Sustainability in Aviation Biofuels: Economics, Policy, and Challenges

1. Summary Remarks Economics and Policy Session Biofuels for Aviation Summit Moderator: Harry S. Baumes, Ph. D. Associate Director Office of Energy Policy and New Uses September 2, 2009

2. Carbon and Greenhouse Gases • Brent Gloy, Ph. D. • Associate Professor, Cornell University • Zia Haq • Senior Analyst, Dept. of Energy • Sustainability and Greenhouse Gases • William Meyers, Ph. D. • Professor, University of Missouri • Co-Director of FAPRI-MU • Neilsen Conklin, Ph.D. • President, Farm Foundation • Gregory Graff, P.h. D. • Assistant Professor, Colorado State University • Food versus Fueland Greenhouse Gases • Joe Outlaw, Ph. D. • Professor, Texas A&M University • Wally Tyner, Ph. D. • Professor,Purdue University • F. Larry Leistritz, P.h. D. • Distinguished Professor, North Dakota State University

3. Questions • Carbon and Greenhouse Gases • Will current legislation on controlling carbon/greenhouse gases be effective? How will it impact the biofuels industry? • What are the economic factors determining land use and how are they changing? • Sustainability • What are the non technical factors to be considered in deciding between oil, starch or cellulose based systems for aviation fuels production? • What kinds of production, delivery and processing systems are sustainable? • How do economists define sustainability? • Food versus Fuel • What are the food/fuel issues for aviation biofuel production? • What government policies (federal and state) can accelerate biofuel for aviation production and combat food/fuel issues? • How can the Air Force contribute to developments in technology, organization and policy that would accelerate aviation biofuels development?

4. Carbon and Greenhouse Gases • Contrast Past Growth Biofuels with Second Generations Feedstocks/Biofuels (alternative fuels) • Producers of Feedstocks and Biofuels must make profit or be incentivized to produce • First Generation Fuels and Feedstocks • Economics supported growth: cheap corn and high energy costs • Proven Technology – knew how to make ethanol and biodiesel on commercial scale • Policy Supported Growth – EPACT 2005 and EISA 2007 • Financial Sector willing to provide capital for investment • Second Generation Cellulosic • Economic environment not as favorable: lower energy cost and higher commodity prices, fluctuating commodity prices, financial crisis and recession • Technology is not proven, not tested on commercial scale • Policy is uncertain or wavering, GHG emissions and climate concerns • Financial sector not willing to provide capital in the current environment

5. Carbon and Greenhouse Gases • Carbon and Greenhouse Gases • Too narrow scope there are at least 7 GHG, reducing one may create problems with others • Formally we are trying to incorporate externalities that were not or may not have been considered in the decision making process • Identify both environmental costs and benefits to produce feedstocks and biofuels, and markets are either thin or do not exist for these externalities • Life Cycle Analysis, Indirect Land Use, and GHG • LCA results sensitive to assumptions and methodology • Technology Change • Affects feedstock production, conversion and economics of market • Disemenation and adoption cultural practices, conversion, supply chain and end use markets

6. Sustainability • Economists Like to Allocate Resources to Alternative Uses • Market efficient allocation system – markets can (given sufficient time) determine feedstocks and alternative fuels (regional differences likely). Make a product for a “cost” and sell that product for a “price” • Environmental goods and services – not well defined and markets not well developed or non-existent • Need to internalize all benefits/costs to make investment decision • Manage Risk – role for government in these enviromental goods and services markets? • Questions to consider with regard to sustainability – RISK MGMT • What is it we want to sustain? • How long do we want to sustain it? • With what level of certainty do we want to sustain it?

7. Sustainability • Integrated Systems Approach Required • Renewable Energy, Climate and Sustainability all spoken in the same sentence – need to consider jointly or simultaneously • Regionally – different or multiple feedstocks perhaps mulitple alternative fuels (demand or end use considerations)

8. Food versus Fuel • Hot Spot or Hot Topic – There will be others • Land – used to produce biomass that can be used for transportation fuel production. EISA places constraints on that production: land that can be used and meeting GHG threshholds. • Land use – need to understand international adjustment • Third general feedstock/fuel: Algae – needs water could be a “hot spot” issue • Food versus fuel issues not well understood by most. USDA invested resources to try and address consumers concerns and lack of understanding

9. Food versus Fuel • Competition for land • Traditional use for crop production and transportation fuels production • NEW USES: Biomass required for heat and power and land being used to create carbon offsets • Second and third generation fuels expected to have low food price impact • Policies need to accelerate biofuels for aviation industry • Technology – government can help by funding research and development • Market Prices are volatile – policy can be used to stabilize prices or reduce fluctuations • Government policy supporting or impacting industry – uncertainty needs to be minimized

10. Conclusions • Outreach and Education • Consumers need to understand the complexities of food (commodities), biofuels production, land use and economy interactions • Air Force might consider • Funding a second generation facility to supply jet biofuel • Vertical integration approach – feedstock production to end use by air force and commercial aviation industry • New models in approach: partnerships with private sector, local municipalities/farmers/companies

11. THANK YOU! Contact Information: Harry S. Baumes hbaumes@oce.usda.gov 202-401-0497