Of Cellulosic Ethanol - Energy in 2020: Assessing the Economic Effects of Commercialization
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Energy in 2020:
Assessing the Economic Effects
of Commercialization
of Cellulosic Ethanol
by Stefan Osborne
Office of Competition and Economic Analysis
Executive Summary • The primary beneficiaries of commercially
viable cellulosic ethanol production would be
U.S. dependence on imports of crude oil has crop-producing U.S. industries and their sup-
steadily increased for three decades. One way to pliers. The increase in output over baseline
reduce this dependence is to increase domestic Manufacturing and Services
projections from these sectors would range
production of renewable fuels such as etha- from 2.4 percent to 4.3 percent in 2020. U.S. Competitiveness Report
nol. This report examines the effect on the U.S. agriculture could gain 20,350 jobs at the ex- November 2007
economy in 2020 if advances in technology allow pense of other sectors.
cellulosic ethanol to become commercially viable
and if cellulosic ethanol production becomes • Conversely, lower prices for crude oil would
adequate to allow total ethanol production to hurt U.S. oil producers, although the motor
reach 30 billion gallons (including 10.5 billion fuel producing industry would benefit from
gallons of corn-based ethanol). In this report, “oil” lower input prices.
and “crude oil” are used interchangeably, unless Two critical factors that influence our impact
otherwise noted. Our findings, based on produc- assessments are our assumptions on (a) the
tion of 19.5 billion gallons of cellulosic ethanol in cost-competitiveness of cellulosic ethanol and (b)
2020, indicate the following: the volume of production of cellulosic ethanol in
• Compared with current projections for 2020, 2020. Sensitivity analysis indicates that the U.S.
U.S. crude oil imports would be 4.1 percent economy would benefit even if we assume that
lower than projected, amounting to a dif- cellulosic ethanol is only cost-competitive when
ference of about 460,000 barrels per day. world oil prices are $60 per barrel, rather than
Furthermore, the worldwide price of oil and the $50-per-barrel assumption used in the base
the domestic U.S. fuel price would be 1.2 per- scenario. Our findings further suggest that the
cent and 2.0 percent, respectively, lower than benefits are roughly proportional to the volume
projected. of cellulosic ethanol produced domestically. In
a best-case scenario where enough cellulosic
• The annual benefits to U.S. consumers of in- feedstock is available to produce 49.5 billion gal-
creased cellulosic ethanol production would lons of cellulosic ethanol in 2020 and the world
be $12.6 billion in 2020. Expressed in terms of price of crude oil is $50 per barrel, U.S. crude oil
today’s economy, that amount is equivalent to imports in 2020 would be lowered by 1.2 million
about 40 percent of the gains in real income barrels per day over baseline projections and U.S.
that would accrue to the United States from agriculture would gain 54,000 jobs compared
eliminating all restraints on imports. with current baseline projections.Our analysis does not take into account all factors gallons in both cases, with the remaining ethanol
determining the costs associated with additional production coming from cellulosic feedstock.2,3
cellulosic ethanol use, such as the transitional This report assesses the projected benefits to the
investments necessary to replace crude oil with U.S. economy and industries if price and volume
ethanol in the U.S. fuel supply. Similarly, this targets are met.
report does not address all the economic benefits
To assess the economic impacts of meeting those
associated with expanded cellulosic ethanol use,
targets, we constructed a simplified facsimile
such as reduced greenhouse gas (GHG) emissions
of the U.S. economy in 2020. This facsimile is
resulting from decreased petroleum consump-
consistent with forecasts of macroeconomic
tion. Given that transition costs are likely to be
variables and energy prices released by the
incurred only once, whereas the benefits would
Energy Information Administration (EIA) An-
accrue each year, the value of the stream of
nual Energy Outlook 2006 (AEO). The facsimile
benefits from cellulosic ethanol production likely
provides a snapshot of how the U.S. economy
exceeds the one-time transition costs.
would look in 2020 without commercially viable
This report assesses the impact of cellulosic cellulosic ethanol. We then assumed that 19.5
ethanol production from a U.S. economy-wide billion gallons of cellulosic ethanol could be
perspective. The report uses a computable general produced at the Department of Energy (DOE)
equilibrium model that tracks 500 industry sectors. target cost of $1.07 per gallon, so that total ethanol
production (corn-based and cellulosic combined)
would replace 10 percent of the crude oil inputs
Introduction used in gasoline and distillates. The findings are
presented by comparing the alternate picture of
The United States is importing an increasing
the 2020 economy with the EIA’s original or base
share of the petroleum that it consumes each
projection. The report also examines a best-case
year and world petroleum prices are projected to
outlook, in which 49.5 billion gallons of cellu-
remain high over the next few decades. Without
losic ethanol could be produced in 2020, and an
alternative sources of transportation fuel, the U.S.
alternate scenario where the $1.07 per gallon cost
economy could face adverse economic and politi-
target is not met.4
cal consequences.
An understanding of the changes likely to occur
Few viable alternatives exist for the crude oil
in the petroleum and agricultural markets is es-
used in transportation fuels. Although ethanol
sential to gauge the benefits to the U.S. economy
manufactured from corn can be used to replace
associated with increased production and use of
gasoline, corn-based ethanol can replace only a
cellulosic ethanol. The study begins, therefore,
limited amount of U.S. crude oil consumption.
with a description of the state of the world market
However, much more ethanol could be manufac-
for crude oil, including trends that are leading
tured from the cellulosic materials in biomass,
to higher world prices in the long run. The study
such as crop and forestry residues, energy crops,
then explains the different methods for reducing
and wood wastes.
