Dimensions of Sustainability and Expanding Biofuel Production
This chapter summarizes workshop presentations and discussions that focused on defining what sustainability means in the context of biofuel production and more broadly transportation systems. It describes some of the likely environmental, economic, and social impacts associated with the expanded production and use of both corn-based ethanol and next-generation biofuels.
To provide a context for examining the sustainability dimensions of biofuels, different definitions of sustainability were discussed. The most widely used definition is derived from the Brundtland Commission report, Our Common Future: “Sustainability meets the needs of the present without compromising the ability of future generations to meet their own needs.”1 While this definition was seen as useful conceptually, it was not seen as a practical construct for policy makers. The biologist E.O. Wilson offered an alternative definition: “The common aim must be to expand resources and improve quality of life for as many people as heedless population growth forces upon Earth, and do it with minimal prosthetic dependence. That, in essence, is the ethic of sustainable development.”2 This implies the need for decision makers to consider the ethical implications surrounding a problem or issue—such as potential tradeoffs between food production and fuels—as well as the need to apply a broad systems perspective.
Life-cycle assessment (LCA) is often used to evaluate the sustainability of biofuels from a systems perspective. However, as shown in Figure 2, “attributional” LCA analyses do not address economic or social impacts, and generally focus only on the directly attributed environmental impacts.
World Commission on Environment and Development. 1987. Our Common Future. Oxford University Press. Available at http://www.un-documents.net/wced-ocf.htm.
E.O. Wilson. 1998. Consilience: The Unity of Knowledge. New York: Alfred A. Knopf, Inc.
The workshop presenter suggested that a more appropriate approach would be to consider a “consequential” LCA, which could consider both the immediate or direct impacts as well as the indirect impacts, although still not fully assessing the economic or social impacts (Figure 3).
While these analytical tools still do not provide clear guidance for policy makers or investors, they do create a tool for dialogue. A number of workshop participants suggested that more comprehensive systems frameworks are needed to examine the interconnected environmental, economic, and social impacts and to allow the outcomes of alternative systems to be consistently evaluated and
compared. A frequent theme throughout the workshop was the need to have tools that would allow decision makers to consider tradeoffs between various feedstocks, conversion technologies, feedstock sources, location of refineries, the characteristics and conditions of local environmental resources, and the environmental, health, economic, and social impacts at various scales.
Other tools mentioned included “standards” or certification schemes, many of which include social and economic effects. A number of domestic and international organizations are in the process of developing these standards, including the Council on Sustainable Biofuel Production, the Global Bioenergy Partnership, and the Roundtable on Sustainable Biofuels. (These activities are described in the background paper in Appendix E.)
The workshop’s discussion on the economics of biofuels focused both on the business side of the biofuel industry and on its economic impacts—how the industry has changed local and regional job markets, prices, and government budgets. Many of the “policy drivers” that led to the expansion of the biofuel industry were first put in place to create rural economic development opportunities, boost the price of corn by fostering an industry based on corn, and reduce U.S. dependence on imported petroleum. In addition to these policies, two important events accelerated the growth of the industry—state decisions to phase out the use of methyl tertiary butyl ether (MTBE) as a fuel oxygenate and Hurricane Katrina. The lesson from Hurricane Katrina was how incredibly vulnerable our energy system is in the United States, especially when refinery capacity is primarily located in Gulf States or prime hurricane path routes.
MTBE has been banned in most states because of concerns about groundwater contamination. In 2005, EPA refused to grant liability protection to manufacturers of MTBE, forcing a search for substitutes. Ethanol turned out to be a good substitute, and a market was found for increased ethanol production. Hurricane Katrina not only sharply reduced U.S. petroleum refinery capacity; it also made it difficult to export corn, increasing supplies in the Midwest, and drove down prices. These lower prices, along with federal and state incentives, helped drive the rapid expansion of the biofuel industry. From 2000 to 2008, production increased from 1,630 million to 9,000 million gallons and the number of refineries increased from 54 to 139 with approximately 61 refineries under construction during the period (Figure 4). Investors flocked to a proven technology using a traditional agricultural commodity as a feedstock, and early investors were able to quickly recoup their initial investments—often in less than a year.
