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Are Subsidies for Biodiesel Economically Efficient?. March 11, 2004 Chad Wassell, Dept. of Economics Tim Dittmer, Dept. of Economics. Two Quotations to Consider. For every complex problem, there is a solution that is simple, neat, and wrong. -- H.L. Mencken

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Are subsidies for biodiesel economically efficient

Are Subsidies for Biodiesel Economically Efficient?

March 11, 2004

Chad Wassell, Dept. of Economics

Tim Dittmer, Dept. of Economics

Two quotations to consider
Two Quotations to Consider

  • For every complex problem, there is a solution that is simple, neat, and wrong.

    -- H.L. Mencken

  • All progress is precarious, and the solution of one problem brings us face to face with another problem.

    -- Martin Luther King, Jr.

Biodiesel as an alternative to petroleum diesel
Biodiesel as an Alternative to Petroleum Diesel

Biodiesel is…

  • Renewable

  • Non-toxic

  • Biodegradable

  • Lower greenhouse gas emissions than petroleum diesel

    • Effectively zero, if renewable energy is used in its production

Still more reasons
Still more reasons?


  • Aids creation of rural employment and development

  • Is associated with improved air quality

  • Decreases reliance on external sources of oil

Sounds good right
Sounds good, right?

  • Biodiesel is more expensive than petroleum diesel, and will only be viewed by users as a viable alternative if costs of products are comparable.

  • Thus, subsidies are required for adoption of biodiesel in favor of petroleum diesel on a wide-scale basis.

The big question
The Big Question

  • Do the external benefits from biodiesel justify the required subsidies?

  • That is, is biodiesel economically efficient?

The answer
The Answer

  • We examine the external benefits of using biodiesel in non-road machinery, and can say, categorically, that the answer is “Yes.”


  • (We’re economists, so you knew there had to be a “but” coming.)

  • The production and use of biodiesel are not without some negative ecological and socioeconomic impacts.

  • Biodiesel cannot replace the petroleum diesel that we currently consume (or even come close).

What is biodiesel
What is Biodiesel?

  • Biodiesel is defined as the mono-alkyl esters of fatty acids derived from vegetable oils or animal fats.

  • In simple terms, biodiesel is the product you get when a vegetable oil or animal fat is chemically reacted with an alcohol to produce a new compound that is known as a fatty acid alkyl ester.

How is biodiesel made
How is Biodiesel Made?

  • You can produce biodiesel at home using appropriate small-scale equipment, in just two easy steps!

  • Stage 1: potassium hydroxide + ethanol > potassium ethoxide + water

    KOH + CH3CH2OH > CH3CH2OK + H2O

  • Stage 2: potassium ethoxide + water + fatty acid triglyceride (oil) > biodiesel (methyl ester) + glycerine + potassium hydroxide

    CH3CH2OK + H2O + C3H5(OOCR)3 > 3RCOOCH3 + C3H5(OH)3 + KOH

    R = hydrocarbon chain


  • Take an alcohol (usually ethanol or methanol), add a catalyst such as sodium or potassium hydroxide.

  • Take that, add oil, and you get biodiesel, and glycerol as a byproduct.

  • The approximate proportions of the reaction are:

    100 lbs. of oil + 10 lbs. of methanol > 100 lbs. of biodiesel + 10 lbs. of glycerol


  • Soybean oil and methanol are the most popular feedstocks in the U.S.

    • Soybeans are a major U.S. crop and government subidies are available to consumers who need or want to use a nonpetroleum-based fuel.

    • Biodiesel from soybeans is sometimes called soydiesel, methyl soyate, or soy methyl esters (SME).

More feedstocks
More Feedstocks

  • In Europe, most biodiesel is made from rapeseed oil and methanol and it is known as rapeseed methyl esters (RME).

  • The University of Idaho has done considerable work with rapeseed esters using ethanol, which produces rapeseed ethyl esters (REE).

Still more feedstocks
Still More Feedstocks

  • Biodiesel can also be made from other feedstocks:

  • Other vegetable oils such as corn oil, canola (an edible variety of rapeseed) oil, cottonseed oil, mustard oil, palm oil, etc.

  • Restaurant waste oils such as frying oils

  • Animal fats such as beef tallow or pork lard

  • Trap grease (from restaurant grease traps), float grease (from waste water treatment plants), etc.

Biodiesel production possibilities
Biodiesel Production Possibilities

  • Using the rough guideline that a pound of oil or fat will give a pound of biodiesel, we can use the total production of fats and oils in the U.S. to estimate the potential impact of biodiesel on total diesel consumption.

Total annual production of oils in u s
Total Annual Production of Oils in U.S.

