Full Cost Accounting for Liquid Transportation
Fuels: Ethanol and Gasoline
Steve Polasky
University of Minnesota
September 26, 2010
On integrating economic, ecological and
regulatory dimensions of biofuels
• Good news: we already have methods &
tools that can accomplish integrated
assessments
• Bad news: the devil is in the details
(many, many details…)
• Talk about particular approach for
integration of economic, engineering and
ecological dimensions: full cost accounting
Full cost accounting
• For society, what alternative fuel source
can be produced and consumed with least
social cost?
• Research goal: compare the “full cost” of
conventional fossil-fuel vs. biofuels
alternatives
• Simple objective...mess of details
Full cost
• Energy production and use generates
significant environmental impacts
• Full cost: include the cost of
environmental externalities with direct
production costs to estimate social cost
Not so full cost…
• Title really should be “Comparing the
Partial Full Costs…”
• Include estimates of
– Direct production costs
– Costs associated with GHG emissions
– Costs associated with air emissions leading to
formation of fine particulate matter (PM2.5)
Don’t include costs of…
• Water quality issues (nitrates, phosphorus,
pesticides…)
• Some air quality issues (ozone, air toxics)
• Habitat issues
• Oil spills
• Energy security issues
• Agricultural supports…
Where the research stands
• Parts of this work has had prior scrutiny:
(environmental externalities)
– Hill, J., S. Polasky, E. Nelson, D. Tilman, H.
Huo, L. Ludwig, J Neumann, H. Zheng, D.
Bonta. 2009. Climate change and health costs
of air emissions from biofuels and gasoline.
Proceedings of the National Academy of
Sciences 106(6): 2077-2082.
• Parts of this has not (direct cost
calculations)
The research approach
• Calculate direct production cost and external
cost from “wells to wheel” to produce an
equivalent amount of energy from alternative
sources
• Lifecycle assessment: estimates for all inputs
and outputs from production of raw materials to
emissions from tailpipe
• Combine lifecycle assessment with input and
output prices to estimate direct production and
external costs
The research approach
• 1 billion gallon expansion in US production
and combustion of ethanol (0.66 billion
gallons of gasoline – conversion on BTU
basis)
• Note: roughly equal to the 2006–2007
increase in US gasoline consumption
The research approach
• To make fair comparisons, we assumed:
• All production activity occurs in the US
• Hold production of all other goods and services
in the economy constant
– Avoids problem of assessing welfare consequences
of changes in consumption of other goods (e.g.,
increased food prices)
• Additional corn or biomass needed for biofuel
production occurs on land converted from US
Conservation Reserve Program (CRP)
• Crop residues harvested from existing cropland
Comparison of alternatives
• Fossil-fuels: gasoline from conventional crude oil
• Corn-grain ethanol
– Natural gas process heat
– Natural gas process heat with technology improvements (higher
corn yield, higher refinery efficiency)
– Coal process heat
– Corn stover process heat
• Cellulosic ethanol
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Corn stover
Switchgrass
Mixed prairie grass
Miscanthus
Externality
cost
methodology
Carbon cost per ton
• Carbon mitigation (capture and storage) costs
for an integrated gasification combined-cycle
electricity generating plant are $92–$147 Mg-1 C
• We use the midpoint of this range, $120 Mg-1 C
• Alternative: social cost of carbon.
– Tol (2005, 2009) median estimate $43 Mg-1 C (mean
of $85 Mg-1 C)
– Wide range of estimates: from below 0 (benefit) to
over $1,000 Mg-1 C
External cost of GHG emissions
C = $120 / tonne
Land use component from CRP expansion is almost identical to some
estimates of indirect land use: 30 g / MJ
Spatial LCA
Farming
Corn
Transport
Coproduct
Generation
Fertilizer
Production
With respect to pollution costs,
GHG is the exception rather
Ethanol
Plant
Ethanol
Transport
than the rule. Location of
emissions matters!
Ethanol stage locations
• Areas where agricultural lime and N, P, and K fertilizer is produced
• Locations of electrical plants powering lime and N, P, and K
production
• Pesticide production facility locations
• Areas farmed for corn and biomass, and their relative productivity
• Locations of electrical plants providing power to farms
• Areas over which corn and biomass are transported
• Locations of biorefineries
• Locations of electrical plants providing power to biorefineries
• Areas from which natural gas is extracted and coal is mined
• Areas over which the finished product (ethanol) is transported
• Areas in which the finished product (ethanol) is sold and combusted
Location of corn production and
ethanol production facilities
American Chemical Society 2009
Gasoline stage locations
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Areas where crude oil is extracted
Locations of electrical plants providing power for crude oil extraction
Areas over which crude oil is transported
Locations of refineries
Locations of electrical plants providing power to refineries
Areas from which natural gas is extracted and coal is mined
Areas over which the finished product (gasoline) is transported
Areas in which the finished product (gasoline) is sold and
combusted
Air quality impacts (PM2.5)
Health effects of PM2.5
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Acute bronchitis
Acute myocardial infarction
Acute respiratory symptoms
Asthma exacerbation
Chronic bronchitis
Emergency room visits, Respiratory
Hospital admissions, Cardiovascular
Hospital admissions, Respiratory
Lower respiratory symptoms
Premature mortality
Upper respiratory symptoms
Work loss days
External cost of PM2.5 emissions
Combined GHG and PM2.5 costs
Direct production cost
• Standard production economics and
finance techniques
• Analysis from refinery gate onwards. Take
feed stock commodity prices (crude oil,
corn) as given
– Do not try to calculate cost of producing oil
(complications of scarcity rents)
– Do not try to calculate cost of growing corn
(complications of land rents)
Direct production cost
• One exception: cellulosic feed stocks
(switchgrass, corn stover)
– Large scale markets do not exist
– Do not have commodity prices as with oil and corn
• What would farmer have to be paid to make it
worthwhile to produce and transport biomass?
