬁnancially proﬁtable to the individual investor because they have been highly subsidized by the government, but they are probably a poor investment for the Nation. It is not clear that this fuel makes much of an energy Slide 145: 128 C.A.S. Hall et al. proﬁt, with an EROI of 1.6 at best, and less than one for one at worst, depending upon the study used for analysis (see review in Farrell et al. 2006 and also the many letters on that article in Science Magazine, June 23, 2006). Biodiesel may have an EROI of about three to one. Is that a good investment? Clearly not relative to remaining petroleum, but some day as petroleum EROI declines it may be. However real fuels must have EROIs of 5 or 10 or more returned on one invested to not be subsidized by petroleum or coal in many ways, such as the construction of the vehicles and roads that use them. Other biomass, such as wood, can have good EROIs when used as solid fuel but face real difﬁculties when converted to liquid fuels, and the technology is barely developed. The scale of the problem can be seen by the fact that we presently use more fossil energy in the US than is ﬁxed by all green plant production, including all of our croplands and all of our forests (Pimentel, D. Personal communication). Biomass fuels may make more sense in nations where biomass is very plentiful and, more importantly, where present use of petroleum is much less than in the US. Alternatively one might argue that if we could bring the use of liquid fuels in the United States down to, say, 20 percent of the present then liquid fuels from biomass could ﬁll in a substantial portion of that demand. Nevertheless we should remember that historically we in the U.S. have used energy to produce food and ﬁbre, not the converse, because we have valued food and ﬁbre more highly. Is this about to change? Energy return on investment from coal is presently quite favourable compared to alternatives (ranging from perhaps 50:1 to 100:1), but the environmental costs are probably unacceptable as the case for global warming and other pollutants from coal burning becomes increasingly clear. Injecting carbon dioxide into some underground reservoir seems unfeasible for all the coal plants we might build, but it is being pushed hard by many who promote coal. Nuclear has a debateable moderate energy return on investment (5–15:1, some unpublished studies say more), but newer analyses need to be made. Nuclear has a relatively small impact on the atmosphere, but there are large problems with public acceptance and perhaps safety in our increasingly difﬁcult political world. Windmills have an EROI of 15–20 return on one invested, but this does not include the energy cost of back up or electricity “storage” for periods when the wind is not blowing. They make sense if they can be associated with nearby hydroelectric dams that can store water when the wind is blowing and release water when it is not, but the intermittent release of water can cause environmental problems. Photovoltaics are expensive in dollars and presumably energy relative to their return, but the technology is improving. One should not be confused by all claims for efﬁciency improvements because many require very expensive “rare-earth” doping materials, and some may become prohibitively expensive if their use expands greatly (e.g. Andersson et al. 1998). According to one savvy contractor the efﬁciency in energy returned per square foot of collector has been increasing, but the energy returned per dollar invested has been constant as the price of the high end units has increased (Blair May, Waldoboro Maine, personal communication). Additionally while photovoltaics have caught the public’s eye the return on dollar investment is about double for hot water installations. Windmills, photovoltaics and some other forms of solar Slide 146: 5 Peak Oil, EROI, Investments and the Economy in an Uncertain Future 129 do seem to be a good choice if we are to protect the environment, but the investment costs up front will be enormous compared to fossil fuels. Energy and money are not the only critical aspects of development of energy alternatives. Recent work by Hirsch et al. (2005) has focused on the investments in time that might be needed to generate some kind of replacement for oil, should that be possible and peak oil occur. They examined what they thought might be the leading alternatives to provide the US with liquid fuel or lower liquid fuel use alternatives, including tar sands, oil shales, deep water petroleum, biodiesel, high MPG automobiles and trucks and so on. They assumed that these technologies would work (a bold assumption) and that an amount of investment capital equal to “many Manhattan projects” (the enormous project that built the ﬁrst atomic bomb) would be available. They found that the critical resource was time – once we decided that we needed to make up for the decline in oil availability these projects would need to be started one or preferably two decades in advance of the peak for there not to be severe dislocations to the US economy. Given our current petroleum dependence, the rather unattractive aspects of many of the available alternatives, and the long lead time required to change our energy strategy the investment options are not obvious. This, we believe, may be the most important issue facing the United States at this time: where should we invest our remaining high quality petroleum (and coal) with an eye toward insuring that we can meet the energy needs of the future. We do not believe that markets can solve this problem alone or perhaps at all. Research money for good energy analysis unconnected to this or that “solution” simply are not available. Fortunately some private individuals are stepping into the void as per our acknowledgements. Human history has been about the progressive development and use of ever higher quality fuels, from human muscle power to draft animals to water power to coal to petroleum. Nuclear at one time seemed to be a continuation of that trend, but that is a hard argument to make today. Perhaps our major question is whether petroleum represents but a step in this continuing process of higher quality fuel sources or rather is the highest quality fuel we will ever have on a large scale. There are many other possible candidates for the next