Production of Renewable Diesel from
Domestick Feedstocks and Palm Oil in
the EU: Market Equilibrium, Greenhouse
Gas Emissions and Biofuel policy
Presenter: Liisa Saikkonen, University of Helsinki
Co-authors: Markku Ollikainen, University of
Helsinki and
Jussi Lankoski, OECD
Research questions
• Is it socially profitable to produce renewable
diesel from domestically grown rapeseed or
imported palm oil in Finland/EU ?
• Does the current biofuel policy support
socially profitable production of renewable
diesel ?
Research frame
• Renewable diesel is produced in Finland from
domestically grown rapeseed and imported
palm oil.
• Renewable diesel can then be sold in Finland
or in EU biofuel market (Central Europe).
• The by-product of rapeseed based renewable
diesel is animal feed.
Methods
• We develop a market equilibrium model for
four cases:
i) private optimum in the absence of policies
ii) social optimum where the life-cycle
greenhouse gas emission damages of the
diesel products are taken into account
iii) traditional fiscally-motivated energy policy
iv) current biofuel policy
Methods
• We calculate prices and produced and
demanded quantities for diesels and their
feedstocks in all four equilibria.
• We also assess the social welfare impacts of
renewable diesel production in these
equilibria.
Estimates for greenhouse gas emissions by
production stages (kg CO2-eq/t fos.dies.-eq)
Stage
1. Cultivation and transport of the
crop
2. Oil production and transport
3. Pretreatment and hydro
treatment of vegetable oil /Crude oil
refining to diesel
4. Transportation and distribution of
the diesel
5. Diesel use
6. Greenhouse gas emission offsets
due to by-product
Total
Emission damage €/fossil diesel
equal ton of diesel (Damage =
0.02€/kgCO2eq)
Rapeseed
Palm Oil
Fossil Diesel
3794
282 (2959)
0
198
955
177
217
217
371
28
28
30
0
0
3148
-276
0
0
e1 =3961
e2 =1482 (4151)
E =3726
79.2
29.6 (83.1)
74.5
Summary of greenhouse gas emissions
• Renewable diesel production from palm oil can be
warranted by lower life-cycle greenhouse gas emissions
compared to rapeseed based renewable diesel and
fossil diesel, but only if oil palm cultivation does not
result into clearing of rainforests.
• The rapeseed cultivation in Finland leads to significant
greenhouse gas emissions, mostly due to nitrogen
fertilizer and lime application.
• The life-cycle greenhouse gas emissions of rapeseed
based renewable diesel can thus be higher than for
fossil diesel.
Summary of greenhouse gas emissions
• If the palm oil used in diesel production is from a
plantation that is established by clearing natural rainforest,
the life-cycle greenhouse gas emissions of palm oil based
renewable diesel can be higher than those of rapeseed
based renewable diesel or fossil diesel.
• EU’s sustainability requirements followed by renewable
transport fuel producers are criticized for neglecting the
indirect land use change caused by oil palm cultivation.
• Indirect land use change caused by oil palm cultivation can
result in clearing of rainforest when for example food crop
cultivation has to expand elsewhere to make room for oil
palm plantations.
Theoretical model: supply and demand
• In the theoretical model country A produces
renewable diesel from domestic feedstock and
from feedstock imported from country B.
• Inverse supplies for renewable diesels
produced from domestic (1) and imported (2)
feedstocks:
• Total supply of renewable diesel:
Theoretical model: social supply
• Social inverse supplies (marginal social costs) of
renewable diesels (i=1 or 2)
• Social price of fossil diesel
• Social supply of renewable diesel
are the life-cycle greenhouse gas emissions of
renewable diesels.
D is the damage caused by one unit of emissions.
P is the exogenous tax-free price of fossil diesel.
E are the life-cycle emissions of fossil diesel.
Theoretical model: private and social
optimum
• Renewable diesel is produced in the private
optimum if
.
• The demand of diesel in the private optimum in
country A is
.
• Renewable diesel is produced in the social
optimum if
.
• The demand of diesel in the social optimum in
country A is
.
• The diesel taxes according to the social optimum
are
,
and
.
Theoretical model: energy policy
• The producer price of renewable diesel in
country A is
.
• Demand of diesel in country A is
.
• Supply of renewable diesel in country A is
.
is the value added tax in country A.
is the tax for renewable diesel in country A.
is the tax for fossil diesel in country A.
Theoretical model: biofuel policy
• Under biofuel policy the producer price of renewable diesel is
determined by biofuel policies in the EU.
• The blend mandate in country A is .
• Following De Gorter and Just the demand of blended diesel in
country A:
• The demand of renewable diesel in country A:
• The producer price of renewable diesel in country A:
• The supply of renewable diesel in country A:
where denotes the renewable diesel exports from country A to
international market.