  • Vegetable Oil Production (Billion pounds/yr)

    • Soybean 18.340

    • Peanuts 0.220

    • Sunflower 1.000

    • Cottonseed 1.010

    • Corn 2.420

    • Others 0.669

      • Total Vegetable Oil 23.659

Total annual production of fats in u s
Total Annual Production of Fats in U.S.

  • Animal Fats (Billion pounds/yr)

    • Edible Tallow 1.625

    • Inedible Tallow 3.859

    • Lard and Grease 1.306

    • Yellow Grease 2.633

    • Poultry Fat 2.215

      • Total Animal Fat 11.638

The bottom line for oils and fats
The Bottom Line for Oils and Fats

  • In the U.S., soybean oil dominates the vegetable oil market comprising over 75% of the total vegetable oil volume.

  • Animal fats total almost 50% of the vegetable oil market.

  • The combined vegetable oil and animal fat production is 35.3 billion pounds per year.

Some perspective
Some Perspective

  • At about 7.6 pounds per gallon of oil, total U.S. production of oil and fats would equal 4.64 billion gallons of biodiesel.

  • If all of the vegetable oil and animal fat were used to produce biodiesel, we could replace less than 14% of the current demand for on-road diesel fuel.

Why bother with biodiesel
Why Bother with Biodiesel?

There are five primary reasons for encouraging the development of biodiesel in the U.S.

  • It provides a market for excess production of vegetable oils and animal fats

  • Decreases the country’s dependence on imported petroleum

  • Biodiesel is renewable and does not contribute to global warming due to its closed carbon cycle

  • The exhaust emissions from biodiesel are lower than with regular diesel fuel

  • Biodiesel has excellent lubricating properties

Biodiesel it s a good thing
Biodiesel – It’s a Good Thing

  • O.K., back to the original question. Do the net benefits from biodiesel, on a per gallon basis, exceed the subsidy required to make biodiesel price-competitive with petroleum diesel?

  • I will now briefly describe our methodologies, and estimates, for the production costs and external consumptive benefits from biodiesel.

Production costs
Production Costs

  • Our methodology: estimate production costs (average total cost) of biodiesel production using current input prices (feedstock, methanol)

  • Price glycerine byproducts

  • This yields a range of cost-estimates, as input prices have changed over recent history

  • Fixed costs of production also vary widely

Cost comparison

  • The production costs for biodiesel are compared to the wholesale price of #2 petroleum diesel over the same time period.

  • The differences between these two costs are the subsidies required to make biodiesel a viable substitute for petroleum diesel, from a consumer standpoint.

Other cost considerations
Other Cost Considerations

  • We use wholesale prices (i.e., no taxes)

  • We do not account for transportation or distribution costs of petroleum diesel or biodiesel, nor do we count transportation costs for feedstocks

  • We chose soybeans as the oil feedstock, given the dominance of soy production in the U.S.

  • In some production processes methanol is recycled; we provide estimates with and without recycling. Regardless, methanol costs are a relatively small portion of ATC

Cost considerations continued
Cost Considerations (continued)

  • There is a wide range of fixed costs in the literature.

  • There are also some combined soy meal/oil facilities; the associated fixed costs are lower, due to economies of scope

  • The direction of change is for lower fixed costs of production; for this analysis we pick high-low estimates of fixed costs of 20 and 40 cents per gallon

  • Different production techniques produce either refined or unrefined glycerine, and in variable quantities. The most reliable production data we have found is for unrefined glycerine output, and we converted this to refined glycerine output using a multiplier cited in the literature.

Pricing of external benefits
Pricing of External Benefits

  • We engage in a two-step process to price external benefits.

  • First, we determine in parts per million, and on a per gallon basis, how much pollution is reduced from use of biodiesel vis a vis #2 petroleum diesel.

  • We multiply the ppm reduction per gallon by a price for each pollutant, then add across pollutants. This yields gross benefits per gallon in dollars.

Pricing of pollutants
Pricing of Pollutants

  • We make use of an EPA regulatory impact study on changing requirements for non-road diesel to estimate dollar benefits of unit reductions in emissions.

    • These are predominately avoided cost measures.

Why non road diesel
Why Non-Road Diesel?

  • There are several reasons why we consider the benefits of biodiesel in non-road uses.

    • Total annual non-road diesel use is much closer to potential biodiesel production than is on-road use

    • Low-sulfur fuel requirements will soon be imposed on on-road diesel, and engines will need to be modified accordingly. However, existing diesel engines do not have to be modified for use with biodiesel; this makes biodiesel use in construction, farming, etc. equipment an almost perfect substitute from the consumer’s standpoint.

More on low sulfur diesel
More on Low-Sulfur Diesel

  • The incremental benefits of on-road biodiesel use vis a vis low sulfur petroleum diesel are small.

