INDUSTRY LEADER INTERVIEW: Wallace Tyner on U.S. Biofuels Policy
BAR HARBOR, ME: July 26, 2007 -- Wallace Tyner is an agricultural economist and professor at Purdue University whose wide-ranging experience working with commodity, energy and policy issues has led him to play a key role in advising national biofuels policy. Senator Richard Lugar, for example, depends on Dr. Tyner’s insights – and even recently named him a “Lugar Energy Patriot” for his work.PAID ADVERTISEMENT
Dr. Tyner’s research in biofuels policy springs from his interest in agricultural and energy economics. “I actually came to Purdue 30 years ago as an energy economist,” he says, “and I have worked on coal, oil shale, solar, wind and other topics. But biofuels is the one that is really key to this bridge between energy and agriculture.”
Our conversation with Dr. Tyner focused on how U.S. federal policy may best support the ethanol and biodiesel industries.
SOYATECH: How sustainable are current U.S. federal ethanol subsidies?
Dr. Tyner: This year, we will spend about $4 billion on federal ethanol subsidies. But we will save about $4 billion on farm payments because of higher commodity prices. Next year, we will spend about $6 billion on ethanol subsidies, and farm program savings will be constant at $4 billion.
If we were to reach a commonly cited target of 36 billion gallons of ethanol, the subsidy cost, at current rates, would be $18 billion. With costs that high, a renewable fuel mandate (such as passed by the Senate) would be far cheaper on the federal budget. It would not require any subsidy as oil companies would be required to use a certain percentage of renewable fuels.
My bet is that we will move towards mandates and move away from subsidies. I think some form of renewable fuel standard, perhaps combined with a subsidy in the event of very low oil prices, is likely. Also, if we do not adopt a general carbon emissions policy, we may provide differential incentives based on reduction in carbon emissions.
SOYATECH: Is there the political will to move from ethanol subsidies toward mandates?
Dr. Tyner: Well, I don’t know. My role is the economic analysis and somebody else has to do the politics side of it; I don’t even try to read those tea leaves very much. I do interact a lot with Senator Lugar’s staff and try to help them or anybody else that has questions on the analysis and consequences of different options.
But in Europe they have already started to move away from subsidies toward standards, or mandates, and the basic reason is that when you get to the volumes we’re approaching today subsidies cost a lot of money.
If you have a standard that is ironclad -- meaning that it is credible, that everyone believes this standard is going to be enforced -- you no longer need a subsidy. You can still have one if you want but you don’t need it. My bet is that, if you develop a credible standard, when it comes to costing $18 billion a year and it’s not needed it’ll go by the boards. And so we’ll use the standard to accomplish the same objective.
SOYATECH: How does the current blender’s tax credit affect the biodiesel industry?
Dr. Tyner: Biodiesel from plant materials has a subsidy of $1.00 per gallon. That is higher both in energy and volume terms than the ethanol subsidy (subsidy levels are politically driven).
Even at a dollar a gallon, it just barely makes biodiesel economical (unlike the current situation with ethanol, where the subsidy makes it ‘gold rush’ days). So it will not get us as far on the biodiesel line as the ethanol subsidy has even though it is twice as much as the ethanol subsidy. Part of that is because in the United States the feedstock for biodiesel is soybeans, and they only have 18% oil; in Europe, the feedstock they use is rapeseed, and it has 40 some odd percent – it’s about half oil – so the yield from rapeseed is much heavier on the oil side than with soybeans. That is another factor.
Also, soybean futures hit $9 yesterday, and that means it is going to be more expensive in raw materials going into the plant. So it is going to be tougher for soy than it has been for ethanol.
SOYATECH: Could this be at least partially addressed by policy, or is this something the market is going to have to work out with new technologies, feedstocks, etc.?
Dr. Tyner: You can do anything you want with policy, it is just a matter of how much it costs and whether it’s worth it to do. A standard that’s partitioned – you know, 36 billion gallons, but no more than 15 of that is corn and the rest is other things -- if they included a partition for biodiesel, that would have a similar effect. It would mean that they would have to procure a certain percentage of their diesel from biological sources.
But there is always the question of whether you want the government making technological choices. Is it better for the government to say, “We want this many billion gallons” or “we want this many BTUs, the energy equivalent”? Or do you want the government determining what we’re going to do: “we’re going to have this many billion gallons of corn ethanol, this many of soy biodiesel, this many of cellulosic ethanol, etc.”?
Those questions are, as yet, unresolved.
SOYATECH: What is the most important question of agricultural economics that agribusiness should be thinking about right now?
Dr. Tyner: What are going to be the impacts of whatever policy the feds end up adopting on commodity prices?
We’ve already got $9 soybeans and $3 and a half corn; we’re going to have 8 billion gallons of ethanol this year; we’re going to have 12 billion next year. Iowa State [University] came out with a report suggesting that we could go up to 31 billion gallons of ethanol – just from corn. The numbers are huge.
But we really don’t know how far to push commodity prices, because we don’t know what the supply response is going to be in the rest of the world. We’ve already seen in the U.S. how farmers in one year’s time can go from 78 million acres of corn to 95 million acres of corn -- with significant reductions in soybeans and cotton.
We don’t know what is going to happen in the rest of the world yet. We need all of the analytical talent we can find (and research efforts) to figure out what is going to happen for a number of reasons.
One is so that people in those businesses can better manage and better plan, but secondly, we need to get a better handle on what the implications are going to be for poverty around the world.
Because if it turns out that the rich countries’ striving to reduce their dependence on foreign oil through domestic biofuels increases in a significant way poverty around the world, that is going to have some real strong implications. On the other hand, the World Bank says that 70% of the world’s poor live in rural areas and get most of their livelihood from agriculture. Well, to the extent that’s true, it means that the things these folks produce are going to be of higher value, and so it could actually reduce poverty.
But the bottom line is that we don’t know and it’s something we need to watch very carefully. Any time anybody says -- on either side -- “It’s going to starve the poor” or “It’s going to have no adverse impact,” they’re wrong.
The answer is that we just don’t know yet. We have a large project to try to come up with some answers (and other institutions do too) but it is a very critical question – both for getting answers on the business side and for better understanding what the implications of the rich countries’ policies are for poor people around the world.
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For more insights from Wallace Tyner, make plans now to attend the Soya & Oilseed Summit 2007 in Chicago on November 11-13, 2007 (www.soyasummit.com). Dr. Tyner will participate in a roundtable discussion of government policy and will be part of the final, high-level panel conversation on the increasingly complex relationship between food and energy demands on the commodity sector.
More about Wallace Tyner: http://www.agecon.purdue.edu/directory/details.asp?username=wtyner
Energy Patriot Award: http://www.lugar.senate.gov/energy/links/patriot/08_tyner.html
(c) 2007 Soyatech LLC
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