The economics of the industry began to shift in late 2008 when the price of petroleum began to fall, corn prices remained high, and the overall U.S. economy began to decline, stifling demand. Formerly profitable refineries were no longer profitable and overall profit margins declined (Figure 5). Plans for
building new refineries were put on hold; at least one major refinery owner—Vera Sun—declared bankruptcy, closing 12 plants with 1.2 million gallons of annual capacity; and another 11 refinery operations also closed.
One of the key objectives of both federal and state biofuel policies was to create “jobs for rural America.” Hundreds of thousands of new jobs were promised. In fact, many jobs have been created, but far fewer than originally promised or as claimed by the industry’s vocal spokespeople. In 2008, the Renewable Fuels Association claimed that almost 500,000 jobs had been created by the industry. In contrast, data from the U.S. Commerce Department for the same period show only 7,000 ethyl alcohol production jobs. While this 7,000 figure clearly does not reflect all the jobs created by the industry, it is highly unlikely that the multiplier would be 100.3
Data from the Iowa Renewable Fuels Association (IFRA) show that more than 83,000 jobs were created by the state’s ethanol industry in 2008—almost 40,000 more than it claimed in 2007. Information presented at the workshop by Dave Swenson of Iowa State University suggests that these numbers dramatically overstate the job creation impacts of the industry by counting farm workers who were already engaged in growing corn (30,000 of the 83,000), and counting construction workers engaged on a short-term or temporary basis. The IRFA numbers also appear to exaggerate the number of jobs created indirectly though industry suppliers and jobs created by increased household spending.
Continued improvements in plant efficiency and realized economies of scale are likely to slow employment growth, even if production continues to increase in the future. The industry has already realized increasing economies of scale, with average plant capacity growing over the last few years from 50 million to 100 million gallons a year. Furthermore, process changes and greater economies of scale have increased plant efficiencies and reduced labor demand per unit of output. The average job creation impact of a 50-million-gallon-a-year plant was shown to be 133 jobs, while a plant twice that size produced only 36 more jobs.4
Despite these real job gains, the industry has not turned around the loss of rural jobs. In Iowa, farm employment and the number of farm proprietors have continued to decrease, and rural counties have continued to experience population decline—more than 45,000 between 2000 and 2007.5
The dramatic expansion in the ethanol industry had major effects on a variety of prices ranging from food and feed and agricultural land to gasoline. The effects of biofuel production on domestic and international food prices were raised as an
U.S. Census Bureau, 2007 Economic Census, http://www.census.gov/econ/census07/www/using_american_factfinder/, Last accessed: December 29, 2009.
Swenson, D. 2007 Estimating the Future Economic Impact of Corn Ethanol Production in the U.S., Iowa State University.
Iowa, State and County Census Facts, U.S. Census Bureau State and County Quick Facts, http://quickfacts.census.gov/qfd/states/19000.html.
ethical concern by a number of workshop participants. They acknowledged that food price increases have been driven only in part by the expansion of biofuel production increases in the United States, as well as in other parts of the globe. Domestically, expanded biofuel production was linked to increases in corn prices, leading to higher feed costs and increasing prices for meat and dairy products. Many participants acknowledged that a number of other factors were linked to increasing food prices—rising petroleum prices, increasing food demands driven by population growth, increasing per-capita consumption levels, the dollar devaluation, and general increases in production costs. Nonetheless, participants believed that there were critical tradeoffs between land used for food and land used for feedstocks for fuel. The projected expansion of biofuel production—whether cellulosic or corn based—will directly and indirectly affect land use.
The price of agricultural land rose sharply over the last few years, in part because of the increasing demand for corn and the promise of ever-increasing farm revenues. In Iowa, the price of agricultural land increased by more than 100 percent between 2000 and 2007.6 Data for 2008 show some slowing in the growth of farmland values, presumably tied in part to the declining fortunes of the ethanol industry.