    • Among other things, on-road diesel engines already incorporate technologies that make them far less polluting than off-road diesel engines.

  • The financial burden of imposing strict low-sulfur fuel requirements on off-road equipment is onerous.

    • Biodiesel use attains similar reductions in pollution, at far less expense.

Greenhouse gas reductions
Greenhouse Gas Reductions

  • Calculation of the total amount of greenhouse gases produced through biodiesel’s lifecycle is very complex.

  • These emissions can be divided into those produced during production of biodiesel, and those produced during combustion.

Greenhouse gases from production
Greenhouse Gases from Production

  • The main gases produced during production are

  • CO2, from combustion of fuels in agricultural equipment and during transport

  • Nitrous oxides, from fertilizer use

  • Methane, produced during crop and animal production

  • Thus, the amount and type of greenhouse gases produced will depend on the source of biodiesel (e.g., crops or animals – further complicated by the use of waste cooking oil), and the production processes.

    • For example, it has been shown that biodiesel made from canola emits less greenhouse gases than soy-biodiesel.

Greenhouse gases from combustion
Greenhouse Gases from Combustion

  • On average, combustion of biodiesel emits greater quantities of CO2 than conventional diesel for the same energy output.

    • However, because it is derived from biomass, and so is only releasing the CO2 that it recently took up, this CO2 does not count towards its total emissions.

    • On net, biodiesel has the lowest level of greenhouse gas emissions of all comparable fuels tested (including ethanol, LPG, CNG, etc.)

Tailpipe emissions
Tailpipe Emissions

  • Exhaust emissions from biodiesel, when compared to petroleum diesel have:

    • 96% lower total hydrocarbons

    • 45% lower carbon monoxide

    • 13% more oxides of oxygen

    • 28% less particulate matter

  • Note, however, that on a life-cycle basis high levels or particulates are emitted during production of biodiesel, with the result that it has higher total particulates than diesel.

    • However, the particulate matter produced by biodiesel is mainly unburnt fuel which is non-toxic compared to carcinogenic diesel emissions.

    • It is also likely that particulates emitted during production will have less of a health impact because production occurs in low-population areas.

More emissions complexity
More Emissions Complexity

  • Tailpipe emissions are strongly influenced by the control standards in which the vehicle is sold.

  • The benefits conferred by a biodiesel mix are better than proportional.

  • The NOX emissions from biodiesel increase or decrease depending on the engine family and testing procedures.

  • Due to low sulphur concentrations, it is now possible to neutralize these NOX emissions using current technology that is hampered by high sulphur levels in conventional diesel.

The dollar values
The Dollar Values…

  • The EPA provided, in a regulatory impact analysis, pollutant reductions from implementing non-road diesel standards, as well as the dollar benefits from these reductions.

  • Using these figures, we compute the dollar benefit per unit pollutant reduced.

  • Using data on the pollution-reduction properties of biodiesel, we then compute the $/gal benefits from pollution reduction using biodiesel.

Pollution reduction benefits
Pollution Reduction Benefits

  • Under the most conservative assumptions we could come up with (pretty much the worst of all possible worlds), the dollar benefits from biodiesel total $1.65/gallon

    • $0.37/gal attributable to NOX

    • $0.09/gal attributable to SO2

    • $1.16/gal attributable to Primary Particulate Matter

  • This is four to five times the subsidy required to make biodiesel cost-competitive with petroleum diesel. The “real” benefit is almost certainly higher.

Additional impacts
Additional Impacts

  • Biodiesel production and use have a variety of impacts in addition to the pollutant benefits outlined above

    • Biodegradable and nontoxic

    • Less damaging than petroleum diesel to marine environments such as wetlands, marshes, rivers, and oceans

    • Use of waste oil reduces waste going to landfill

    • Social benefits, including employment and development in rural areas during growth of crops and in manufacture and operation of biodiesel plants

    • Biodiesel is less combustible, and therefore safer, than conventional diesel because its flash point is greater than 150° C (the flash point of petroleum diesel is 58° C)

    • Classified as nontoxic to humans, with the lethal dose being 10 times that of table salt

    • Decreased reliance on external supplies of oil and therefore improved national balance of payments, and an increased security of energy supply

Biodiesel s prospects
Biodiesel’s Prospects

  • Biodiesel has some very attractive properties, but still requires non-trivial subsidies to be price-competitive with petroleum diesel

  • It may be an excellent fuel for use in non-road engines, particularly older engines, where low-sulfur fuel standards and other technological modifications are onerous

  • The quantities that may be produced will not – can not – substitute for petroleum diesel on a national level. Because of the relatively small quantities involved, the overall impact of biodiesel should not be overstated.