U.S. demand for petroleum, with ethanol as the
Because cellulosic ethanol is not yet commercially primary option for directly replacing the petro-
viable, the benefits of cellulosic ethanol produc- leum used in vehicle fuel. The current market for
tion can be realized only if its production costs corn-based ethanol and the potential for cel-
are reduced. The magnitude of benefits gained lulosic ethanol production are explained next.
will depend on the degree of cost reduction and The report concludes by describing the projected
the volume of cellulosic ethanol produced do- benefits to the U.S. economy if 19.5 billion gallons
mestically. The DOE has set a target for reducing of cellulosic ethanol can be used to replace the
cellulosic ethanol’s production costs to $1.07 per petroleum used for vehicle fuel. Effects on specific
gallon by 2012. Available literature indicates that U.S. industries are also highlighted.
annual ethanol production (both corn-based and
cellulosic) could range from 30 billion gallons to
60 billion gallons in 2020.1 Annual production of
corn-based ethanol would be about 10.5 billion
2 U.S. Department of Commerce, International Trade AdministrationLong-Term Demand Rising; World oil supplies have become tight in recent
Prices for Crude Oil Worldwide Will years primarily because of strong demand from
the United States and from developing countries in
Remain High Asia, including China and India. The United States
The need to consider alternative fuels like cel- consumes about one-quarter of the world’s petro-
lulosic ethanol is driven largely by high crude oil leum production. Developing countries in Asia,
prices and energy security. Not only are crude including China and India, have enjoyed strong
oil prices relatively high at present, but the EIA recent economic growth and have also become
forecasts that crude oil prices will continue to important users of petroleum. According to EIA
be high, reaching $50 a barrel (in 2004 prices) in forecasts, daily petroleum consumption by 2030
2020. The increases in crude oil price will follow will rise by 5.4 million barrels over current levels
a decline between 2007 and 2014, when world in the United States and by 13.6 million barrels
crude oil prices are forecast to fall to $46.90 per in developing Asian economies. Daily petroleum
barrel as new crude oil supplies enter the market consumption will grow by 9.7 million barrels per
(see Figure 1). day in the rest of the world by 2030 (see Figure 2).
Figure 1. Crude Oil Price
Figure 1. Crude Oil Price Forcast in 2004
Forecast in 2004 Dollars,Dollars,
2004–20 2004–20
Source:
Figure Energy Information
1. Crude OilAdministration,
Price Forecast AnnualinEnergy
2004Outlook 2006 (Washington,
Dollars, 2004–20 D.C.: U.S. Department of Energy, 2006),
available at www.eia.doe.gov/oiaf/archive/aeo06/pdf/aeotab_12.xls.
Source: Energy Information Administration, Annual Energy Outlook 2006 (Washington, D.C.: U.S. Department of Energy, 2006),
70 available at www.eia.doe.gov/oiaf/archive/aeo06/pdf/aeotab_12.xls.
70
60
60
per barrel
50
per barrel
50
40
dollars
40
dollars
30
U.S. U.S.
30
20
20
10
10
0
0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Source: Energy Information Administration, Annual Energy Outlook 2006 (Washington, D.C.: U.S. Department of Energy, 2006), available at
www.eia.doe.gov/oiaf/archive/aeo06/pdf/aeotab_12.xls.
Figure 2. Compound Annual Growth in
Figure 2. U.S.
WorldICT 2.Exports
Figure to Asia,
Oil Consumption
Compound 2001–06
Annual Growth inForcasts, 2010–30
Source: U.S. Exports
U.S. ICT Census Bureau.
to Asia, 2001–06
Vietnam Source: U.S. Census Bureau.
China
Vietnam
India
China
Malaysia
India
Hong Kong
Malaysia
South
HongKorea
Kong
Singapore
South Korea
Thailand
Singapore
World
Thailand
Taiwan
World
Philippines
Taiwan
Indonesia
Philippines
Japan
Indonesia
Japan
-10.0% -5.0% 0.0% 5.0% 10.0% 15.0% 20.0%
-10.0% -5.0% Compound
0.0% annual
5.0%growth10.0%
(%) 15.0% 20.0%
Compound annual growth (%)
Source: Energy Information Administration, International Energy Outlook 2006 (Washington, D.C.: U.S. Department of Energy, 2006),
available at www.eia.doe.gov/oiaf/ieo/excel/ieoreftab_5.xls.
Energy in 2020: Cellulosic Ethanol 3Ethanol Is the Only Current ethanol demand (and production) was relatively
Substitute for Crude Oil in low. MTBE was preferred because it is a byproduct
of refinery operations, making it easier to handle
Transportation Fuels and less expensive than ethanol when crude oil
Because the United States is the world’s largest prices are low, as they were throughout the 1990s.
importer of crude oil, reducing U.S. demand for
However, in 2004, a number of states (including
crude oil imports would significantly affect world
California, Pennsylvania, and New York) banned
demand and would likely cause world oil prices
MTBE because it tended to leak into and contami-
to fall, which could lead to significant economic
nate groundwater supplies. Ethanol then became
benefits for the United States. One way to reduce
the main oxygenate additive in those states. Etha-
U.S. demand for crude oil is to develop alternative
nol demand rose significantly at that time and was
fuels like cellulosic ethanol, although the size of
largely driven by state-level environmental regu-
the effect will largely depend on how much etha-
lations mandating oxygenate use (see Figure 3).
nol can be produced in the United States.
