The promise and challenge of bioenergy: discussion.

The three papers in this session focus on important issues currently facing the ethanol industry in the United States. They are: (1) the implications of alternative incentive schemes for the production of renewable fuels; (2) the impact on U.S. agriculture of producing 10 billion, 30 billion, and 60 billion gallons of ethanol in 2010, 2020, and 2030, respectively; and (3) a comparison of two methods of organizing the production and harvest of an energy crop. I will comment on each paper in turn.

The authors of the first paper provide a conceptual comparison of six alternative approaches to providing incentives for renewable fuels using either subsidies or a renewable fuels standard (RFS). The authors develop two important conceptual results. First, considering two externalities, national security and green house gas (GHG) emissions, they show that a uniform subsidy for two forms of renewable energy with different environmental benefits (such as grain based and cellulosic ethanol) is not an optimal policy. They argue that the subsidy for the two (or more) fuels should be based on their marginal environmental benefits and then illustrate how the difference in subsidy level could be determined for the two fuels based on their marginal impact on GHG emissions. Second, when an RFS, rather than a subsidy, is used as the incentive for the two renewable fuels, the authors argue that it is important to have a separate RFS for each fuel, since having just one standard encourages the industry to fulfill the standard with the lower cost renewable fuel. This is a valid conclusion, but it fails to prescribe the size of the RFS for each fuel.

My major concern with the paper is that the authors do not delineate the important policy objectives to use in evaluating the alternative subsidy schemes at the start and to clearly contrast their six subsidy/RFS schemes in light of these objectives. The authors mention five objectives throughout their paper. They are the impact of the incentive scheme on: (1) the consumer cost of fuel, (2) food prices, (3) the provision of a safety net for the renewable fuels industry during periods of low crude oil prices, (4) national security, and (5) GHG emissions. Their analysis suggests a fixed subsidy (that does not vary either by type of renewable fuel or by price of crude oil) falls short regarding two of these criteria: impact on food prices and valuing the impact on GHG emissions. In contrast, a variable subsidy (that does not vary by type of fuel but does vary by price of crude oil) addresses the impact on food prices, but does not credit the renewable fuel for its impact on GHG emissions. A two-part subsidy (based on energy security and GHG emissions) does the best job of addressing all five objectives. The split RFS may result in higher prices for fuel, but addresses the other four objectives.

The authors of the second paper were given quite a challenge, fitting an explanation of their national model, the assumptions, and the results into a short article. Having admitted the challenge they faced, I am obliged to note that including an explanation of the baseline prices for crops, livestock, and celulosic feedstocks (wood, stover, switchgrass, etc.) in table 2 would facilitate readers' understanding of the results. A third table listing the acreages of crops and amounts of livestock and poultry produced would help clarify the adjustments needed to achieve target ethanol production levels. The lack of these data leaves the reader with many questions. Here are some of them.

The results indicate that as cellulosic ethanol technology and as cellulosic feedstock supplies become available, cellulosic ethanol replaces some of the existing grain ethanol production. Does that occur because cellulosic ethanol can be produced at a lower cost than grain ethanol or because the model must shift to cellulosic ethanol to satisfy the production goal? The authors indicate that farmgate costs of energy crops are in the range of $21.60 to $30 per ton throughout the 2010-30 period. These costs are quite low compared to estimates in the third paper in this session. How are these low costs achieved? The paper does not provide information on the price of crop residues and other cellulosic biomass, but other studies suggest the cost of these feedstocks will be above $50 per ton (e.g., see Petrolia's (2006) case study). Providing information on the cost and conversion rates of the alternative feedstocks (corn, energy crops, stover, straw, and wood) would help clarify why these adjustments occur. What does the model tell us about the subsidy that cellulosic ethanol would require to achieve the 30 and 60 billion gallon targets? Price data may also help the reader understand the adjustments in livestock production, particularly in beef.

The third paper compares two likely switch-grass production systems. One is a fully integrated system in which the biorefinery signs long-term leases for the land and then takes responsibility for the establishment, production, harvest, transportation, and delivery to the plant. The second system assumes that the biorefinery enters into long-term production contracts with farmers who produce and harvest the switchgrass, with the biorefinery taking responsibility for transporting the biomass to the plant. The results highlight the impact of a shorter harvest season on the delivered costs for switchgrass to the plant, raising them from $48.88 per ton with an eight-month harvest season to $65.92 per ton with a two-month harvest season.

Both systems would most likely outsource the harvesting and transportation of the switchgrass. This would leave the biorefinery in system 1 and the farmer in system 2 with the responsibility of establishing and producing the switchgrass. This division between production and harvest/transportation would align the incentives to produce a large yield and to harvest and transport the crop efficiently. It would be interesting to discuss how this modification of system 2 would fit into the labor and management requirements on representative farms and ranches in the area. If establishment and production complement other farming and ranching activities, system 2 may be likely to evolve. If not, then system 1 will most likely be used.

The second part of this paper presents 11 bids submitted by Tennessee farmers to produce and harvest switchgrass for sale to the University of Tennessee. These bids for a four-year contract were made by farmers with no previous experience in producing and harvesting switchgrass. I learned from the authors that the bids were for land that was currently producing corn and soybeans and rented for about $55 per acre at that time (Clark 2007). While I agree with the authors' reasons why bids for an actual plant might differ, the projected costs per ton do tend to confirm the Oklahoma cost estimates.

References

Clark, C.D. 2007. Personal Communication, June 14, 2007.

Petrolia, D.R. 2006. "The Economics of Harvesting and Transporting Corn Stover for Conversion to Fuel Ethanol: A Case Study for Minnesota." Staff Paper P06-12, Department of Applied Economics, University of Minnesota, St. Paul, August.

Vernon R. Eidman is Professor Emeritus, Department of Applied Economics, University of Minnesota, St. Paul, Minnesota.

This article was presented in a principal paper session at the AAEA annual meeting (Portland, OR, July 2007). The articles in these sessions are not subjected to the journal's standard refereeing process.