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Can India Meet Biofuel Policy Targets? Implications for Food and Fuel Prices

Can India Meet Biofuel Policy Targets? Implications for Food and Fuel Prices. Madhu Khanna , Hayri Onal , Christine L. Crago , and Kiyoshi Mino University of Illinois at Urbana-Champaign. Berkeley Bioeconomy Conference March 28, 2012 Berkeley, CA. Background.

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Can India Meet Biofuel Policy Targets? Implications for Food and Fuel Prices

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  1. Can India Meet Biofuel Policy Targets? Implications for Food and Fuel Prices MadhuKhanna, HayriOnal, Christine L. Crago, and Kiyoshi Mino University of Illinois at Urbana-Champaign BerkeleyBioeconomy Conference March 28, 2012 Berkeley, CA

  2. Background Motivation for biofuels in India • Fuel consumption • has 0.5% of world’s oil reserves, consumes 3.4% of oil production • Demand growing at 7.5% per year • Crude oil imports: 75% in 2008, 90% projected by 2025 (graph) • Rural employment • Lower GHG emissions

  3. Background Ethanol Policy • 20% blending by 2017 (5.7 billion liters) • Price: 27 Rs/liter • Feedstock : molasses and sugarcane • Limited to molasses to avoid food vs. fuel • Molasses : by-product of sugar production  alcohol • Direct production from sugarcaneallowed recently

  4. This paper • Analyzes the cost-effective mix of feedstocks (molasses and sugarcane) to meet the 20% blend mandate in 2017 • Food production and prices • Fuel prices • Alcohol production and price • Examine the viability of meeting the mandate under current fuel pricing policy

  5. Research Framework • Develop a static, multi-market partial equilibrium model of the agricultural sector with major crops • Objective: Maximize consumer and producer surplus in markets for crops, sugar and alcohol by choosing the optimal allocation of land and irrigation water • land availability • water availability and irrigation constraints • technology for ethanol production from molasses and • sugarcane • technology for crop production: costs, yields, crop calendar • world market conditions: exports/imports

  6. Numerical Simulation Model • State level data on: acreage, yields, production costs, water availability, cropping patterns, land availability • 15 of the most agriculturally productive states in India • 8 primary agricultural commodities: wheat, rice, • sorghum, corn, groundnut, rapeseed, cotton, soybean, • + sugarcane • Data obtained from Directorate of Economics and • Statistics (India), FAOSTAT; FAPRI World Agricultural • Outlook projections, INDIASTAT, Sugar Mills Assoc

  7. Numerical Simulation Model • 2006-08 market data for calibration • 2017 projections based assumed growth in demand for crops, fuel, sugar and alcohol, and growth in yields and irrigation • Model endogenously determines: • Commodity production and prices • Feedstock mix for ethanol production • Implicit cost of ethanol production • Land and water allocation for crops

  8. Numerical Simulation Model Sugar Molasses Alcohol Sugarcane Ethanol Considering feedstock cost, direct conversion of sugarcane to ethanol is less costly

  9. Model Validation: 2006-2008

  10. Policy Scenarios • Scenario 1: 20% Blend mandate, baseline conversion costs • Scenario 2: 20% Blend mandate, 50% higher conversion cost of sugarcane to ethanol • Scenario 3: • 20% blend mandate • baseline conversion costs • government requires 50% of molasses be used for ethanol • price of molasses for ethanol set to 3,000 Rs/ton

  11. Results I : 2017 • Without the mandate: • sugarcane is planted on 4% of agricultural land • All molasses (14.5 M tons) are used in alcohol production • imports of alcohol are .5% of production • Using all molasses produced in 2017 for ethanol production will only meet 57% of the mandate

  12. Results II: Fuel and Feedstock Mix

  13. Results II: Prices

  14. Results IV: Production and Land Use

  15. Results V: • Marginal cost of ethanol ranges from 28-33 Rs/liter (no molasses subsidy) • Given gasoline price of 28 Rs/liter, blenders would be willing to pay 19 Rs/liter for ethanol • With fixed procurement price of 27 Rs/liter, there is no economic incentive for mills to produce or blenders to buy ethanol

  16. Results VI • Enforcing 27 Rs/liter procurement price will cost both ethanol producers and blenders • Cost can be passed on to consumers, raising blended fuel price by 10-15% • Government can provide a subsidy to blenders • Subsidies will range from 9-14 Rs/liter, which will cost • 51 to 81 billion Rs/year • Government can fix the allocation of molasses and price of molasses for ethanol production (Scenario 3) • Sugar and alcohol industries subsidize ethanol industry

  17. Limitations • Government interventions, including minimum support prices and output levies are not considered • Gasoline consumption is fixed in 2017

  18. Summary and Conclusions • A mix of molasses and sugarcane feedstocks is necessary to meet 20% blending mandate for ethanol • Trade-offs • Crop production, prices and land use  small • 1 M ha of additional land for sugarcane • Sugar • Alcohol • Fuel

  19. Summary and Conclusions • Meeting the mandate in 2017 • Mills retro-fitted to enable direct conversion of sugarcane to ethanol • Government subsidies to blenders • Reduced profits for mills and blenders OR higher fuel prices • Distributional effects

  20. Thank you! Questions? Christine LascoCrago Energy Biosciences Institute mlasco2@illinois.edu

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