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Biofuels: Interpreting the Numbers Publication No.

PRB 08-55E 24 July 2008 Reviewed 17 May 2012 Mathieu Frigon Economics Division Parliamentary Information and Research Service Biofuels: Interpreting the Numbers (In Brief) HTML and PDF versions of this publication are available on IntraParl (the parliamentary intranet) and on the Parliament of Canada website.

In the electronic versions, a number of the endnote entries contain hyperlinks to referenced resources.
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Papers in the Library of Parliament’s In Brief series provide succinct, objective and impartial overviews of current issues.

They are prepared by the Parliamentary Information and Research Service, which carries out research for and provides information and analysis to parliamentarians and Senate and House of Commons committees and parliamentary associations.

Publication No.
PRB 08-55E Ottawa, Canada, Library of Parliament (2008) CONTENTS INTRODUCTION ....................................................................................................... 1 EMISSIONS PER KILOMETRE ................................................................................ 1 BIOFUELS AND CROP PRODUCTION ................................................................... 1 NET ENERGY BALANCE VERSUS ENERGY QUALITY ........................................ 2 IS NET ENERGY BALANCE NEGATIVE FOR GASOLINE?
................................... 3 BIOFUELS AND THE RURAL ECONOMY ............................................................... 3 CONCLUSION .......................................................................................................... 4 LIBRARY OF PARLIAMENT i PUBLICATION NO.
PRB 08-55E BIOFUELS: INTERPRETING THE NUMBERS 1 INTRODUCTION Discussions surrounding the use of biofuels are fraught with disputes about how the environmental and economic effects of these energy sources should be quantified.
The parliamentary debate that preceded the passage in 2008 of Bill C-33, An Act to amend the Canadian Environmental Protection Act, 1999, which provides for the regulation of biofuel content in gasoline, diesel fuel and heating oil, was characterized by such a “numbers war.” What appeared to be conflicting data were presented by witnesses at parliamentary committee hearings, adding difficulty to already complicated and often highly technical discussions.
The objective of this paper is not to settle disagreements about the numbers themselves, but to explain some technical points that should be taken into account in quantifying the relative merits of different fuel types.

2 EMISSIONS PER KILOMETRE In quantifying the environmental impact of vehicle fuels it is important to think in terms of emissions per kilometre travelled rather than emissions per litre.

Ethanol contains less energy per litre than gasoline.
Therefore, the distance travelled on a litre of an ethanol blend will be less than the distance travelled on a litre of regular gasoline.

For example, a Consumer Reports study conducted in the United States indicated that the fuel economy of the SUV Chevrolet Tahoe was 27% lower with E85 (85% ethanol and 15% gasoline) than with regular gasoline.1,2 distance travelled on a tank of E85 is 27% less than on a tank of regular gasoline.
Quantifying on a per-litre basis the potential reduction in greenhouse gas emissions that could be achieved with the use of ethanol blends can therefore be misleading: to attain the emissions reductions presented in these terms, Canadians would have to drastically reduce the number of kilometres they travel.

That is, the The potential impact on greenhouse gas emissions resulting from biofuels use should ideally be discussed on a per-kilometre basis.
For example, the following form would be appropriate: “The reduction of (or increase in) greenhouse gas emissions attained with the use of E85 in comparison with regular gasoline is estimated at X% per kilometre travelled.” 3 BIOFUELS AND CROP PRODUCTION The environmental impact of biofuels use is often discussed in terms of the proportion of total cropland used to produce the raw material or “feedstock” for these fuels.
Whether calculated for specific countries or on a global scale, this proportion is typically small.

It has been estimated that in the top six producing countries in 2006–20073 about 3% to 4% of arable land was devoted to crops destined for biofuels feedstock production.4 Although these numbers suggest that biofuels production would have a negligible LIBRARY OF PARLIAMENT 1 PUBLICATION NO.

PRB 08-55E BIOFUELS: INTERPRETING THE NUMBERS impact on world grain prices, this is not in fact the case.
Because prices on agricultural markets are determined at the margin, it is competition – or the lack of it – for the purchase of “additional production” that determines price fluctuations.

