The Hidden Costs of Ethanol

1. The Hidden Costs of Ethanol Team 198 Eric Chung, Alaap Parikh, Ashutosh Singhal Holmdel High School

2. Overview • Goal: US Energy Independence • Ethanol is a combustible biofuel that can replace petroleum in cars and homes. • Concerns: • Effect on Environment • Cost • Effect on International Grain Trade

3. Outline of Study 1. Amount of Ethanol Needed • Effects on Carbon Dioxide Emissions • Cost Efficiency of Ethanol • Effects on International Prices and Consumers • Strategy for US Energy Independence

4. Problem 1 How much ethanol is needed to replace 10% of annual US gasoline usage? Assumptions • Gasoline consumption will continue its trend from the last 15 years. Amount of Ethanol Needed

5. Projected Gasoline Consumption Linear Fit Increasing Demand R2 = 0.994 Data Source: Energy Information Administration Amount of Ethanol Needed

6. Demand for Ethanol • Equation used: • Conversion Factor: 1.18 gallons of ethanol have an equivalent energy utility to 1 gallon of gasoline. Amount of Ethanol Needed

7. Demand for Ethanol Amount of Ethanol Needed

8. Problem 2 What effect will this fuel substitution have on carbon dioxide emissions? Assumptions • Industrial carbon dioxide emissions will remain constant. • Trade policies and partners will not change. • Gasoline Consumption values from Problem 1 are accurate. Carbon Dioxide Emissions of Fuels

9. Factors to be Considered for Ethanol Production • The United States currently does not have the capacity to produce all of the ethanol it needs. Ethanol must be imported until this capacity expands enough to support all domestic consumption. • Assumption: All imported ethanol comes from Brazil and is derived from sugarcane. Carbon Dioxide Emissions of Fuels

10. Carbon Dioxide Emissions of Fuels Gasoline Ethanol Production Domestic: 8.662 kg CO2/gal Foreign: 1.925 kg CO2/gal Transportation Overseas Ship (Foreign only): 0.388 kg CO2/gal Domestic Truck (46%): 0.0525 kg CO2/gal Domestic Rail (54%): 0.0695 kg CO2/gal Consumption: 6.987 kg CO2/gal Plus 90% of gasoline emissions • Production: 10.286 kg CO2/gal • Transportation: • Overseas Pipeline (38%): insignificant • Overseas Ship (62%): 0.0971 kg CO2/gal • Domestic Truck (100%): 0.105 kg CO2/gal • Consumption: 8.788 kg CO2/gal Data Source: UK Department of Transport Carbon Dioxide Emissions of Fuels

11. Total Gasoline CO2 Emissions Steadily increasing emissions Carbon Dioxide Emissions of Fuels

12. Total Ethanol CO2 Emissions Steadily increasing emissions Higher than gasoline overall Carbon Dioxide Emissions of Fuels

13. Percent Change in CO2 Emissions Levels out at around 11% Carbon Dioxide Emissions of Fuels

14. Conclusions • Replacement of gasoline by E10 would have a negative impact on the environment. • However, since the farming of the corn used in ethanol production naturally removes CO2 from the air, the actual effects of the switch to ethanol are less clear than expected. Carbon Dioxide Emissions of Fuels

15. Problem 3 Is corn-derived ethanol a cost-efficient way of producing fuel? Assumptions • Gas prices will continue the trend shown by the last 30 years. • Ethanol prices will continue the trend shown by the last 5 years. • Projections for 10 and 20 years cannot be made because of unforeseen advances in technology. Cost Efficiency of Fuels

16. Gas Prices Two-peaked Gaussian Fit R2 = 0.801 Data Source: Energy Information Administration Cost Efficiency of Fuels

17. Ethanol Prices Linear Fit R2 = 0.679 Data Source: Energy Information Administration Cost Efficiency of Fuels

18. Cost Efficiency of Fuels • Equation Used: • Energy content of gasoline = 121.3 MJ/gal • Energy content of ethanol = 80.2 MJ/gal Cost Efficiency of Fuels

19. Cost Efficiency of Fuels Cost Efficiency of Fuels

20. Conclusions • Gasoline is much more cost effective than ethanol, despite large subsidies on ethanol. This is due to the higher energy content of gasoline. • The cost efficiency of ethanol is expected to rise in comparison to gasoline as newer technologies are developed and gasoline prices rise in the future. Cost Efficiency of Fuels

21. Problem 4 Estimate the effect of E10 substitution for gasoline on grain prices and developing nations over the next five years. Assumptions • All ethanol is produced from corn, as implied by the prompt. • The demand for wheat, rice, and corn are interrelated. • Current trends in the prices and supply/demand of wheat, corn, and rice will continue in the future. • Projections for 10 and 20 years cannot be made because of unforeseen advances in technology. International Effects

22. wheat:εwd = % increase in quantity demanded of wheat % increase in price of corn rice:εrd = % increase in quantity demanded of rice % increase in price of corn εwdand εrdcalculated for each of the past seven years and then averaged wheat: εwd=1.137, rice: εrd=0.7524 The cross elasticity of wheat is higher because of a higher availability of substitute goods. Cross-Elasticity of Demand Data Source: US Department of Agriculture International Effects

23. Projection Algorithm Linear fit fc(year)= price calculated from corn prices of past seven years Linear fits fw(quantity demanded)= price and fr(quantity demanded)= price calculated from wheat and rice data of past seven years Data Source: US Department of Agriculture International Effects

24. Projection Algorithm • Example: Year 2008 • Year 2007: price of corn = 119.694 ($/metric ton), quantity demanded of wheat = 603.249 (million metric tons) • price of corn = fc(2008) = 157.518 • % increase from previous year = 31.6% • % increase in wheat demanded = 31.6% × εwd= 35.9% • quantity demanded of wheat = 603.249 × 135.9% = 820.102 • price of wheat = fw(820.102) = 247.315 • Same procedure applied to projecting price of rice, substituting εrdfor εwdand frfor fw Data Source: US Department of Agriculture International Effects

25. Price Projections • Price of wheat and rice will be pushed higher by increased corn consumption for ethanol. • Price of rice will rise more sharply than price of wheat. • This will benefit farmers, but hurt consumers in developing countries. International Effects

26. Problem 5 Are there better ways for the US to attain national energy independence? US Energy Independence

27. Evaluation of Energy Sources • Cost-effectiveness – a measure of the fuel’s efficiency, based on cost per kilowatt-hour • Renewability – the usefulness of a fuel based on its long-term availability • Reliability – a measure of the fuel’s ability to generate consistent power output • Environmental impact – the damage done to the environment by the fuel’s usage US Energy Independence

28. Evaluation of Energy Sources • All categories rated on scale of 1 (worst) to 10 (best) except for renewability, which was rated from 1 to 20 • Most renewable fuels were environmentally-friendly, but unreliable and expensive. • While nonrenewable fuels were the most reliable and most cost effective, their advantages were offset by a large negative environmental impact. US Energy Independence

29. Current Energy Usage US Energy Independence

30. Optimal Energy Usage Optimal usage percentages found by dividing source’s evaluation total from sum of all evaluation totals on previous chart Shows a transition towards renewable fuels for US energy independence. US Energy Independence

31. Overall Conclusions • Ethanol’s impact on the environment cannot be accurately calculated due to natural processes involved in corn growth. • Ethanol is not yet a cost-effective source of energy, but can become cheaper in the future as new technologies are developed. • Increased corn harvesting due to an increased demand for ethanol will raise grain prices and hard developing nations. • A switch to renewable resources is important in achieving US energy independence.