The economic of biofuel and policy-Program in the EBI: What We Have

Done and What We Need To Do

David Zilberman, Professor Department of Agricultural and Resource Economics

University of California, BerkeleyPresented at the EBI Strategic Directions workshop

University of Illinois Urbana Champaign September 25 2010

overview• Dimensions of biofuel research we covered

– The supply of biofuel– The demand for biofuel– Environmental side effects of biofuel– The impacts of biofuel policies– IPR

• We covered less– Uncertainty– The supply chain– Dynamics– Integrated systems

• Nature of research– Mostly Individual projects– Some integrated models– Mostly US emphasis– Future emphasis – tom prepare to the emergence of the second generation– Much simulations some theory little econometrics

Understanding biofuel supply- and related topics ( food environment)

• Biofuels consist of multiple product – First generation –corn, biodiesel– Second generation

• We should distinguish between supply of feedstock and fuels derived from them

• First generation is here- second is being developed– It affects estimation and prediction• For first we can use econometric and actual outcomes• For second prediction based on field results

• But both are linked to the land and natural resource base-

Building feedstock supply and related estimates from the bottom up

• Using biophysical and GIS we developed models to predict supply of biofuel feedstock as well as food for the US. They– Assume profit max and consider some policies

• The Biofuel supply choices are linked with food commodity choices and may affect deforestation-

• Biofuel choices may lead to food price choices• The spatial modeling of supply allow estimating pollution – The supply models are linked to models of land and food commodity

price choices market – – to allow estimating actual outcomes-adjusting for changes in

pricing– They are linked to biophysical model and can project GHG

emissions and other pollutants

These system of models provide a sound foundation

• They Provide a sound foundation that can be– Constantly updated and improved– expanded geographically – Expand to include other pollutants and Ecosystem services– Include more complex behavioral rule and institutional

constraints- risk considerations, credit issues– The model have strong US emphasis – need to become

more global

Related area : Food , Fuel and land use• We developed frameworks to study food fuel tradeoff – including inventory

consideration• They were used to assess the food price inflation of 2008• These frameworks show that the supply of biofuel is linked to the overall

productivity of agriculture and the technologies and regulation facing the farming sector overall

• They are applied to first generation- but the issues will continue

• These models need to be further developed and future looking- to include second generation better inventory and ag policy links

• To address second generation trade offs they need to include better modeling of water and other resource trade offs

• They Need to go beyond profits maximization• Need to develop capacity to assess indirect land use of 2nd generation

Supply – summary• We have a good foundation to further study the

supply of feedstock and linked food price and productivity and environmental issues

• This work has strong multidisciplinary dimension• We need better understanding of the supply of

second generation biofuel and how it will be affected by Incentives and policies

• As more is known on the cost of new technologies- of processing and refining derivation of supply will become possible

The economics and design of the fuel supply chain

• This is an emerging area of research some case studies and primary data collection, but minimal theory and large scale modeling

• There is minimal understanding of – land owners/ farmers choice to adopt biofuel crops- in

developed and developing countries- taking into account risk and credit issues

– Economics of investment in bio-refineries- • How does risk and finance consideration matter?• The role of credit

– The industrial organization of processing including contracting in different environments• We need both conceptual understanding and basic applied

knowledge

The demand for biofuels

• Biofuel demand is affected by– The demand for fuel– Oil supply and market – Biofuel price – Automobile inventory and innovation– Policies-

we have some research on factors affecting biofuel demand- more needed

• We started work on – OPEC effects on biofuel price and impacts– Relations between gasoline oil and fuel prices

• Need– Quantitative understanding of the demand for biofuel– More quantitative understanding of how the economics

of automobile affect biofuel demand globally – Quantitative assessment of Role of policies in creating

biofuel demand– Assessing the complementarity and substitutions between

first and second generation and their economic and policy implications

The economics of biofuel under various scenarios

• We have built quantitative capacity to understand the economics of feedstock and factors affecting demand for biofuels

• But future of biofuels depends on developed of second generation fuels ( would we have butanol?)

• We need capacity to quantitatively assess the economics of second generation biofuels under various scenarios about the products of the technology

The economics of biofuel policies• We have multiple efforts• One line of work used quantitative welfare

modeling to assess We biofuel polices taking into account GHG and congestion consideration

• We need to continue and expand the welfare based assessment of biofuel and related food fuel and GHG policies- at different levels

Another line realized that biofuel polices are not text book policies

• Developed an economic framework to assess LCA based policies

• Identify inconsistencies in RFS and LCFS- especially given that they are partial not global

• We identified inconsistencies and flaws in the use of ILUS- in particular not all indirect effects are considered in polices- IFU is ignored

• Assessment of the theoretical and logical base of biofuel policies and their implications should be continue and expand as policies evolve

• Area for interdisciplinary cooperation

Economics and other social and policy sciences

• Future of biofuel depends on policies as much as technology– Economics provide one perspective on policy analysis– Political science and anthropology provide others

• Law provide an integrated perspective – Our law program is an important channel to analyze and

influence the actual making of the policy and standards in the real world

• The economics and law program need to continue and intensify their cooperation and joint ventures

Communication• Communication is part of our main effort• It contribute to the education of technical people

about economics and policy• The economics program is part of an

multidisciplinary effort- and communication is key to building new integrated research direction

• The conferences at Berkeley and Illinois and collaboration with USDA and farm foundation helped to shape the biofuel debate

• Understanding information and learning is crucial for designing strategy to introduce new technologies

Strategic choices-1• How much emphasis should we give to a coherent

consistent modeling framework vs. parallel efforts under various assumptions and techniques

• Programming models are useful if they are based on correct assumptions= their assumptions and predictions need to be tested as data emerges- their design modify as new knowledge accumulates– Econometric assessment of predictions and estimation

of missing parameters should be given priority

Strategic choices-2• How much emphasis should we give to specific

biofuel issues ( economics of miscanthus) vs more general issues that affect biofuel choices and outcomes (economics of deforestation, contract design between grower and refinery, factor affecting investments in perennials- and tier implication for biofuel crops

Strategic choices-3• How much to emphasis analysis of strategic issues –

optimal incentive design for biofuel? The merit of ILUC = vs. tactical questions- the impact what is the exact ILUC parameters for switch grass

Strategic choices-4• We are a small group that needs to address major

topics- what do we prioritize, to what extent should we “outsource” how we fit within the global economic research on biofuel.