Since 2005, market forces have driven ethanol
Currently, the only commercially viable substitute
demand more than environmental regulations
for crude oil in transportation fuels is corn-based
for two main reasons: (a) the 2005 Energy Policy
ethanol.5 Annual U.S. ethanol production in 2006
Act (EPACT) eliminated the requirement to use
was slightly less than 5 billion gallons. Because
oxygenates in reformulated gasoline, and (b) the
ethanol holds about two-thirds of the energy
price of oil rose, making corn-based ethanol more
content of gasoline, 5 billion gallons of ethanol
cost-competitive than MTBE.
can replace about 1.7 percent of U.S. gasoline and
distillates. Currently, the United States consumes The EPACT replaced the oxygenate requirement
annually about 200 billion gallons of gasoline and with the Renewable Fuels Standard (RFS), which
distillates (including diesel fuel). mandates the use of renewable fuel. Currently
the only commercially viable renewable fuel is
If cellulosic ethanol becomes commercially
ethanol. The RFS requires refineries and fuel
viable, the available literature suggests that
importers to purchase enough ethanol to meet a
between 19.5 billion and 49.5 billion gallons of
nationwide target, rising from 4 billion gallons in
cellulosic ethanol could be produced annually by
2006 to 7.5 billion gallons in 2012. On an energy-
2020, while corn-based ethanol production would
equivalent basis, the mandated consumption
rise to about 10.5 billion gallons. Thirty billion
amount of 7.5 billion gallons would replace about
gallons of ethanol would replace about 20 billion
2.5 percent of current U.S. gasoline and distillate
gallons of gasoline, or 10 percent of U.S. gasoline
fuel consumption. However, because of continued
and distillate fuel consumption.
high gasoline prices, market demand for corn-
based ethanol has already led to production levels
exceeding the RFS mandate. The AEO forecasts
Market Forces Rather Than
that corn-based ethanol production in 2012 will
Regulations Are Becoming continue to exceed the mandate.6
Increasingly Important for Ethanol
Until recently, environmental regulations drove
the U.S. ethanol market. The Clean Air Act, as The Potential to Displace Gasoline
amended in 1992, requires that oxygenates be Consumption Is Greater for
added to reformulated gasoline to lower auto- Cellulosic Ethanol than for Corn-
mobile tailpipe emissions. Oxygenates are fuel based Ethanol
additives (alcohols and ethers) that contain
oxygen, which can boost gasoline’s octane qual- Most ethanol currently produced in the United
ity, enhance combustion, and reduce exhaust States is produced from corn, but there is a limit
emissions. Methyl tertiary-butyl ether (MTBE) to corn’s ethanol production capacity. Given
and ethanol are the two main oxygenates used the stable demand for U.S. corn supplies from
to satisfy the Clean Air Act requirements. Until domestic and international livestock producers,
2003, MTBE was the main oxygenate used, and it is unlikely that the entire U.S. corn crop would
be used to produce ethanol. A report sponsored
4 U.S. Department of Commerce, International Trade AdministrationFigure 3. U.S. Ethanol Production, 1990 to 2005
Source: Ethanol production before 2001: Renewable Fuels Association, “Industry Statistics,”
www.ethanolrfa.org/industry/statistics/#A. All other production and supply statistics are from
the 2004 to 2007 editions of the Energy Information Administration’s, Annual Energy Outlook
Figure 3. U.S.(Washington,
Ethanol Production, 1990–2005
D.C.: U.S. Department of Energy).
4.5
290.0
4.0
270.0
3.5
3.0 250.0
ethanol production (left axis)
billion gallons
billion gallons
2.5
230.0
2.0
210.0
1.5
190.0
1.0
170.0
0.5 gasoline and distillate supply
(right axis)
0.0 150.0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Source: Ethanol Production before 2001: Renewable Fuels Association, “Industry Statistics,” www.ethanolrfa.org/industry/statistics/#A. All other
production and supply statistics are from the 2004 to 2007 editions of the Energy Information Administration’s Annual Energy Outlook (Washington,
D.C.: U.S. Department of Energy)..
jointly by the U.S. Department of Agriculture and ability will increase from approximately 100 mil-
the DOE, Biomass as Feedstock for a Bioenergy lion to 220 million dry tons per year.9 Combining
and Bioproducts Industry: The Technical Feasibil- the resulting cellulosic ethanol production with
ity of a Billion-Ton Annual Supply7 (henceforth existing corn-based ethanol production would be
the Billion-Ton Biomass report), predicts that corn enough to produce a total of 30 billion gallons of
used to manufacture ethanol could grow to a ethanol in 2020. The DOE’s “biofuels roadmap”
maximum of about 50 million to 97 million tons, policy states that 60 billion gallons of ethanol
depending on yield growth assumptions. A total could be produced annually by 2030, mostly
of 97 million tons of corn would produce about 11 from cellulosic feedstock, although in a best-case
billion gallons of ethanol, which on an energy- scenario the annual target of 60 billion gallons
equivalent basis would replace only 3.7 percent of could be met earlier, between 2020 and 2025.10 If
current U.S. gasoline and distillate consumption. the DOE’s technological targets are met, 60 billion
In its 2006 AEO, the EIA projected that ethanol gallons of ethanol could be manufactured from
production would reach 10.75 billion gallons in 667 million tons of biomass. The “moderate crop
2020 (10.5 billion gallons of corn-based ethanol yield growth with land-use change” scenario
plus 250 million gallons of cellulosic ethanol pro- (from the Billion-Ton Biomass report) was meant
duction, as mandated in the 2005 EPACT). to determine the maximum theoretical avail-
ability of biomass; under that scenario, as much
Although its production technology is not yet
as 710 million tons of biomass could be available
commercially viable, cellulosic ethanol offers a
between 2020 and 2025.