While ethanol represents less than 3 percent of U.S. transportation fuels, its production has had a significant effect on retail gasoline prices. Information presented at the workshop suggests that ethanol production has led to relatively large reductions in overall gasoline prices, in part, by creating more domestic refining capacity. The availability of somewhat lower-priced gasoline has increased overall demand. Many participants noted that if gasoline consumption continues to grow faster than ethanol production, there will be no reduction in the nation’s need to import petroleum, making it yet more difficult to achieve energy independence—one of the principal objectives of the U.S. biofuels policy.
Bruce Babcock, of Iowa State University, stated that the price of petroleum is critical to determining profits for the biofuel industry. Since ethanol is a substitute for petroleum, it closely tracks the price of oil. This makes the industry very vulnerable to volatile petroleum markets, as was evident during 2008. As petroleum prices dropped sharply, the profit margins of refinery operators fell precipitously. Farmers who thought ethanol production would serve as a hedge against declines in commodity prices have been disappointed. They assumed that during periods of low corn prices they would make large profits from ethanol refineries, and that when corn prices were high they could make money by selling corn for food and feed. However, the price of ethanol is not correlated with corn prices. Corn and ethanol prices can both be low, cutting or eliminating profit margins.
Incentives in the form of tax credits, tax rebates, and various forms of subsidies enacted by both the federal government and many state governments have
Iowa Land Value Survey, Iowa State University, University Extension www.extension.iastate.edu/landvalues, Last Accessed December 29, 2009.
been costly. Estimates suggest that the overall cost of these incentives is as high as $8 billion-$11 billion7 a year, and can be expected to increase as the provisions of the EISA and the 2007 Farm Bill come into play, and more attention is focused on promoting the development of a cellulosic-based industry. Incentive programs promoted in the Upper Midwest have been costly and are now coming under increasing scrutiny because of the current state budget problems, questions about their effectiveness, and uncertainty about federal energy and climate policy. Many participants noted that less obvious are the costs to states and local communities to expand and maintain the transportation infrastructure necessary to move increasing volumes of feedstocks and biofuels to intended users, as well as the need to pay for new supplies for first responders in the event of ethanol fires.
Economics and Next-Generation Fuels
EISA mandates dramatic increases in the use and production of renewable fuels. Overall levels are to increase production from 9 million gallons in 2008 to 36 million gallons in 2022, with the increase after 2016 in advanced biofuels— primarily cellulosic ethanol. This means that in the first years—2010-2012—the cellulosic industry must grow by more than 100 percent a year. Even during 2020-2022, the industry is projected to grow by more than 20 percent a year. Bruce Babcock of Iowa State University noted that no U.S. industry has ever grown that fast. While the corn-based ethanol industry’s expansion was dramatic, the year-to-year increase was only 25-30 percent at its highest.
Participants almost universally said this rate of expansion is unlikely because the technology is not yet available on a scale that would sustain this growth. It is unclear which feedstocks or combination of feedstocks are going to be most viable and what they will cost. New production will need to compete with corn-based ethanol—a proven technology and feedstock with far less technical and operational risks. And it is likely that improvements in efficiency will continue driving down the costs of corn-based ethanol. Dramatic increases in cellulosic ethanol production will require enormous new capital, estimated by one presenter to be over $60 billion. Based on the required level of investment and recent experience with corn-based ethanol, investors see significant business risks—far more than was the case with first-generation ethanol. For the foreseeable future, the credit markets are expected to remain tight and venture capital funding will continue to be scarce. Many of the technology uncertainties have been covered earlier, so this section will examine some of the other economic barriers facing potential investors.
