Detours on the Road to Sustainable Feedstock Production for Cellulosic Biofuel: Assessing Multidimensional Policy Approaches

Madhu Khanna Department of Agricultural and Consumer Economics Energy Biosciences Institute University of Illinois, Urbana‐Champaign Energy Biosciences Institute: A Unique Public‐Private Partnership Energy Farm at University of Illinois Cellulosic Biofuels: A Promising Approach to Achieve Energy Security and Reduce Greenhouse Gas Emissions

Biofuel Yield: Gallons per Acre 900 600 300 0 Corn Sugarcane Wheat Stover Switchgrass Miscanthus Energy ethanol straw ethanol ethanol ethanol Cane ethanol Carbon Intensity of Alternative Fuels g CO2/MJ Can reduce Food vs 100 75 Fuel competition 50 25 for land 0 ‐25 ethanol Gasoline Sugarcane Miscanthus Corn stover Switchgrass Wheat straw Energy Cane Corn ethanol Second Generation Feedstocks: Energy Crops

• Productive on low quality land • Low input requirements; rainfed • Non‐invasive varieties • Reduce soil erosion and nitrate run‐off • Establishment lag: 1‐3 years • High upfront cost of planting and establishment • Long term commitment: 10‐15 years Cost of Production and GHG Savings with Various Feedstocks in Rainfed US

4.5 Switchgrass High Quality Land

4.0 Miscanthus High Quality Land Ethanol energy Corn Stover

of 3.5

gasoline) Switchgrass Low Quality Land 3.0 Miscanthus Low Quality Land gallon Cellulosic

of

per

2.5

equivalent Wholesale price of gasoline ($ Cost 2.0 50 70 90 110 130 150 170 % Reduction in GHG Emissions Relative to Energy Equivalent Gasoline All prices in 2010 dollars Biomass Crop Assistance Program (BCAP)

– 50% cost share of establishment cost and annual payment to cover cost of land during establishment (capped at $500 per acre) – Up to $20 per ton matching price subsidy for collection, harvest, storage and transportation – $25M budget per year for 5 years – Eligibility requirements

• No explicit mechanism for selecting land to be enrolled

• Does not address price and yield risks

• Cap on establishment cost‐share creates disincentives for crops with high establishment costs Key Issues

• Current level of BCAP funding $125 Million is inadequate to achieve Billion Ton vision

• Need for a mechanism to competitively select enrollment in BCAP

• Expanding the current program alone may be ineffective if farmers are risk averse and expect high rates of return

• Supplementing BCAP with a crop insurance program for energy crops and establishment cost loans may be more cost‐effective at inducing production of cellulosic biofuels Yield per acre with 30 years of Weather Data Using DAYCENT Model Miscanthus (tons per acre) Corn (bushels per acre)

Switchgrass (tons per acre) Soybean (bushels per acre) Cost of Producing Energy Grasses in Marion, IL

Switchgrass on Good Quality Land Miscanthus on Good Quality Land Fertilizer Fertilizer 13% Establishment 3% Transport Transport 12% 14% Establishment 18% 2% Harvest Preharves Preharvest Harvest Land Rent Land Rent 1% 24% 1% 28% 46% 38% $118/ Ton $89/Ton Switchgrass on Poor Quality Land Miscanthus on Poor Quality Land Fertilizer 4% Establishment Transport Fertilizer Establishment Transport 16% 19% 19% 2% 23% Preharvest 1% Land Rent Preharvest Land Rent 26% 1% Harvest 20% Harvest 33% 36% $84/Ton $69/Ton Breakeven Prices of Miscanthus and Switchgrass $ per ton Miscanthus

Price based on $100 per barrel oil

On Marginal Landg On Cropland Switchgrass 20 - 40 - 80 - 100 - 160 < 0 - 120 20 40 - 6060 > 180 80 10 120 - 140140 160 - 180 Comparing Income Profiles with Corn vs Energy Crops at $50 per ton in Southern IL

600 400 200 0 ‐200 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 acre ‐400 per ‐600 $ ‐800 ‐1000 Corn Miscanthus ‐1200 ‐1400 Barriers to energy crop production in addition to low biomass price • Chicken and egg problem • High establishment cost, high discount rate and credit constraints • Risk aversion Riskiness of Corn, Miscanthus and Switchgrass Yield Miscanthus Corn Switchgrass

< 0.1 0.1 - 0.15 0.15 - 0.2 0.2 - 0.25 0.25 - 0.3 0.3 - 0.35 > 0.35

Miscanthus yields are LESS risky than corn Switchgrass yields are MORE risky than corn What would the current level of BCAP funding achieve? • Depends on a number of factors – Price of biomass offered by a refinery/processor – Availability of marginal land – Degree of risk aversion – Expected rate of return – Credit constraints – Riskiness of energy crop relative to existing use of land • Crop insurance coverage for conventional crops – Type of crop it is used for • Crops differ in establishment cost and lags, yields and risks – Selection mechanism for enrolling land in BCAP Potential Acres of Miscanthus Likely to be Induced by BCAP@$125M • 118000 acres

• Can produce 95 Million gallons of miscanthus based ethanol*

Legend acres < 250 250 - 500 • 10 cents per 500 - 750 750 - 1000 additional gallon of > 1000 ethanol

*Assuming a baseline price of $47 per ton of biomass Impact of Expanding BCAP Funding

800 Greater availability of Marginal Land 700

600 Low Risk Aversion Low Discount Rate 500 High Risk Aversion Low Gallons 400 Discount Rate

300 No Credit Constraint Million High Risk Aversion High 200 Discount Rate Low Risk Aversion High 100 Discount Rate 0 125 250 375 500 625 750 875 1000 High Risk Aversion High Discount Rate Million Dollars Corn Crop Yield Insurance Premium ($ /acre)

PremPerAcre Miscanthus < 10 10 - 20 20 - 30 30 - 40 40 - 50 50 - 60 > 60 Additional Gallons of Biofuel Induced by Existing BCAP and Supplementary Policies

350 $192 M $125 M 300 $125M 250 200 150 $125 M

Million Gallons 100 50 0 BCAP BCAP with BCAP with BCAP with Establishment CostEstablishment Cost Establishment Loans Loans and Energy Loans and Crop Insurance Subsidized Crop Insurance With Credit Constraint and BCAP Acres no Crop Insurance

Legend acres < 250 250 - 500 500 - 750 750 - 1000 > 1000 With Establishment Loans and Crop Insurance

Legend acres < 250 250 - 500 500 - 750 750 - 1000 > 1000 Summary

• Cellulosic biofuels from energy crop have high yields per acre and low carbon intensity

• Credit constraints, risk aversion, high rates of discount and low price likely to be key barriers to growing energy crops

• Very limited incentives to produce energy crops under current policy incentives and oil prices

• Mix of policy incentives and larger funding levels needed for – establishment cost share, price subsidy, low interest credit and crop insurance to induce large scale energy crop production Questions?

Based on research at the Energy Biosciences Institute, University of Illinois with: • Ruiqing Miao • Weiwei Wang • Tara Hudiburg • Melannie Hartman • William Parton Email: [email protected] • Evan Delucia http://ace.illinois.edu/directory/madhu-khanna • Steve Long • Deepak Jaiswal