To take a theoretical example, let us assume a market for an agricultural commodity that is in equilibrium at a price of $5 per unit and a production of 100 units.
Assuming a bumper crop of 120 units, what would need to happen to the price for the market to absorb these 20 additional units – that is, for the market to “clear”?

If demand for the commodity is decreasing or stagnating, competition for these 20 additional units will be low or nonexistent, and the decrease in price necessary for the market to clear would have to be substantial.
Conversely, if demand for the commodity is strong and competition among buyers is fierce, 20 units of additional production might prove insufficient, and prices might have to rise in order for the market to clear.5 In essence, this latter scenario describes what has happened in the last few years in grain markets.

The additional demand for grains that was stimulated by biofuels production occurred when demand was already heating up because of increasing consumption by emerging economies such as China.
Thus, competition at the margin was high because of increasing demand from both developing countries and biofuels producers.

In such a context, if increased production were limited or disappointing (because of crop failures, for example), prices would inevitably shoot up.

This is what happened in some agricultural markets in 2007–2008.
Therefore, a better way to quantify the impact of biofuels production on agricultural markets is to show the proportion of additional production that has been captured by biofuels, rather than the proportion of total production.

For example, although only a very small proportion of arable land is used to produce feedstock for biofuels worldwide, biofuels production accounted for over half of the increase in world grain use between 2005 and 2007.
6 4 NET ENERGY BALANCE VERSUS ENERGY QUALITY Perhaps no aspect of the biofuels debate has been as controversial as the concept of a net energy balance (NEB).
As NEB is commonly defined, its analysis: seeks to compare the amount of energy delivered to society by a technology to the total energy required to find, extract, process, deliver, and otherwise upgrade that energy to a socially useful form.7 Based on this definition, there is a general consensus that the net energy balance of ethanol made from corn and wheat is weak relative to that of comparable sources of energy such as gasoline or ethanol made from sugar cane.
Opponents of the biofuels mandate have used this result extensively, alleging that ethanol uses more energy that it generates.

However, it is important to understand a common limitation of NEB analysis: Despite [the] widespread use [of this analysis], aggregating different energy types by their heat units embodies a serious flaw: it ignores qualitative differences among energy vectors.
Defined by Kaufmann and Cleveland et al, energy quality is the relative economic usefulness per heat equivalent unit of different fuels and electricity.8 LIBRARY OF PARLIAMENT 2 PUBLICATION NO.

PRB 08-55E BIOFUELS: INTERPRETING THE NUMBERS In other words, it is important to take into account the qualitative attributes of the energy used in the production process as well as the quality of the energy that is ultimately generated.
For example, generating electricity from coal entails significant losses of energy.

Nevertheless, the process still makes economic sense in that electricity, because of its unique qualities, is a much more useful form of energy per heat- equivalent unit than coal.

(Turning on the lights or running a computer directly on coal would not be very practical, to say the least.)
This point does not render the measure of net energy balance irrelevant; it simply shows that NEB calculations need to be properly contextualized, if not adjusted, on the basis of energy quality.

5 IS NET ENERGY BALANCE NEGATIVE FOR GASOLINE?

To counter claims that the NEB of ethanol made from corn or wheat is negligible, some have argued that corn and wheat ethanol still have a much better NEB than gasoline, whose NEB is deeply negative.
Such claims have further complicated the debate by using an altered definition of NEB.

The conclusion that the NEB for gasoline is negative is premised not on the original definition of NEB as the ratio between the amount of energy delivered by a technology and the total energy required to make that energy available, but rather as the energy gain that results from the production process for a given energy source.
Under this altered definition, fossil-fuel NEB – that is, its energy gain – would indeed be in the negative.

The reason for this is that, even before oil is found, extracted and refined, it is sitting in its reservoir with a very high energy content.

Any energy then used to extract, transport and upgrade this oil into useable products such as gasoline is therefore considered an energy loss.

Energy gains resulting from the production process of gasoline are therefore deemed negative.
Under this definition, ethanol fares much better: the sun brings energy gains in the process of growing crops.