Investors are looking for ways to minimize risk and maximize returns. The business case for advanced biofuels depends on a variety of factors on both the supply side and the demand side. The federal government and private investors
D. Koplow “Biofuels in the Midwest—A Discussion,” www.wilsoncenter.org.
are supporting research to allow for the commercialization of advanced biofuels. The new economic stimulus plan includes almost $800 million for biofuels research in addition to funds allocated in the fiscal year 2009 budget of more than $200 million. And many experiments are being conducted assessing potential feedstocks. However, the returns to investment in advanced biofuels are highly uncertain, in part because promises of low-cost feedstocks grown on marginal land have not been confirmed or analyzed comprehensively to determine the unintended consequences associated with these feedstocks. Investors are looking for consistent supplies and low-cost feedstocks. To some extent the provisions of EISA and EPACT and evolving federal and state renewable fuel standards provide some assurances that there will, in fact, be a demand for both corn-based ethanol and advanced biofuels and create a floor price.
Bruce Babcock of Iowa State University described how the renewable fuel standards (RFS) in both EPACT (RFS 1) and EISA (RFS 2) support investors. RFS 1 effectively provides a guaranteed market for investment that has already taken place. The mechanism for enforcing the standard is the renewable identification number (RIN), which is equal to the RFS—the mandated level of biofuel use. During a year, when companies choose to purchase biofuels, they receive the RIN associated with that purchase. If they do not choose to purchase biofuels, then they can purchase the RIN instead and meet the RFS mandated level. If the demand for biofuel is low, they will start purchasing the RIN, but when they enter the RIN market, the price of RIN will begin to rise reflecting the increase in demand. As the price of the RIN rises, because each gallon of biofuel includes a more valuable RIN with it, the price of biofuels will begin to rise, and biofuel production facilities will re-open because their product’s value is rising. In early 2009, the price of gasoline fell so low that no one wanted to buy the more expensive biofuels. Then the price of the RIN started to increase until the price of ethanol increased, which led to the re-opening of many ethanol production facilities—enabling the RFS to be met.
The price of the RIN will only rise enough to keep the least-efficient production plants running in order to meet the mandates of the RFS. The more efficient plants will stay in operation, but as the price of ethanol rises, the less efficient plants will begin to come on line. The price of the RIN not only covers the operational cost of feedstock production, but also accounts for the labor costs and the cost of natural gas. The RFS will help to cover operational costs but will not provide a return on investment, therefore doing nothing to stimulate new investment.
Babcock explained that the RFS 2 makes things yet thornier for investors because it includes “waivable mandates” that allow the EPA Administrator to change the level of the biofuel production mandate. Basically, if the plants are not built, no capacity exists to meet the mandate, and the mandate must be waived—effectively eliminating any incentive for early investors. The price of the RIN with a waivable mandate is only going to cover operational and not
capital costs. Therefore, additional tax credits or subsidies will still be needed to induce investment.
Other barriers are also hampering the widespread use of expanded biofuel supplies. Flex-fuel vehicles have been widely promoted, but they still represent a very small portion of the total vehicle stock. And while these vehicles are engineered to operate on a variety of fuel blends up to E85, currently few distribution outlets are selling E85, so many flex-fuel vehicles use standard gasoline. For most of the vehicle stock, EPA regulations limit fuel blends to 10 percent ethanol. While there have been some attempts to increase this level, to date EPA has not changed its regulations and is continuing to test the effect of higher blends on engines and tailpipes. This “blend wall” effectively limits demand.8
Participants discussed prospects for a number of other bio-based fuels that would not depend on new storage and distribution infrastructure, such as biobutanol and “green gasoline.” In fact, the lack of adequate distribution and storage facilities was cited as a major barrier to the expansion of the biofuel industry. At the time of the workshop, neither the federal government nor private investors were creating the necessary infrastructure.9
In addition, some participants cautioned that too much attention may be focused on biofuels, when there are other ways to increase America’s energy independence and reduce the growth of greenhouse gas emissions, such as increased fuel efficiency and plug-in hybrid vehicles.
Several participants suggested that future biofuel production should meet the following objectives: reduce land-use pressures and greenhouse gas emissions, use non-food feedstocks, and compete with fossil fuels without subsides. They suggested that a price or tax on carbon would promote more efficient biofuel production.
