Report - Energy Technology Innovation Policy Project, Belfer Center

The Future of Low-Carbon Road Transport: What Role for Second-Generation Biofuels?

| June 2015

Overview

The promise, prospects, and public policy trade-offs related to second-generation biofuels in road transport were addressed in an executive session convened at The Henry Ford Museum in Dearborn, Michigan, on April 7 and 8, 2015. The workshop brought together twenty-eight of the world's leading experts from the fields of policy, science, and business for an intensive two-day session (see the Appendix for a list of the participants). The discussions were off-the-record, with each participant present in his or her own capacity, rather than representing his or her organization. This report is a summary of the main points and issues raised over the two days. It has been reviewed by all the participants. The summary is intended to reflect the breadth of the discussion, rather than to suggest any form of overall consensus among the participants.

Highlights

  • Several fuel options exist to steeply reduce net carbon emissions from road transport. They include electricity and hydrogen produced from renewable sources and sustainable, low-carbon biofuels. However, none of these fuel options can presently compete with conventional fossil fuels, and in the short term marginal emission reductions appear easier to achieve through engine efficiency improvements, including partial electrification in the form of hybrid electric vehicles, and selected first-generation biofuels. One of the key challenges is therefore to attract continued investment in R&D to bring down the costs of alternative-fueled vehicles and low-carbon biofuels.
  • Second-generation biofuels are now being produced at limited commercial scale in the United States, mainly in the form of cellulosic ethanol from different feedstocks. But investments in cellulosic bio-refineries will continue to depend on government subsidies for years to come. Consumers have not been prepared to pay a price premium for biofuels, as evidenced by low uptake of E85 by owners of flex-fuel vehicles. At the same time, with full production cost still above 5 USD per gallon, cellulosic biofuels are unlikely to become competitive with conventional gasoline and hybrid electric vehicles in the mass market for road transportation for the foreseeable future. Hence the need for direct government subsidies to make investments in cellulosic biofuels attractive.
  • There is a vigorous debate on the size of the carbon footprint of biofuels and, while there has been some convergence between regulatory bodies in the United States, this debate is likely to continue for the foreseeable future. The environmental uncertainty surrounding biofuels has led some to question the basis for support, while low gasoline prices and record U.S. production have reduced public enthusiasm for direct government subsidies. Participants expected that the politically powerful agricultural constituency will continue to play an important role in supporting biofuels policies. But investors will have to accept the risk of further decline in the societal legitimacy of biofuels during the lifetime of their investments.
  • A number of participants argued that direct government subsidies for second-generation biofuels are justified because of the technology's option value. Should the impacts of climate change worsen, society will value the ability to rapidly scale-up low-carbon biofuels. Especially for heavy duty, long-range vehicles and aircraft, few alternatives to low-carbon biofuels exist. But without government support in the short and mid-term, the option of switching to cellulosic biofuels is unlikely to be available. If direct subsidies to second-generation biofuels are to be justified on the basis of the technology's option value, the subsidies will need to be made conditional on demonstrated climate benefits and the pursuit and maturation of innovative technologies. If direct subsidies are only used to deploy mature technologies, no new option value will be created.
  • Biofuels can be integrated more easily into the existing vehicle and fuel distribution infrastructure than electricity or hydrogen. Bio-ethanol, mostly from first-generation feedstocks, now contributes roughly 10 percent to U.S. gasoline demand by volume, far more than electricity or hydrogen combined. But any growth beyond current levels will be more difficult, because increased use of higher ethanol blends will require investments in compatible vehicles and distribution infrastructure. A number of strategies exist to breach this 'blend wall,' but pursuing any one of them effectively requires a high level of coordination between investment decisions made by farmers, fuel producers, retailers, car manufacturers, and consumers—a coordination that does not currently exist.
  • Mid-level ethanol blends (E20-E40) appealed to many participants as economically and technically attractive options to breach the blend wall, because they allow engine and vehicle designers to exploit the octane properties of ethanol without incurring the lower energy content penalty of high-level blends. However, capturing the benefits of ethanol requires blend-specific engine optimization and vehicle designs. Flex-fuel vehicles may only partially be able to take advantage of the properties of mid-level blends.
  • The Renewable Fuel Standard (RFS) is at a crossroads. First, many participants emphasized that stable, predictable demand is the highest near-term priority to develop second-generation biofuels. But the overambitious targets under the RFS, in combination with controversy about the EPA's implementation strategy, have created large uncertainty about the future of the RFS blending mandates for cellulosic biofuels. For the RFS to attract further investments in cellulosic bio-refineries, EPA will need to shape new, more realistic expectations for the development of cellulosic blending mandates in the medium term, and create regulatory certainty for investments to fulfil these new expectations. Second, breaching the blend wall will require complementary investments along the supply chain, including farmers, fuel producers, retailers, vehicle manufacturers, and consumers. This will require the federal government to set strategic priorities and, possibly, provide additional policy support for specific actors along the supply-chain. If ethanol mandates are raised without such coordination and policy support, the cost burden on consumers might rise sharply.
  • Besides bio-refineries, participants highlighted two links in the supply-chain—farmers and retailers—that may become critical bottlenecks if production and consumption of cellulosic biofuels are to be expanded. Participants argued that production is hindered by the lack of commoditized cellulosic feedstocks, and that the current policy environment does not provide sufficient incentives for farmers to switch to dedicated cellulosic feedstocks on a large scale. Consumption, meanwhile, is hindered by the fact that fuel retailers are reluctant to invest in fueling infrastructure for higher ethanol blends, because they face significant uncertainty about future consumer demand for different biofuel blend products, the compatibility of different blends with existing infrastructure, and the actual cost of introducing new products. Attracting significant investments by these two groups of actors will require a strong consumer pull as well as innovative, regionally focused policy approaches.

Statements and views expressed in this paper are solely those of the authors and do not imply endorsement by Harvard University, the Harvard Kennedy School, or the Belfer Center for Science and International Affairs.

For more information on this publication: Please contact Energy Technology Innovation Policy
For Academic Citation: Huenteler, Joern and Henry Lee. “The Future of Low-Carbon Road Transport: What Role for Second-Generation Biofuels?.” Energy Technology Innovation Policy Project, Belfer Center, June 2015.

The Authors

Henry Lee