Empirical application
• The theoretical model is applied to production and
market data from Finland (country A), Malaysia
(country B) and EU biofuel market.
• Prices and other market data are from year 2010.
• Greenhouse gas emissions and quantities of
production inputs are based on Finnish studies :
-Inventory of greenhouse gas balances for different
biofuels (Mäkinen et al., 2006).
-greenhouse gas and energy intensities of renewable
diesels (Nikander, 2008)
• The empirical model is defined in more detail in
Section 3 of the paper.
Results: prices
Private equilibrium Social equilibrium
Producer price of
renewable diesel
from rapeseed (€/t
fos.dies.-eq)
Producer price of
renewable diesel
from palm oil (€/t
fos.dies.-eq)
Price of rapeseed
(€/t)
Price of palm oil
(€/t)
Value of animal feed
(€)
Retail price of
blended diesel in
Finland (€/t
fos.dies.-eq)
Traditional energy
policy
Biofuel policy
653.00
648.27
625.99
1116.38
653.00
697.86
625.99
1116.38
316.77
315.04
306.93
485.58
629.71
629.71
629.71
902.71
19 622 074
19 372 387
18 132 419
31 853 649
653.00
727.51
1341.77
1376.45
Results: quantities
Private equilibrium
Social equilibrium
Traditional energy
policy
Biofuel policy
Amount of rapeseed (t)
189 335
186 926
174 961
307 359
Amount of palm oil (t)
0
0
0
2 656 258
68 975
68 097
63 739
111 971
0
0
0
2 232 675
107 342
105 976
99 193
174 254
68 975
68 097
63 739
130 920
0
0
0
2 213 726
2 363 368
2 350 634
2 279 781
2 276 874
Production of
renewable diesel from
rapeseed (t fos.dies.eq)
Production of
renewable diesel from
palm oil (t fos.dies.-eq)
The amount of rape
seed meal produced as
by-product (t)
Demand of renewable
diesel in Finland (t
fos.dies.-eq)
Export of renewable
diesel from Finland (t
fos.dies.-eq)
Demand of diesel in
Finland (t)
Results: Social welfare impacts in
Finland (M€)
Traditional energy
Private equilibrium
Social equilibrium
Producer surplus
8.99
8.66
7.20
53.25
Consumer surplus
2492.30
2491.84
896.87
817.85
Climate damage
-176.43
-175.47
-170.17
-178.49
Tax revenue
0.00
0.00
1525.58
1586.54
Social welfare
2324.86
2325.03
2259.47
2279.16
policy
Biofuel policy
Foreign welfare impacts under biofuel
policy
• If the exported renewable diesel is used to substitute for fossil
diesel, the resulting loss in greenhouse gas emissions is 8.18 million
CO2-equal tons, which equals climate benefit of M€163.69.
• If the diesel is exported to a country which has a tax exemption for
renewable diesel, can this lead in a significant loss in the tax
revenue in that country.
• The loss in the consumer welfare can be considerable if the diesel is
sold in a country with a binding blend mandate for biofuels.
• In Malaysia the increased production of palm oil results in a social
welfare gain of M€320.71, but only if oil palms are cultivated
sustainably and no rainforest is cut down.
• If all palm oil used in renewable diesel production (2 656 258 tons)
is from oil palm plantations which are established by cutting down
natural rainforests, the social welfare in Malaysia decreases to
M€201.17.
Greenhouse gas emissions in the
equilibria (CO2-equal tons)
Emissions in the
private equilibrium
Emissions in the
social equilibrium
Emissions under
traditional energy
policy
Emissions under
biofuel policy
Emissions under
biofuel policy, when
clearing of
rainforests is taken
into account
Finland
EU
Malaysia
Total
8.82
0
0
8.82
8.77
0
0
8.77
8.51
0
0
8.51
8.92
-8.18 (M€163.69)
2.76 (M€55.22)
3.50
8.92
-8.18
8.74 (M€174.75)
9.48
Conclusions
• According to our results the production of
renewable diesel from imported palm oil is
neither privately nor socially profitable.
• It is the high renewable diesel price set by the
current EU biofuel policies that promotes the
production of palm oil based renewable diesel.
• The use of domestically produced rapeseed in
renewable diesel production is socially profitable
in Finland, but only if rapeseed meal is produced
as a by-product.
Conclusions
• However, the greenhouse gas emissions balance
shows that life-cycle emissions from palm oil
based renewable diesel are significantly lower
than those of fossil diesel or rapeseed based
renewable diesel, but only if oil palm cultivation
does not result in clearing of rainforests.
• If palm oil production results into clearing of
rainforest, the greenhouse gas emissions
resulting from renewable diesel production and
consumption under biofuel policy can be higher
than under traditional energy policy.
Thank you!