The major environmental issues associated with expanding biofuel production are greenhouse gas emissions, land use, water use, air and water quality, biodiversity, and human health. Currently most biofuel production relies on corn or soybeans as feedstocks. These are annual crops requiring significant water inputs, including water for irrigation in some regions, as well as fertilizers and pesticides. The negative impacts associated with corn-based ethanol have been widely reported (see the Selected Bibliography in Appendix F). Recent studies suggest that improved corn yields and more efficient refineries improved the en-
vironmental performance of corn-based ethanol, but despite these improvements cellulosic-derived fuels are thought to be more sustainable.10
One presenter defined a sustainable biofuel system as one that is carbon negative with respect to climate, is nutrient and water conservative, provides biodiversity benefits, and has a positive impact on human health. He noted that the promise of advanced biofuels is based on their perenniality and crop diversity—versus annual corn, the feedstock currently used to produce most ethanol. For example, annual cropping systems have a nitrous oxide footprint four to five times greater than that of cellulosic crops and deplete levels of soil carbon. More diverse landscapes also increase levels of ecosystem services, including biocontrol services and cleaner water. However, not all cellulosic systems are created equal. The extent to which this promise is realized will depend on:
The choice of crops (e.g., annual versus perennial, native versus exotic, invasive versus non-invasive, landscape diversity);
Management practices (e.g., residue return, harvest timing and intensity, fertilization rate, irrigation); and
Location (e.g., What crops have been raised before? Whether energy crops will be grown on land previously enrolled in the CRP).
Even with advanced biofuel feedstocks, however, the environmental benefits may be difficult to fully realize. For example, crop residues, such as corn stover, are often cited as a promising cellulosic feedstock. However, if the removal of these residues from fields is not managed effectively, the loss of these field residues could increase soil erosion and nutrient loss and cause soil water loss. Local soil temperatures could rise—creating localized climate effects and overshadowing global warming benefits.
The water impacts of expanding biofuel production, primarily corn-based ethanol, were cited by a number of participants as a major long-term problem for the biofuel industry—a problem that was likely to become more of a constraint with climate change. Water consumed during crop cultivation is significantly more than that consumed by fuel processing facilities, though data monitoring to fully assess water demands is difficult. Current ethanol processing requires approximately 3 gallons of water for every gallon of fuel produced. Only limited data exists for the water resource requirements for cellulosic and algae feedstock production and fuel processing.11 While some of this water may be recovered, its negative impact on aquifers and other water resources remain a serious local issue.
The increased use of nitrogen-based fertilizers to improve corn yields has led to large amounts of leaching, with only 40 percent of the nitrogen actually going
to the plants. For example, in the Midwest, the excess nitrogen is deposited into water bodies and eventually travels to the Gulf of Mexico. The excess nitrogen in the Gulf causes large algal blooms that decompose, using up oxygen and creating a hypoxic zone. This zone has increased significantly in recent years, and is likely to continue to expand with projected increases in exports of dissolved inorganic nitrogen, despite pledges in 2005 to address its root causes.
There are also concerns about local groundwater quality as evidenced by increased nitrate-nitrogen concentrations. A number of wells in Wisconsin’s Dane County now exceed recommended EPA levels of 10 parts per million.
The health and safety impacts, both positive and negative, of biofuel production and use have received only limited attention with most studies on corn based ethanol or soybased biodiesel not advanced biofuels. Understanding and mitigating potentially significant negative impacts are critical to evaluating future renewable fuel options. There are recognized health and safety impacts along the entire biofuel supply chain—beginning with feedstock production and moving progressively through feedstock logistics, biofuel production, biofuel distribution, and biofuel end use (Figure 6). There are also likely to be indirect effects on human health. The scope of these impacts will depend on the types of fuel, feedstock, and conversion technologies and the characteristics of individual places (e.g., population density and baseline measures of air and water quality).
