Estimates of the global indirect energy-use emission impacts of USA biofuel policy

Abstract

This paper evaluates the indirect energy-use emission implications of increases in the use of biofuels in the USA between 2001 and 2010 as mandates within a dynamic global computable general equilibrium model. The study incorporates explicit markets for biofuels, petroleum and other fossil fuels, and accounts for interactions among all sectors of an 18-region global economy. It considers bilateral trade, as well as the dynamics of capital allocation and investment. Simulation results show that the biofuel mandates in the USA generate an overall reduction in global energy use and emissions over the simulation period from 2001 to 2030. Consequently, the indirect energy-use emission change or emission leakage under the mandate is negative. That is, global emission reductions are larger than the direct emission savings from replacing petroleum with biofuels under the USA RFS2 over the last decade. Under our principal scenario this enhanced the direct emission reduction from biofuels by about 66%. The global change in lifecycle energy-use emissions for this scenario was estimated to be about −93 million tons of CO2e in 2010, −45 million tons of CO2e in 2020, and an increase of 5 million tons of CO2e in 2030, relative to the baseline scenario. Sensitivity results of six alternative scenarios provided additional insights into the pattern of the regional and global effects of biofuel mandates on energy-use emissions.

Introduction

The consumption of biofuels has accelerated since 2000. An important factor behind the increase in biofuel use was the strong growth of the global economy. Coupled with limited increases in the global capacity for oil production, this led to a tight energy market that raised serious concerns about energy security. Policy makers across the world responded to these concerns by enacting policies to accelerate the use of alternatives to fossil fuels, particularly biofuels. The Renewable Fuel Standards in the USA Energy Independence and Security Act (EISA) of 2007 set mandates for biofuel use that grow gradually from 9 billion gallons¹ in 2008 to about 36 billion gallons by 2022 [1]. The EISA-RFS is often referred to as the RFS2 because it extended a previous program (RFS1) that required 7.5 billion gallons of renewable fuels by 2012. In addition, several states of the USA banned the use of methyl tertiary butyl ether (MTBE) as a gasoline additive between 2001 and 2004 due to evidence that it is harmful to humans, and leaking into the groundwater [2]. The European Union (EU) has a target to derive 5.75% of its fuels from renewable sources [3], and a number of Latin American and Asian Pacific nations have set biofuel blending targets [4], [5], [6], [7]. Brazil, which pioneered the large-scale production of ethanol in the 1970s, continues to require a blend of 20% anhydrous (i.e. water content of 1% or less) ethanol in its motor fuels. In addition, most of the new vehicles sold in Brazil are designed to run on a flexible mix of gasoline and ethanol, including pure hydrous ethanol [8].

Fig. 1 shows that the use of biofuels in the USA, mainly corn ethanol, grew from about 3 million tons of oil equivalent (Mtoe) in 2000 to more than 25 Mtoe in 2010. By 2005, the USA became the world’s largest producer of ethanol. On the other hand, the use of oil grew slowly from 2000 to 2005, and then began to decline. In 2010, the use of oil in the USA was 4% below its 2000 level, with the largest declines observed in the recession years of 2008 and 2009. The use of biofuels in the rest of the world (ROW) grew at a similar rate as in the USA. Fig. 1 also shows that the use of oil, coal and natural gas in the ROW increased almost steadily during the period from 2000 to 2010.

The policies in the USA and EU required biofuels to meet thresholds for reductions in lifecycle greenhouse gas (GHG) emissions relative to their fossil fuel equivalents. Lifecycle emissions account for the cradle-to-grave emissions from the supply and use of biofuels, including direct emissions and “indirect emissions such as significant emissions from land use changes”. Direct emissions are those from inputs and outputs of processes along the entire biofuel supply chain. Indirect emissions are other emissions that are induced or attributable to biofuel policy, but not directly due to activities along the supply chain. Thus, indirect emissions are usually deduced using modeling approaches since they cannot be easily separated from other sources of emissions.

To date, most of the efforts to estimate the emission-related indirect effects of biofuel policies have focused on land use change, and has produced a copious amount of research [9], [10], [11], [12], [13], [14], [15], [16], [17], [18], [19], [20]. However, a number of recent studies have shown that these polices can also lead to indirect energy-use changes (IEUCs) that are important in determining the net global greenhouse gas emission impacts [21], [22], [23], [24], [25], [26], [27]. IEUC is the change in global energy use due to biofuel policies and is a type of rebound effect or “market leakage” [22]. When the emission associated with IEUC, referred to as “emission leakages”, are positive (negative) it counteracts (enhances) the direct emission savings from the replacement of fossil fuels with biofuels.

The magnitude and sign of IEUC are determined primarily by the response of global energy prices to biofuel policies. Bento et al. [24] noted that the domestic use of the petroleum–biofuel blend would increase under biofuel policy when the share-weighted increase in the price of ethanol is less than the share-weighted decrease in the price of gasoline, and vice versa. Similarly, if domestic biofuel policy leads to reductions in global energy prices the use of energy in the ROW would be expected to increase. However, these potential changes also depend on a number of other factors, including the type and combination of policies, the role of different regions in the global energy market, and market parameters. Drabik et al. [23] found that international and domestic market leakage is always positive under a tax credit or subsidy, and that market leakage under a consumption mandate is always less than under a tax credit. The terms of trade effects have been shown to be central to the welfare effects of biofuel policies [25], [28], and play a role in the regional response of energy use. Energy consumers in the ROW would gain a positive welfare change if domestic biofuel policies lead to lower global fossil fuel prices. On the other hand, fossil fuel suppliers would lose revenues due to the reduction in demand and prices. These differences in the terms of trade effects have different IEUC effects, and associated emissions, at the regional level. Finally, market parameters, particularly the elasticities of fossil fuel supply, elasticities of biofuel supply, elasticities of liquid fuel demand [21], [23], [27] and the elasticity of substitution between biofuels and fossil fuels [27], [28], [29] play a crucial role in determining the effects of biofuel policy on the global energy market. For example, a flat global oil supply curve implies that biofuel policies would not affect oil prices, with implications for the IEUC effects.

Estimates of IEUC and the associated emissions from existing studies are mixed. Rajagopal et al. [21] found that indirect emissions from biofuel policy in the USA are negative, and robust to variations in several market parameters. On the other hand, de Gorter and Drabik [22] estimate that the indirect emissions are positive under different combinations of policies and market parameters, and lead to a “green paradox”. The green paradox was used by Sinn [30] to describe a condition under which policies aimed at reducing GHG emissions actually lead to an overall increase in the final analysis. In the context of biofuel policies, the green paradox means that IEUC effects are positive and larger in magnitude than the emission savings (or direct emission reductions) from replacing fossil fuels with biofuels.

The potential for a green paradox outcome of biofuel policies requires a careful evaluation of the sources and magnitudes of its indirect energy-use emissions. Such an evaluation would need to consider the role of the factors identified above, and the full interaction of biofuel policies with the global energy market because other energy sources would also be affected in addition to petroleum products. The current study uses a full scale empirical model of the global economy to evaluate the IEUC and associated emissions from recent increases in the use of biofuels in the USA. The model incorporates specifications designed to examine the dynamics of biofuel use and interactions with fossil fuel markets. The rest of the paper is organized as follows. Section 2 provides a brief overview of the model, the data, and baseline calibration (see the Supplementary Online Material – SOM for a more detailed description of the model). Section 3 discusses the energy use and emission results of several biofuel policy simulation scenarios, and the paper ends with summary and conclusions.