Proposed ethanol regulations have uncertain benefits

Blog - June 8, 2010 - By Jesse Row

A few weeks ago, the Government of Canada released draft regulations that would require gasoline to contain five per cent ethanol, on average, starting in September this year. The main reason for doing this, it stated, is to reduce greenhouse gas (GHG) emissions and Canadians' impact on the climate. As any good energy and environmental policy organization should do, we took our own look at the climate implications of these regulations.

Since we are not experts in how increased ethanol production may or may not impact food availability and hunger in various parts of the world, we will leave that topic for others to debate.

Total costs and benefits of the regulations

When it published the proposed regulations, the government provided some numbers on their expected costs and benefits.

The cost of complying with the regulations, in "present value" terms, was estimated to be about $1.2 billion to build new infrastructure, plus $2 billion in higher fuel costs over the next 25 years. These costs will be primarily borne by consumers. (It should be noted that the current federal government has also allocated over $2 billion in subsidies, in addition to the costs cited above, for ethanol and other biofuels as a way to ensure that some of the ethanol used to meet the 5 per cent requirement will be produced in Canada.)

For benefits, the government listed a permanent reduction in annual GHG emissions of about one million tonnes. This is equivalent to taking about 170,000 cars off the road. No other benefits were quantified in the government's cost-benefit analysis.

Gap in the analysis

During our review, we noticed that the government did not take into account all of the emissions that may be created as a result of producing ethanol. This means that the government may be overestimating the emission reductions.

The component of the life-cycle analysis that is missing is commonly called indirect land use change. This can occur when crops are diverted from traditional markets to new industries, such as biofuels. If supply goes down in these traditional markets, there are three possible responses:

1.     People consume less,

2.     More supply is created by increasing yields on existing cropland, or

3.     More supply is created by opening up new cropland.

The third option is the one with the biggest climate implications. Creating new cropland requires land to be changed from one type (or use) to another: for example, changing a forest into agricultural land. These kinds of changes can release large amounts of carbon that were previously stored in the soil and the vegetation on these lands. Studies show that the changes can be large enough to negate any GHG emission reduction that occurred from replacing gasoline with biofuels in the first place.

Now I'm not saying that the third option automatically happens whenever biofuels are produced - but it's a potential response and should, at the very least, be looked into. In fact, this is precisely what other governments around the world are doing. The U.S. federal government, California and the EU are all considering indirect land use changes in the development of their regulations. It's still early days in using this type of analysis, but those governments are moving forward with the best information that's currently available.

Traffic on the 401, Toronto, OntarioSome folks believe there is very little or no indirect land use change associated with biofuels. In contrast, both the U.S. Environmental Protection Agency and the California Air Resources Board have recently published numbers for indirect land use change that would shrink the estimated emission reductions from the Canadian regulations by about 85 per cent. 

Given the potential importance of this issue, it is a significant omission for the Government of Canada to leave indirect land use change out of its calculations, particularly since the government has identified reducing GHG emissions as THE reason for the regulations in the first place.

Improving the regulations

For the regulations themselves, one way they could be improved is to differentiate between different types of ethanol based on their life-cycle GHG emissions. This could create an incentive to increase the supply of ethanol with very low life-cycle GHG emissions, such as ethanol produced from waste or using second generation technologies, and could enhance the environmental benefit of the regulations.

Cost effectiveness of the regulations

Using the numbers currently provided along with the draft regulations, their cost is roughly $340 per tonne of GHGs (carbon dioxide equivalent, or CO2e) reduced, although once indirect land use change is considered, the $340 per tonne number for biofuels is likely to rise. In comparison, economic modelling indicates that Canada could meet an ambitious GHG reduction target by 2020 using an economy-wide price on emissions of $200 per tonne.

Some folks may argue that the high cost of this policy covers not only reducing GHG emissions, but rural economic development as well. This may be the case, but the government did not quantify economic development as part of the benefits of the regulation, so it was not included in our cost per tonne calculation.

Others may suggest that there are also air quality benefits associated with the regulations, but the government concluded that it doesn't believe this to be the case.

What else we should be doing

When designing policy, it's also helpful to look at different ways to meet your objectives, which in this case is GHG reductions.

One way to reduce GHG emissions that can actually make money is energy efficiency. McKinsey & Company, a consulting firm that operates internationally, found that the United States could reduce their nation-wide energy use (and emissions) by 23 per cent by 2020 through energy efficiency while having a positive return on investment, at today's energy prices. If done in Canada, this would yield significant emission reductions at $0 per tonne.

There are also many ways to develop new, lower carbon energy sources at a relatively low cost per tonne. Wind power, solar heating and biomass combustion are often cited in this way, while even significant carbon capture and storage projects could be initiated for less than $75 per tonne. 

Additional Reading: Pembina's formal submission to Environment Canada on the proposed Renewable Fuels Regulations is available here.


Jesse Row

Jesse is an energy efficiency programs expert for the Pembina Institute. He is based in Calgary.


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