Some of these implications include the following:
Conversion technologies and practices are likely to affect air quality and water quality and quantity. Examples of such impacts include findings that suggest that (1) high levels of volatile organic compounds, carbon monoxide, methanol, and other hazardous pollutants significantly affect communities with ethanol refineries; and (2) the use of dried distillers grains—a byproduct of corn-based ethanol refineries used as cattle feed—may result in microbial protein contamination, which could be harmful to human health (Figure 7).
There are little data on the potential risks posed by leaks from storage or distribution facilities. Will the incompatibility of ethanol blends influence potential leakage from storage tanks? How do blends impact plume migration and remediation? What are the likely exposures associated with new fire retardants required to extinguish ethanol fires?
What are the likely effects on tailpipe emissions and ambient concentrations of criteria pollutants? What are the effects of various ethanol blends on local air pollution? In particular, does it make a difference if blend levels are increased from E10 to E15 or E20?
One presenter proposed applying a risk framework to biofuels; identifying the environmental, health, and safety issues and benefits; integrating this information with outcomes; and comparing various potential biofuel pathways. She also advocated for more monitoring of the affected environment and of specific releases to better analyze potential risks.
Often the social impacts associated with expanding biofuel production are not given nearly enough attention amid the gamut of highly contentious environmental and economic impacts. Current research is examining and exploring the observed and potential social impacts of the expansion of the U.S. biofuel industry. As with other industry expansions, communities and individuals will experience different impacts. The question of who may win or lose in the various scenarios was discussed by many participants—noting that rural communities that share the same values and interests are not homogeneous.
During their remarks, workshop panelists were asked to address a number of social impacts on local communities and institutions surrounding expanding biofuel production in the Upper Midwest, including:
the impacts of the arrival or disappearance of refineries;
the acceptability of adoption and communities’ willingness to adopt new feedstocks, technologies, and fuels; and
the impacts of changes in labor force, culture, and education.
During workshop discussions, panelists and participants raised many issues concerning the most sustainable path forward for U.S. biofuel production. While successful biofuel industry expansion in a region may be beneficial to one community (jobs, economic development, etc.), it may not be beneficial to another community with different circumstances and socioeconomic demographics. Participants also noted issues of community versus individual perceptions associated with the expansion of ethanol production, as well as unintended consequences for human health and well-being associated with negative environmental impacts.
Panel discussions highlighted the most effective ways to move forward with advanced biofuel production, while mitigating negative social impacts. Panelists and participants questioned whether the United States should repeat the same economic development policy model, or whether an alternative approach will allow for innovation coupled with a new economic development strategy for the Upper Midwest. For example, creating more holistic economic development policies at the federal and state levels that include provisions for increased energy independence and concurrently support environmental protection goals will be crucial to expanding a sustainable U.S. biofuel industry.
The issue of “winning” and “losing” was discussed extensively by par-
ticipants who valued the ability to convene a much-needed, necessary and frank discussion about the kinds of tradeoffs that need to be assessed, including the impacts for winners and losers in the farming and processing communities. As the advanced biofuel industry develops, individuals—farmers who grow ethanol feedstocks and employees of refineries and processing facilities—are often perceived as winners. However, often the jobs created by ethanol production plants are not significant (e.g., fewer than 20 jobs for a smaller plant). Panelists suggested that a few new jobs may not significantly impact overall employment numbers in the Upper Midwest. Participants noted, however, that communities often believe that any new jobs are better than none.
Panelists and participants were also asked to discuss how best to minimize adverse social impacts as the industry transitions to a second generation of biofuel production. Here, many participants emphasized the need for a critical analysis of the different costs and benefits (including the path taken) in the development of the U.S. corn-based ethanol industry. Identifying the best policies and management practices will be critical to the successful development of the next-generation biofuel economy.
Many participants also emphasized the need for understanding the social and political issues of expanding a next-generation biofuel industry. How the costs and benefits will be distributed within communities was cited as an area that needs further research and attention—especially more focused data on how communities will benefit or suffer from future losses.