It is important to understand that the energy gains concept is entirely different from the commonly used NEB metric defined earlier.
Using the common definition, a study commissioned by Natural Resources Canada estimated that the NEB of gasoline was more than twice that of ethanol made from corn or wheat.9 6 BIOFUELS AND THE RURAL ECONOMY One of the reasons provided in support of government biofuels policy is that growth in the biofuels industry will benefit the rural economy through, for example, direct and indirect job creation.
From an economic standpoint, however, an opportunity-cost analysis would provide a more robust assessment of such potential benefits.

A report of the Saskatchewan Institute of Public Policy makes this point: The impact of an expanded ethanol industry (including indirect effects) on the rural economy must be carefully considered.
To accurately assess the benefits to Saskatchewan’s economy, one must also consider what such an investment could end up costing taxpayers and what the alternative uses of this subsidy might be.10 An opportunity-cost analysis would involve comparing the estimated benefits to the rural economy of the government biofuels policy with the benefits that would be achieved under an alternative public policy with a comparable budget and similar level of regulation.

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PRB 08-55E BIOFUELS: INTERPRETING THE NUMBERS 7 CONCLUSION Five technical elements have been discussed in this brief to help interpret and contextualize statistics that are commonly used in the biofuels debate.

These may be summarized as follows: • The potential impact of biofuels use on greenhouse gas emissions should be quantified on a per-kilometre, not per-litre, basis.
• The impact of biofuels production on demand for agricultural products should be considered in terms of the proportion of the increased (not total) grain use that is accounted for by biofuels.

• The NEB concept has important limitations.

For example, most NEB analyses for ethanol do not take into account the qualitative aspects of various forms of energy.

• NEB and energy gains resulting from the production process are not equivalent metrics.
Gasoline, and fossil fuels in general, exhibit very different results under these two measures.

• Numbers on job creation in the rural economy do not indicate whether a given set of government biofuels measures is the best means of achieving job creation in the rural economy.

An opportunity-cost analysis could help to provide such an answer.

NOTES 1.

2.

3.

4.

5.

6.

7.


“The ethanol myth,” Consumer Reports, October 2006, http://www.consumerreports.org/cro/cars/new-cars/news/2006/ethanol-10- 06/overview/1006_ethanol_ov1_1.htm.

Similarly, the Ethanol Promotion and Information Council in the United States reported that “E85 has approximately 27% less energy then [sic] gasoline, but fuel economy loss varies between 10 to 25%.” See http://www.drivingethanol.org/ethanol_in_vehicles/frequently_asked_questions.aspx.
The top six producing regions/countries in 2006–2007 were Argentina, Brazil, Canada, China, the European Union and the United States.

Ronald Trostle, Global Agricultural Supply and Demand: Factors Contributing to the Recent Increase in Food Commodity Prices, Economic Research Service, United States Department of Agriculture, WRS-0801, Washington, DC, May 2008, p. 19.
Although drawing down or stockpiling additional inventories could delay or smooth the price response, the basic pricing mechanism illustrated through this simplified example still holds.

OECD-FAO Agricultural Outlook 2008–2017, Highlights, Organisation for Economic Co- operation and Development and Food and Agriculture Organization of the United Nations, Paris, 2008, p. 40.
Cutler J. Cleveland, “Energy Aggregation and Energy Quality,” The Encyclopedia of Earth, June 2008, http://www.eoearth.org/article/Net_energy_analysis#Energy_Aggregation_and_Energy_ Quality.

8.

Ibid.

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PRB 08-55E BIOFUELS: INTERPRETING THE NUMBERS 9.

Expansion of Energy Balance Information in GHGenius, prepared for Natural Resources Canada by (S&T)2 Consultants, November 2007.

10.
10.

Rose Olfert and Simon Weseen, Assessing the Viability of an Ethanol Industry in Saskatchewan, Saskatchewan Institute of Public Policy, Public Policy Paper Series no.

48, University of Regina, Regina, February 2007, p. 14.

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