– Corn stover – residual from corn production. Costs
are baling, densifying, transporting
– Switchgrass – land rents, planting and fertilizer costs,
baling, densifying, transporting
Production costs for gasoline
• Used existing data on bulk wholesale price
for gasoline (average for all grades) from
EIA
Production costs for corn-grain
ethanol
• Costs are estimated for a dry mill ethanol
biorefinery
• Products per bushel of corn:
– Ethanol: 2.75 gallons
– DDGS: 17 lbs.
– Captured commercial quality CO2: 17 lbs
• Net out the revenue from sales of “co-products”
(DDGS and CO2)
• Note: for cellulosic ethanol, net out excess
electricity generated that can be sold back to the
grid
Production costs for cellulosic
ethanol
• Commercial scale plants do not exist
• Cost estimates are based largely on NREL
studies (Aden 2002, 2008)
• “Nth plant” assumption – cost estimates
assuming that learning-by-doing has occurred
• Two projections of technology
– “Current” technology – currently exists and in principle
could be scaled-up
– “State of Technology” – NREL projections for where
technology could be in the future (“optimistic” – if
everything goes right where are we likely to be)
Assumptions: Ethanol Yield
Corn Dry-Grind
Cellulosic Corn Stover
Cellulosic Switchgrass
Current
2.75
57.6
60.8
State of Technology
2.75
72.0
76.0
Price data
Coal ($/ton)
Natural gas ($/million BTU)
Gasoline ($/gallon)
Corn ($/bushel)
Corn stover ($/dry ton)
Switchgrass ($/dry ton)
DDGS ($/ton)
CO2 ($/ton liquid CO2)
2005
$47.63
$9.46
$1.83
$2.00
$85.22
$96.48
$65.00
$10.00
2008
$63.44
$8.96
$2.78
$4.46
$89.37
$101.67
$144.95
$10.00
Results with different price and
technology assumptions
“Full” cost: 2005 prices, current
cellulosic conversion efficiency
“Full” cost: 2005 prices, projected
cellulosic conversion efficiency
“Full” cost: 2008 prices, current
cellulosic conversion efficiency
“Full” cost: 2008 prices, projected
cellulosic conversion efficiency
Important points from results
• Direct production cost make up the majority of
costs
• Production cost rankings are sensitive to input
prices (2005 v 2008)
• Input prices are variable
• Important input prices
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Crude oil price (for gasoline)
Corn price (for corn-grain ethanol)
Natural gas
Electricity
Important points from results
• Direct production costs
– Higher for cellulosic ethanol
– Similar for gasoline and corn-grain ethanol
• Cellulosic ethanol is not currently produced at
commercial scale
– Production costs are estimates
• Open questions: when will cellulosic ethanol
technology be commercially viable? How fast
and how far will cellulosic production costs fall?
Important points from results
• Externality costs vary widely across fuels
– Lowest external costs for cellulosic ethanol
– Highest external costs for corn-grain ethanol with coal
process heat
• For low commodity prices: will either choose
gasoline or corn-grain ethanol despite higher
external costs than cellulosic ethanol
• For high enough commodity prices (e.g., 2008
prices) and large enough technical progress on
cellulosic then cellulosic ethanol is superior
Policy: environmental externalities
• Basic policy principle: internalize externalities
• Preferred policy: higher taxes on gasoline and corn-grain
ethanol than on cellulosic ethanol
– Tax products causing external damage
– Lower tax on cellulosic ethanol because of lower environmental
costs
• Political economy: if you can’t tax then wish to have
differential subsidy based on environmental impacts
• Current policy to subsidize all ethanol production is not
justified on the basis of env. impacts
– Subsidy for corn-grain ethanol would have to rely on energy
security or income distribution arguments
Policy: R&D
• R&D has elements of public good
• Learning-by-doing: to the extent that whole
industry learns from experience of
particular plant then operation of first
generation of plants also generates a
public good
• Role for incentives in R&D and early
adoption of new technology
Additional research needs
• Expand the set of fuels considered
• Expand the set of methods of production
considered
• Expand the set of externalities considered
– Ozone
– Water quality
– Habitat
• Continual need to update parameters
based on new data
Additional research needs
• Combine full cost accounting with general equilibrium
models to show effects through
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Changes in land use
Changes in crop production and food prices
Changes in oil, gas, and other energy markets
Changes in general economic conditions
• Incorporation of policy/regulatory regime
– Effect of subsidy/regulatory costs into production cost framework
– Producer cost analysis in comparison to social cost analysis
• Analysis of supply chain & contract issues
• Consideration of increasing efficiency on demand side
and conservation
– Getting the prices right creates incentives on both supply and
demand sides for sustainable energy supply
Acknowledgements
• Research team: Jason Hill (University of Minnesota),
Doug Tiffany (University of Minnesota), Erik Nelson
(Bowdoin College), David Tilman (University of
Minnesota), Hong Huo (Argonne), Lindsay Ludwig
(University of Wisconsin), James Neumann (Industrial
Economics, Haochi Zheng (University of Minnesota),
Diego Bonta (University of Minnesota)
• Thanks for valuable comments to: Joe Fargione, Ray
Hattenbach, Peter Hawthorne, Moira Hill, Bryan Hubbell,
John Sheehan, Kerry Smith, Steve Taff, Michael Wang,
Gary Yohe
• We gratefully acknowledge funding from The Initiative for
Renewable Energy and the Environment, University of
Minnesota