Future Energy Fellows post

harvesting wheat for biofuels processing

Policy developments and the future of biofuel technology

Oil-derived fuels remain the dominant energy source for our transportation network, and this is unlikely to change for the foreseeable future. The free market often dictates what technologies succeed or fail in society, and entrepreneurs take risks by bringing new, innovative technologies to the market. Unlike the current consumer technology industry, where new products can offer novel or superior services, transportation fuel options compete primarily on price and availability with limited room for product differentiation. Without substantial government support and private investment, the prospects for biofuels are limited.

The majority of biofuel development to date has been driven by the Renewable Fuel Standard (RFS) in the United States and the ethanol program in Brazil, Proálcool. These programs have created a burgeoning ethanol industry, and the RFS program has gone slightly further to provide additional support for biodiesel and to lay the groundwork for next generation biofuels like cellulosic ethanol.

While a good start to biofuel development, these programs have been setup to address concerns with energy security and agricultural development rather than trying to address greenhouse gas (GHG) emissions. Next generation biofuels need not only exist at cost-competitive levels to oil-derived fuels, but must also compete with alternative technologies while working to reduce GHG emissions without contributing to a rise in global food prices. A new set of policies is being enacted to direct this next-generation of biofuel development.

The Low Carbon Fuel Standard

Low Carbon Fuel Standards (LCFS) have been implemented in California, British Columbia, and the European Union. This regulatory framework creates a market for novel fuel technologies, including biofuels, by forcing transportation fuels to compete based on carbon intensity (the amount of carbon released per unit of energy a fuel can provide) rather than price. This differs fundamentally from RFS-like programs that mandate specific volumes of biofuel to enter the market.  The LCFS forces biofuels to compete against oil, natural gas, diesel, and other alternative fuels; requiring a certain fuel carbon intensities for the technology to be viable. If GHG emissions associated with oil-derived fuel use can be reduced substantially through carbon capture and sequestration technologies, then that is considered to be just as good of an option as bringing cellulosic ethanol to market.

While not exactly a biofuel policy, biofuels are currently one of the lowest-cost options for complying with LCFS policy due to the long-existing support for biofuels from the RFS and Proálcool that has brought costs of production down. As the LCFS specifies a carbon intensity reduction schedule that is more difficult to comply with using conventional biofuel technologies in the long-term, substantial technological development of nascent technologies is necessary. Due to heavy-reliance on biofuels to achieve short-term compliance requirements, the LCFS promotes continued research and development for lower-carbon biofuel options while allowing the free-market to ultimately select winners and losers in the sector.

This different framework for addressing transportation fuel development means that biofuels are not as directly supported as they once were, and that the market for biofuels will be increasingly more competitive. Further, if biofuels are unable to come down in cost or to be able to reduce their GHG emissions substantially from today’s levels, the support for them will ultimately diminish and phase out in favor of more competitive technologies.

By tying biofuel production to GHG emissions, there are also implications for agricultural development policy and escalating food prices. If a given biofuel displaces a food crop, then the associated GHG emissions from the biofuel go up because the food crop will be planted elsewhere. As the food crop production shifts to areas that were previously uncultivated, this contributes to an increase in GHG emissions that may be attributed to the biofuel responsible for the crop displacement.  This makes biofuels that displace food crops less valuable under LCFS policy. There is therefore limited incentive to continue using productive food-crop land for biofuels due to this diminishing value of compliance, and so food price escalation is mitigated.

Carbon taxes and Cap and Trade

Carbon taxes or cap and trade (CAT) policies use pricing mechanisms that encourage novel technology deployment by making incumbent technologies more expensive. However, economy-wide CAT policies or carbon taxes are unlikely to be effective at incentivizing biofuel deployment as GHG emission reductions from the transportation sector are not the lowest cost option for reducing GHG emissions.  Nonetheless, these policies may work in combination with other supporting policies, such as volumetric fuel mandates or low-carbon fuel standards, which specifically target the transportation sector to help support biofuel development.

Carbon taxes and CAT policies that target only the transportation sector are considered to be first-best solutions for mitigating climate change and reducing GHG emissions from transportation. Unlike an LCFS, which directly reduces fuel carbon intensity, CAT would work to mitigate total emissions, which could be achieved through vehicle efficiency measures and reductions in total fuel demand, as opposed to shifts in the fuel supply. A carbon tax would similarly work to reduce demand for transportation fuel by making oil-derived fuels more expensive. In turn, this sort of approach could make more expensive, next-generation biofuel technologies more compelling to adopt in the market (less of a barrier to entry), but does not directly encourage the use of biofuels.

While CAT policy and carbon taxes will promote lowest-cost options for reducing GHG emissions, these policies aim to target the transportation sector as a whole, without providing direct support for fuel production and advancement. Given this shift in policies from deployment mandates to market-based solutions, these policies may inadvertently remove some of the support that presently exists for biofuel development unless enacted in conjunction with other supporting policies, like a low carbon fuel standard.

Volume Mandates

Volume mandates, like the RFS, are likely to remain in place, but alterations to these policy structures may happen that promote a more-varied field of fuel options that contribute to GHG emission reduction goals. The original RFS, which called only for ethanol production at a certain volume, was modified in 2007 to create requirement tiers for biofuels based on overall GHG emission reductions compared to gasoline.  Further modification is likely to take place that allows for non-conventional fuels like natural gas, electricity, or hydrogen to be incorporated into the mandate. Additional modifications are also likely that will incentivize incremental improvements in carbon intensity for a given technology pathway.

Conclusions

The once-popular volumetric mandates that have single handedly created today’s biofuel markets are changing. Biofuels will have to evolve, becoming low-cost, low-carbon options for the transportation market if they are to continue to receive political support. 

Carbon taxes and cap and trade policy as stand-alone options may substantially weaken existing incentives for biofuel development, discouraging entrepreneurial activity in the field while encouraging other low-carbon pathways.  Low carbon fuel standards and modifications to volumetric mandates will shift the direction of biofuel developments by forcing biofuels to compete with other novel technologies, impacting biofuel’s place as the premier alternative transportation fuel. The next set of fuel policies will gradually change our transportation network, making it a diverse system with no single dominant fuel. Biofuel may or may not continue to be part of it.

Image: Harvesting for Biofuels via Shutterstock