main fuel, but few are both quantitatively and qualitatively attractive (Figure 5.5). In our view we cannot leave these decisions up to the market if we are to solve our future climate or peak oil problems. One possible way to look at the problem, probably not a very popular one with investors, is to pass legislation that would limit energy investments to only “carbon-neutral” ones, remove subsidies from low EROI fuels such as corn-based ethanol, and then perhaps allow the market to sort out from those possibilities that remain. A difﬁcult decision would be whether we should subsidize certain fuels. At the moment alcohol from corn is subsidized three times: in the natural gas for fertilizers, the corn itself through the Department of Agriculture’s 100 or so billion dollar general program of farm subsidies, and the additional 50 cents per liter subsidy for the alcohol itself. It seems pretty clear that the corn-based alcohol would not make it economically without the subsidy as it has only a marginal (if that) energy return. Are we simply subsidizing the depletion of oil, natural gas (and soil) to generate an Slide 147: 130 C.A.S. Hall et al. approximately equal amount of energy in the alcohol? Wind energy appears to have about an 18:1 EROI, enough to make it a reasonable candidate, although there are some issues relative to backup technologies for when the wind is not blowing. So should wind be subsidized, or allowed to compete with other zero emission energy sources? A question might be the degree to which the eventual market price would be determined by, or at least be consistent with, the EROI, as all the energy inputs (including that to support labor’s paychecks) must be part of the costs. Otherwise that energy is being subsidized by the dominant fuels used by society. 5.10 Conclusion It seems obvious to us that the U.S. economy is very vulnerable to a decreasing EROI for its principle fuels, whether that comes from an increase in expenditures overseas if and as the price of imported oil increases more rapidly than that of the things that we trade for it, or as domestic oil and gas reserves are exhausted and new reservoirs become increasingly difﬁcult to ﬁnd, or as we turn to lower EROI alternatives such as biodiesel and or photovoltaics. We do not know exactly what all this means, but our straightforward model suggests that a principal effect will be a decline in discretionary income and a greater investment requirement for getting energy, with all the economic impacts that entails. Since more fuel will be required to run the same amount of economic activity the potential for environmental impacts increasing is very strong. On the other hand protecting the environment, which we support strongly, may mean turning away from some higher EROI fuels to some lower ones. We think all of these issues are very important yet are hardly discussed in our society or even in economic or scientiﬁc circles. Acknowledgments We thank our great teacher, Howard Odum, many students over the years, colleagues and friends including Andrea Bassi, John Gowdy, Andy Groat, Jean Laherrere and Kent Klitgaard, and many others who have helped us to try to understand these issues. Art Smith and Lysle Brinker of John S. Herold Company were generous with their time, insight and data. Nate Gagnon created Fig. 5.4 and Nate Hagens made many useful comments. The Santa Barbara Family Foundation, ASPO-USA, The Interfaith Center on Corporate Responsibility and several individuals who wish not to be named provided much appreciated ﬁnancial help. References Adelman, M. A. & Lynch, M. C. (1997). 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Light behind the fall: Japan’s electricity consumption, the environment, and economic growth. Japan Focus. http://japanfocus.org/products/details/2394 Soddy, F. (1926). Wealth, virtual wealth and debt. (New York: E.P. Dutton and Co.) Solow, R. M. (1974). The economics of resources or the resources of economics. American Economic Review, 66, 1–14. Strahan, D. (2007) Open letter to Duncan Clarke. Posted on Wednesday, August 15th, 2007 http://www.davidstrahan.com/blog/?p=35. Tryon FG. (1927). An index of consumption of fuels and water power. Journal of the American Statistical Association 22: 271–282. Slide 150: Chapter 6 Wind Power: Beneﬁts and Limitations Andrew R.B. Ferguson Abstract Wind turbines have a potential beneﬁt insofar as they have a power density that matches coal, at least according to one measure. Set against this is the uncontrollable nature of their output. This means that without a suitable method of storing output, wind power can satisfy only about 10% of total energy demand. This limit applies to all uncontrollables collectively, with the slight exception that in places using a lot of air conditioning, photovoltaics could be used to help satisfy peak electrical demands. The basic problem of uncontrollables would resolve if a suitable method of storing electricity could be found. The severe limitations of hydro, hydrogen storage, and vanadium batteries are explored. A storage system that would be both efﬁcient and signiﬁcant in size, at least in the USA, is Compress Air Energy Storage (CAES), but more experience of this is needed before it can be properly assessed. Assessment becomes even more difﬁcult when looking ahead to the time when all fossil fuels are scarce, because at present there appears to be no satisfactory solution to the ‘liquid’ fuel problem, yet the process of manufacturing, installing, and maintaining wind turbines and the associated transmission lines would be very difﬁcult without the help of liquid fossil fuels. In the USA, any likely gain from the use of wind power is likely to be overtaken by the present population growth of at least 1.4% a year. Keywords Population growth · power density · storage · uncontrollables · wind 6.1 Introduction The power density1 that can be achieved using each speciﬁc renewable energy source is an important measure of the usefulness of that energy source. To see wind turbines in perspective, it is helpful to look ﬁrst at a variety of energy sources. A.R.B. Ferguson 11 Harcourt Close, Henley-on-Thames, RG9 1UZ, England e-mail: andrewrbferguson@hotmail.com D. Pimentel (ed.), Biofuels, Solar and Wind as Renewable Energy Systems, C Springer Science+Business Media B.V. 2008 133