much greater potential to displace gasoline con-
sumption than does corn-based ethanol. Accord-
ing to estimates from the DOE’s Office of Energy
Efficiency and Renewable Energy, as the price of
cellulosic feedstock increases from approximately
$29 to $33 per dry ton8, cellulosic feedstock avail-
Energy in 2020: Cellulosic Ethanol 5Cellulosic Ethanol Will Be Because of the expensive pretreatment process for
Competitive With Corn-Based cellulosic ethanol and its higher capital costs, the
only way to make cellulosic ethanol cost-compet-
Ethanol If Cellulosic Costs Are itive with corn-based ethanol is to reduce the cost
Reduced to $1.07 per Gallon of the cellulosic feedstock. The DOE’s $1.07 per
Cellulosic ethanol currently costs about $2.65 per gallon target can be reached by taking the follow-
gallon to produce, down from more than $5 per ing actions:
gallon in 2001, while corn-based ethanol costs • Reducing the cost of enzymes to $0.05 per
between $0.90 and $1.65 per gallon to produce, gallon.
depending on the price of corn.11 The DOE has
set targets for technological advances that would • Reducing the cost of cellulosic feedstock to
reduce the cost of producing cellulosic ethanol $30 per ton.
to $1.07 per gallon by 2012, which would make • Increasing ethanol yield from cellulosic feed-
cellulosic ethanol competitive with corn-based stock to 90 gallons per ton.
ethanol (in 2004 corn and crude oil prices).
Reaching the last two goals would lower the cost
Crucial differences exist between the technolo- of cellulosic feedstock to $0.33 per gallon of etha-
gies used to produce ethanol from corn and cel- nol, providing a cost advantage over corn feed-
lulose. In both technologies, feedstock sugars or stock that would be just large enough to offset the
starches are extracted and fermented to make cost of enzymes and the higher capital costs. Our
ethanol, but extracting sugars from cellulose re- analysis assumes that the DOE’s technological
quires expensive chemical processes that are not targets are feasible, and that the targets are met.
necessary to extract sugars from corn.
According to a 2000 report by the National Re-
newable Energy Laboratory, it costs $30 million to Ethanol Is Less Competitive Once
construct a typical corn-based ethanol plant that Annual Production Exceeds 14
can produce 25 million gallons per year.12 Adding Billion Gallons
the pretreatment equipment needed for cellulose
The demand for ethanol (both corn-based
would increase the cost of constructing a plant
and cellulosic, which have essentially identi-
with the same capacity to $136 million.
cal chemical properties) depends on whether
In addition to the higher capital costs, the pre- ethanol is being used as an additive to gasoline
treatment process must use enzymes to break or as a replacement for gasoline. When ethanol is
cellulose down. Today, those enzymes cost used as an additive, its high octane and its other
about$0.40 per gallon of ethanol produced, down properties allow it to displace some of the more
from more than $3.00 per gallon in 2001. costly components of gasoline, and the market
sets the price of ethanol about equal to the price
Currently, the cost of cellulosic feedstock per
of gasoline. The maximum percentage of ethanol
gallon of ethanol produced is approximately
allowed as a mixture into conventional gasoline
equal to the cost of corn grain used in traditional
is 10 percent. Current U.S. gasoline consump-
ethanol-producing facilities. One bushel of corn
tion is about 140 billion gallons, so the maximum
yields about 2.8 gallons of ethanol, so 0.36 bushels
amount of ethanol that can be used as an additive
of corn are needed to manufacture one gallon of
is 14 billion gallons. The 14-billion-gallon addi-
ethanol. At $3.00 per bushel, the cost of the corn
tive market is almost twice the 7.5-billion-gallon
feedstock in one gallon of ethanol is $1.07. The cur-
mandate for 2012 set in EPACT and is about 3.5
rent estimated cost of cellulosic feedstock is about
billion gallons higher than the projected level of
$60 per dry ton. With each ton of cellulosic feed-
corn-based ethanol production in 2020.13
stock yielding about 60 gallons of ethanol, the cost
of cellulosic feedstock is $1 per gallon of ethanol. Once total ethanol production capacity exceeds
14 billion gallons, most of the output of any addi-
tional capacity will be sold as E85, a fuel mixture
consisting of 85 percent ethanol and 15 percent
gasoline. Currently, E85 sales make up a small
6 U.S. Department of Commerce, International Trade Administrationsegment of the ethanol market, and the market gasoline exceeds $1.60 per gallon (in 2004 dollars),
price for ethanol is set by demand for ethanol as which, according to the above formula, corre-
an additive. Once capacity significantly exceeds sponds to crude oil prices of about $50 per barrel.15
14 billion gallons, the price for ethanol will be
determined largely by the demand for E85.
