The RFS, Capitalism and Climate Change

By Mark Edelman and Barry Flinchbaugh

© Copyright Agri-Pulse Communications, Inc.



ME.  The message from the recent National Advanced Biofuels Conference in Omaha was don't mess with the Renewable Fuels Standard (RFS).  “Big Biofuels” wants the 15 percent ethanol mandate fully implemented, while “Big Oil” wants to return to a 90 percent petroleum mandate. With Congressional dysfunction, odds for passage are small.

BF.  Fall's Congressional agenda was overloaded before Syria was added on top of everything else.  The RFS policy dynamics can change overnight with the threat of war and rising oil prices.  Compared to last year at this time, feed grain prices are lower which takes some pressure off of the livestock sector's interest in the spurious food versus fuel debate.  Oil prices jumped under the threat of military response to Syrian chemical weapons.  Then, prices moderated as diplomatic initiatives moved forward.

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ME. Monte Shaw, Executive Director for the Iowa Renewable Fuels Association, pointed out that even though Congress repealed the infant industry blender credits for the ethanol fuels last year after 30 years of development, the oil industry still has their infant industry specific depletion allowances, recovery tax credits, and intangible deductions after 100 years of development.  Shaw's stats showed only three years during the 1981 to 2006 period before RFS in which the annual national average USDA price of corn exceeded the USDA cost of production. All years since the RFS was passed have had a positive margin, even with the ups and downs.

BF.  Well so far you missed the big picture with advanced biofuels. The cellulosic industry advocates have been saying for ten years that cellulosic ethanol will be commercially significant within the next five years.  So, they are five years overdue and five more years are needed for significance. That puts EPA in a bind with criticism from Big Oil for setting RFS advanced biofuel targets too high relative to actual production.  The Administration has recently said EPA will become more realistic in its future RFS targets. This may relieve some political pressure for revising the RFS in Congress.

ME. The policy discussions often miss the emerging climate change policy problem and solutions.  Public concerns about climate change have been increasing with the apparent rise in natural disasters and weather related events like Hurricane Sandy, droughts, and recent forest fires. On May 9, 2013 the concentration of carbon dioxide in the atmosphere at Mauna Loa, Hawaii, surpassed 400 parts per million (ppm) for the first time since measurements began in 1958. The National Oceanic and Atmospheric Administration (NOAA) observatory at Mauna Loa is the primary location for continuous carbon dioxide (CO2) measurement and global benchmarking.  As a result of this and other supportive evidence, the EPA announced last Friday the first-ever regulations to set strict limits on the amount of carbon that can be generated by new power plants.

BF. Yes, under EPA's new policy, new large natural gas-fired turbines need to meet a limit of 1,000 pounds of carbon dioxide per megawatt hour, while new small natural gas-fired turbines need to meet a limit of 1,100 pounds of CO2 per MWh.  New coal-fired units need to meet a limit of 1,100 pounds of CO2 per MWh.  EPA says plants would be given "operational flexibility" to achieve the new levels.  However according to media reports, the most efficient coal plants currently in operation emit at a rate of at least 1,800 pounds of CO2 per MWh.  Although the EPA announcement does not affect existing power plants, those regulations are to be announced next year. The Midwest economy runs on cheap coal-fired power plants. Thus, industry concerns have been raised and the new regulations will likely be challenged in court.

ME.  So what are the costs of not setting limits?  Power plants account for a third of greenhouse gas emissions. Last May 2013, the Administration's Inter-agency Task Force released estimates of social costs from carbon emissions.  For 2020, the social costs are estimated to range from $12 to $129 per metric ton of CO2 emitted.  The social costs of carbon represent an estimate of the monetized damages associated with incremental increases in carbon emissions each year. The projections are intended to reflect the net impacts on agricultural productivity, human health, property damage from natural disasters, and costs of ecosystem services due to climate change.

BF.  If the Administration's projections for the Social Costs of Carbon are accurate--which is a big if-then in theory, people should be willing to pay up to $12 to $129 per metric ton of CO2 emissions to avoid the social costs so the planet could be saved.  Well, Congress failed to approve the President's “Cap and Trade” proposal in his first term.

ME.  Yes, but California--which is the world's sixth largest economy by itself--is implementing a “Cap and Trade” program on its own.  Regulated entities in California with carbon emissions must begin reducing emissions or purchase offsets from approved sequestration projects that have verified reductions in carbon emission.  One report expects the carbon offsets to have a market value of $10 per ton of CO2 emissions sequestered.

BF. So what is the renewable fuel connection?  The RFS does allocate higher value Renewable Identification Numbers (RINs)to Advanced Biofuels since they reduce life-cycle carbon emissions more than other renewable fuels. And, renewable fuels receive regular RIN values because they reduce life-cycle carbon emissions more than gasoline.

ME.  Yes, but two new advanced biofuel technologies presented in Omaha begin to take the carbon emissions and convert CO2 into higher value products or additional renewable fuels. One technology uses CO2 for growing algae to produce pharmaceuticals. A second technology uses CO2 that is 97 percent pure from ethanol fermenters in combination with biomass, natural gas or coal to produce more biofuels or electricity. The new technologies might even qualify for California's carbon offsets to generate additional revenues.  

BF.  The odds are slim for finding something upon which environmentalists, natural gas, coal, and biofuel interests could agree.  A de-emphasis of philosophy and politics would be required along with greater attention to economics and capital investment.  

 

*  Edelman is a professor of economics at Iowa State University and Flinchbaugh is an emeritus professor of agricultural economics at Kansas  State University


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