Replacing 10 Percent of Gasoline
Ethanol contains about 83,333 Btus (British
thermal units) per gallon compared to 125,000
and Distillates with Corn-Based
Btus per gallon for gasoline. Because of ethanol’s and Cellulosic Ethanol in 2020
lower energy content and the resulting decline in Would Reduce U.S. Dependence
vehicle mileage per gallon, it may be difficult to on Imported Oil and Improve
sell ethanol without offering a 33 percent discount U.S. Income
relative to gasoline.14 Consequently, the market
for ethanol may face a steep price decline when If the DOE’s cost target is met, what would be the
annual ethanol production exceeds 14 billion effect on the U.S. economy of producing enough
gallons. This property of the U.S. ethanol market cellulosic ethanol to reach total ethanol produc-
has important implications for modeling the tion of 30 billion gallons? In the 2006 AEO, the
benefits of producing more than 14 billion gallons EIA forecast that corn-based ethanol production
of ethanol. would reach 10.5 billion gallons in 2020, and
cellulosic ethanol production would be 250 mil-
Prices received by ethanol producers are compa- lion gallons (as mandated in the 2005 EPACT). If
rable to gasoline prices at the refinery gate, which corn-based ethanol production remains at the
can be calculated by combining the value added amount forecast by the EIA,15 reaching the target
by the refinery process with the cost of the crude of 30 billion gallons of ethanol production would
oil used in gasoline. From 2000 to 2007, the value require total production of 19.5 billion gallons of
added by refineries to gasoline averaged about cellulosic ethanol production (including the 250
$0.30 per gallon. This amount can be considered million gallons mandated by the EPACT). Because
as the long-run refinery margin required to keep of ethanol’s lower energy content, the additional
refineries solvent. The price of gasoline leaving 19.25 billion gallons of cellulosic ethanol produc-
the refinery can then be characterized as follows: tion would replace 12.9 billion gallons of gasoline,
or about 6.4 percent of total U.S. gasoline and
distillate consumption.
To estimate the economic benefits of producing
additional cellulosic ethanol, we used the U.S.A.
In this equation, Pgasoline is the ex-refinery price of a General Equilibrium (USAGE) model to construct
gallon of gasoline, and Poil is the price of a barrel of a simplified facsimile of the U.S. economy in 2020.
crude oil. The value 42 in the denominator converts This facsimile is consistent with forecasts of mac-
barrels to gallons, and the value 0.93 recognizes that roeconomic variables and energy prices released
only about 93 percent of crude oil is usable (to make in the EIA’s 2006 AEO. 17 The facsimile provides a
gasoline, diesel fuel, or other products). baseline scenario of how the economy would look
If ethanol faces no discount relative to gasoline, without commercially viable cellulosic ethanol.
meeting the DOE’s cost target of $1.07 per gallon The baseline includes 10.75 billion gallons of
would make it cost-competitive when gasoline corn-based and cellulosic ethanol production,
costs $1.07 per gallon leaving the refinery. How- which would replace about 3.6 percent of crude oil
ever, if ethanol producers must offer a 33 percent inputs used to manufacture gasoline and distil-
discount relative to gasoline prices to account lates in 2020. The construction was then altered
for ethanol’s lower energy content, ethanol that to allow cellulosic feedstocks produced by the
costs $1.07 per gallon to produce would become agricultural sector to replace another 6.4 percent
competitive only when gasoline costs at least $1.60 of crude oil inputs, and this alternate picture of
per gallon. The findings in this study assume that the 2020 economy was compared to the original.
meeting the DOE’s cost target makes ethanol cost- Two main assumptions drive the differences
competitive with gasoline only when the price of between the two future snapshots:
Energy in 2020: Cellulosic Ethanol 7Table 1. Macroeconomic Effects of Producing 19.5 Billion Gallons of Cellulosic Ethanol in 2020
Percentage change, 2004–20 Effect of cellulosic ethanol
2004 prices production in 2020 economyb
($ billion) Base scenario Alternate scenarioa ($ billion)
Public and private consumption 9,914 51.677 51.804 12.6
Investment 1,968 82.047 82.348 5.9
Exports 1,166 237.147 235.707 −16.8
Imports 1,849 112.234 112.073 −3.0
Gross domestic productc 11,199 65.811 65.853 4.7
Percentage change, 2004–20 Effect of cellulosic ethanol
production in 2020 economyb
Index Base scenario Alternate scenarioa (%)
Real post-tax wage rate 1.000 31.868 32.003 0.102
Terms of trade 1.000 0.018 0.361 0.343
Source: USAGE Model Simulation
a. This scenario assumes additional cellulosic ethanol production.
b. Dollar values for 2020 are calculated by multiplying the 2004 value data by the percentage changes for base and alternate scenarios and subtracting.
c. Gross domestic product is the sum of consumption (public and private), investment, and net exports.
• From 2004 to 2020, the price of crude oil rises, over crude oil. However, the additional demand
while the cost of cellulosic feedstocks falls for feed grains would cause the grains’ price (and
with the cost of agricultural production. cellulosic ethanol production costs) to decline by
less than the full 12 percent.18 Because feed grains
• Increased production of a domestically pro-
are an input into livestock production, animal-
duced fuel lowers U.S. demand for domesti-
product prices also decline relatively less than
cally produced and imported crude oil. As
their prices would have without the additional
a result of the decline in crude oil imports,
cellulosic ethanol production.19
both the world price of crude oil and the U.S.
import bill subsequently decline. Three other assumptions drive the results in
the model:
In the original facsimile, the U.S. motor fuel sector
uses domestically produced crude oil, imported 1. Demand for imports and domestic crude oil
crude oil, and a small amount of agricultural production decline by the same amount when
inputs to manufacture vehicle fuels and industrial U.S. crude oil demand falls.
chemicals. The alternate facsimile allows domes-
2. The value of global price elasticity of supply for
tically produced agricultural inputs (specifically,
crude oil is assumed to be equal to one.
from the feed-grains sector) to replace 6.4 percent
of the crude oil inputs used to manufacture ve- 3. The U.S. national savings rate is constant.
hicle fuels. The amount of agricultural inputs that
The United States is a high-cost producer of crude
must be used is determined by the cost-competi-
oil, but the United States also imports crude oil
tiveness of cellulosic ethanol. The main findings
from many high-cost producers, such as Canada,
result from assuming that cellulosic ethanol is
Mexico, Nigeria, and Venezuela. Therefore, with-
competitive in 2004 prices when oil prices are at
out definitive statistical evidence demonstrating
$50 per barrel. Table 1 summarizes the macroeco-
the relative supply elasticities of imports versus
nomic effects.
domestic production, we assume that imports
Furthermore, we assume that the costs of produc- and domestic production are affected equally. If
ing cellulosic ethanol will track the cost trends additional cellulosic ethanol production tends to
of feed-grains production in general, meaning replace more domestic production than imports,
that by 2020, cellulosic ethanol production costs the benefits from cellulosic ethanol production
would drop by an additional 12 percent. Ethanol would likely be smaller.
production would then enjoy a cost advantage
8 U.S. Department of Commerce, International Trade AdministrationSimilarly, given the lack of a reliable estimate Total Consumption Would Be Higher, and
of the global price elasticity of supply for crude Annual Wage Incomes Would Rise
oil, we assume a neutral parameter, or one. The Our findings show that U.S. consumption ex-
more responsive the world crude oil market is to penditures in 2020 would be 0.08 percent higher
changes in U.S. demand, the higher the benefits (or $12.6 billion) with increased use of cellulosic
are for the United States. ethanol. That figure measures the increase in
the value of the goods and services consumed by
The assumption that the U.S. national savings
U.S. citizens and the U.S. government. The U.S.
rate remains constant implies that changes in
economy would benefit from importing crude oil
domestic investment opportunities are met with
that costs less. Furthermore, the improvement in
changes in foreign investment flows.
the U.S. terms of trade would attract foreign in-
vestment, which benefits gross domestic product
Crude Oil Imports, World Crude Oil Prices, and
Domestic Fuel Prices Would Be Lower (GDP). Improved terms of trade would also benefit
U.S. consumers, who would pay less for imports.20
Our analysis indicates that if, as a result of meet-
ing the DOE cost target, an additional 19.25 billion In 2006, the U.S. GDP was $13.2 trillion. Although
gallons of commercially viable cellulosic ethanol an increase of 0.08 percent may look rela-
production were available in 2020, U.S. crude oil tively small, the gains are still substantial when
imports would be lower than baseline projec- compared with benefits accruing from other
tions by 4.1 percent, or by about 460,000 barrels microeconomic policy changes. For instance,
per day. Because the United States accounts for the U.S. International Trade Commission’s 2004
about a quarter of world consumption of crude oil, Import Barriers Report, which also used the US-
reducing the U.S. demand for oil imports through AGE model, found that U.S. public and private
biofuels substitution would affect overall world consumption would rise by 0.20 percent if all U.S.
demand. The world price for crude oil would, import trade barriers were eliminated.21 In terms
therefore, be 1.2 percent lower in 2020 than the of increased U.S. consumption, the benefits of
world price would have been otherwise. Although cellulosic ethanol production account for about
strong demand from China and India will con- 40 percent of the size of the consumption ben-
tinue to drive the price of oil upward, the effect efits that would result from eliminating all U.S.
of increased crude oil demand from the United trade barriers. In another study, the World Bank
States in the baseline scenario would be lessened. estimated that the benefit to the United States of
The benefits of lower world oil prices would be global merchandise trade reform would be an
shared by all net oil-importing countries, but the increase in real income in 2015 of $16 billion.22
benefit to the United States from paying relatively Although not directly comparable to the results
lower prices for imported oil would be significant. of this study, the orders of magnitude of effects
At $50 per barrel, the yearly reduction in expendi- between the two studies are similar.
tures on U.S. oil imports in 2020 would be about
$8.4 billion (in 2004 dollars). Agricultural Employment Would Rise
U.S. domestic fuel prices would fall by 2.0 percent. Replacing transportation fuel with cellulosic
Although cellulosic ethanol production enjoys a ethanol would require a significant increase in
slight cost advantage over gasoline production, activity in the U.S. agricultural sector, in both
the primary effects on domestic fuel prices result output and employment. From 1994 to 2004, U.S.
from the decrease in crude oil imports, which employment in crop and livestock production
causes the world price of crude oil to fall and the declined by 75,000 jobs annually. The U. S. De-
U.S. terms of trade to improve. The EIA projects partment of Agriculture (USDA) now projects that
that motor vehicle gasoline will cost an average of the U.S. agricultural sector will grow in absolute
$2.08 per gallon in 2020. Lowering this price by 2 terms over the near future and will have to attract
percent would save $0.04 per gallon. new labor in order to do so. The increase of 20,350
U.S. agricultural jobs in 2020, as predicted by the
simulation, would somewhat offset recent job
losses and would contribute to further job growth
in the U.S. agricultural sector.
Energy in 2020: Cellulosic Ethanol 9Industries Connected to Agricultural Two broad categories of industries that would see
Production Will Benefit the Most, their output fall are the following:
While Domestic Oil Producers Will • Crude oil–producing industries in the United
See Their Output Decline States. The output of these industries would
decline by 1.8 percent from base projections
When commercially viable cellulosic ethanol low- as both demand and prices for crude oil fell.
ers U.S. fuel prices, the economic effects will be
broad. U.S. consumers will spend less disposable • Industries using biomass commodities as
income on fuel and will have more to spend on inputs, such as livestock producers, meat
other consumption items. However, the competi- packing plants, and wet corn mills. The output
tiveness of some industries will be more directly of these industries in 2020 would decline from
affected than that of others (see Table 2). The two base projections by between 0.8 percent and
industries in the U.S. economy that will benefit 1.5 percent as costs rose.
the most in 2020 from commercially viable cel- As is typical of models that rely on the “natural
lulosic ethanol are as follows: rate of employment” assumption, if aggregate
• Agricultural industries producing feedstock employment is held constant, the increase in
for cellulosic ethanol production, together agricultural employment is offset by decreases in
with industries supporting agricultural pro- employment from other sectors of the economy.
duction, such as farm machinery and fertil- The most affected is the U.S. crude oil–producing
izer producers. Output in those industries in industry, which would lose about 2,200 jobs.
2020 would increase by between 2.4 percent Our findings suggest that one additional out-
and 4.3 percent over base projections. come of expanded cellulosic production is the
• The motor fuel industry, which would benefit appreciation of the U.S. dollar, which increases
from lower input prices. In 2020, output in the price of U.S. exports and decreases the price
this industry would be 1.6 percent higher than of U.S. imports. Typically, an appreciating dol-
base projections. lar would be expected to adversely affect the
production of exporting industries and to benefit
importing industries. Except for the petroleum
Table 2. P
ercentage Change in Output
refining industry, which is directly affected by
by Industry, 2020
changes in the world price of crude oil, the out-
put effects for the top 10 importing and export-
Percentage change
Industry in output
ing industries are relatively small (see Table 3).23
Net importers would see a small expansion in
Crop agriculture 4.27
output, while net exporters would experience a
Industries producing contraction in output.
agricultural inputs 2.43
Motor fuels 1.57
Oil and gas field machinery −0.76 Results Are Robust to
Animal agriculture −0.80 Changes in Assumptions
Meat packing plants −1.00 As with any simulation that is based on a simpli-
Wet corn mills −1.47 fied facsimile of an economy, the results in this
study can be sensitive to assumptions. For exam-
Crude oil and natural gas −1.84
ple, the benefits would be larger if more cellulosic
Pipelines, crude oil −1.93 feedstock were available or smaller if cellulosic
Petroleum and natural gas exploration −2.12 ethanol were not as competitive because research
Petroleum and natural gas drilling −2.16 failed to reach the DOE’s cost target. Alterna-
tive scenarios can reveal the extent to which the
Average overall 0.04
size of the benefits is sensitive to assumptions.
Source: USAGE model simulations Because the main results are driven by a number
of sources of benefits that are effectively indepen-
10 U.S. Department of Commerce, International Trade AdministrationTable 3. Top Net Exporting and Import-Using Industries, 2020
Net exports Percentage
Industry ($ billion) change in output
Foreigners’ holidays in the United States 125.6 −0.23
Industrial chemicals 23.7 −0.24
Banking 20.5 −0.01
Education of foreigners in the United States 19.2 −0.48
Motor vehicle parts and accessories 18.1 −0.27
Telephone and communications services −18.9 0.07
Retail trade −19.7 0.11
Federal government national defense expenditures −22.3 0.09
Motor vehicles −23.0 0.01
Petroleum refining −116.0 1.68
Source: USAGE model simulations
Note: Net exports are defined as exports of output less imports of inputs.
dent of each other—lower costs of fuel production, increasing yields from the current 60 gallons per
lower international prices for oil, and exchange ton to 90 gallons per ton. Failing to meet those
rate appreciation—the benefits are fairly robust to targets would lower the competitiveness of cel-
relaxing individual assumptions. lulosic ethanol.
However, even if cellulosic ethanol is less cost-
Benefits Are Substantial Even with More
competitive than projected, the benefit of replac-
Conservative Assumptions on Cost-
Competitiveness of Cellulosic Ethanol ing petroleum imports with biofuels production
could still be significant. In 2020, world crude oil
Only a portion of the benefits to the U.S. economy
prices are projected to be about $50 per barrel in
from biofuels comes from the cost savings that
2004 prices. If cellulosic ethanol is cost-compet-
would result from meeting the DOE’s cost target
itive today only when crude oil prices are higher
for cellulosic ethanol production of $1.07 per
than $60 per barrel, much of the cost savings ad-
gallon. Reducing the competitiveness of cellu-
vantages associated with using cellulosic ethanol
losic ethanol could eliminate some of those cost
are eliminated, but the price savings resulting
savings, but the other sources of benefits would
from reduced U.S. crude oil demand remain. Con-
remain. For example, replacing oil imports with
sequently, the benefits from lower world crude oil
domestic ethanol production would reduce U.S.
prices and the appreciation of the dollar attribut-
expenditures on imports, resulting in a stronger
able to lower crude oil imports would result in
dollar and in increased prices for U.S. exports.
a consumption increase of $10.1 billion in 2020,
Also, reducing U.S. demand for crude oil would
compared with $12.6 billion in the original simu-
lower world oil prices, thus reducing the cost of
lation. However, U.S. GDP would rise by only $1.5
the oil that the United States still imports. Those
billion, compared with an increase of $4.7 billion
benefits are independent of the cost-competitive-
in the original simulation.
ness of ethanol.
The primary findings in this report result from the Economic Benefits from Cellulosic Ethanol
assumption that, as a consequence of meeting the Are Greater If the 60-Billion-Gallon Target Is
DOE cost target, cellulosic ethanol is competitive Met in 2020
(without subsidies) if today’s oil prices are about The DOE’s Biofuels Initiative, or “30 by 30” target,
$50 per barrel. The DOE’s cost target of $1.07 per calls for annual production of 60 billion gal-
gallon for cellulosic ethanol requires reducing lons of ethanol by 2030.24 At 90 gallons per ton of
costs for enzymes and feedstock, and it requires cellulosic feedstock, the 60-billion-gallon target
Energy in 2020: Cellulosic Ethanol 11would require about 667 million tons of biomass. worldwide reduction in demand for crude oil
However, the “moderate crop yield increase with would cause the price of U.S. crude oil imports to
land-use change” scenario in the Billion-Ton drop even further. However, the U.S. dollar may
Biomass report estimates that as much as 710 mil- not strengthen as much as the currencies of other
lion tons of biomass could be available as early as countries. Even so, the net effect in most cases
2020—about 130 million tons from forest residues would likely still be positive for the United States.
and wastes and another 580 million tons from ag- Generally, replacing the demand for crude oil
riculture (corn, crop residues, and energy crops). with cellulosic feedstock worldwide would benefit
net importers of crude oil at the expense of oil-
To demonstrate the effects on the results of dif-
exporting countries.
ferent assumptions about cellulosic feedstock
availability, we examined the benefits to the U.S.
economy of a best-case scenario in 2020 in which
Assessment of Benefits Will
we assume that 60 billion gallons of ethanol can
be produced annually. Of those 60 billion gallons,
Improve as Information Becomes
10.5 billion gallons would be corn-based, while Available on Other Factors
the remaining 49.5 billion gallons would come This study does not address all the factors that
from cellulosic feedstock. Increasing the amount could ultimately determine the costs and benefits
of cellulosic ethanol production in 2020 to 49.5 associated with the use of cellulosic ethanol—part-
billion gallons would provide almost triple the ly because our goal is to assess a possible future
benefits, as follows: situation without speculating on various transition
• Annual U.S. consumption would increase by scenarios. Moreover, the information necessary to
about $33.5 billion in 2020. provide a more complete picture is not available at
this time. Three issues could particularly impinge
• Domestic U.S. fuel prices would fall by 5.2 on our overall findings and may require additional
percent. analysis to better gauge the benefits associated
• World oil prices would decline by 3.1 percent. with increased cellulosic ethanol use:
• U.S. oil imports in 2020 would decline by 10.7 • Assessment of transition costs.
percent, or by 1.2 million barrels per day. • Availability of data on the (currently nonexis-
• U.S. agriculture would gain 54,000 jobs tent) cellulosic feedstock market.
in 2020. • Better understanding of emissions benefits
The change in benefits is roughly proportional (for example, the reduction of GHG emissions
to the change in additional cellulosic ethanol associated with substituting cellulosic etha-
production. Similar results would hold for any nol for gasoline).
upward or downward adjustment of the amount Furthermore, the estimates in this study are
of additional cellulosic ethanol produced. based on the assumption that crude oil prices will
stabilize at $50 per barrel in 2020, as forecast by
Exporting Cellulosic Ethanol Technology Could the EIA. If oil prices rise (for example, to the EIA’s
Lead to Further Benefits high-price scenario of $85 per barrel), the pre-
Our analysis considers a situation in which bio- dicted benefits from cellulosic ethanol production
fuels from cellulosic feedstock are commercially would be even greater.
viable only in the United States. However, if the
technology for making ethanol from cellulose Analysis of Transition Costs
were developed in the United States, it is possible
A complete economic analysis of any policy
that technology could be licensed to other coun-
should contain a full accounting of both the costs
tries. In addition to the revenue that U.S. produc-
and benefits associated with that policy. For
ers would receive from licensing the technology,
cellulosic ethanol, a cost-benefit analysis would
the United States would benefit significantly if
require an estimate of the costs of infrastructural
all countries were able to substitute significant
investments required to handle the large volume
amounts of cellulosic feedstock for crude oil. The
of cellulosic ethanol production. For example,
12 U.S. Department of Commerce, International Trade Administrationnormal cars can use gasoline containing only up Benefits of Reduced Emissions from
to 10 percent ethanol. Fuel mixtures with greater Ethanol Consumption
than 10 percent ethanol must be used only in Use of cellulosic ethanol could reduce green
flex-fuel cars, meaning that a significant portion house gas (GHG) emissions. A gallon of gaso-
of cars produced in the future would have to be line emits about 25 pounds of carbon dioxide–
flex-fuel cars, which cost approximately $100 equivalent GHG emissions. Cellulosic ethanol
more per vehicle. can achieve about an 85 percent reduction in
GHG emissions relative to gasoline, resulting in
Other transition costs include the costs of infra-
a reduction of 21.25 pounds of carbon dioxide
structural changes to accommodate shipping
emissions per gallon of gasoline equivalent.25 The
large amounts of ethanol around the United
current futures price associated with carbon diox-
States; a large increase in the number of E85
ide emissions reductions in the European carbon
service stations; the costs of research and devel-
dioxide trading market is $20 per ton of carbon
opment to lower the cost of cellulosic ethanol
dioxide equivalent. On the basis of this price, we
production; and the adjustment costs that the U.S.
calculate that the value of using cellulosic ethanol
economy must absorb when reduced demand for
in terms of GHG reductions is about $0.193 per
gasoline reduces the supply of refining byprod-
gallon.26 Producing an additional 19.25 billion
ucts, such as diesel fuel and industrial chemicals.
gallons of cellulosic ethanol would displace about
However, the findings in this study reflect the 12.9 billion gallons of gasoline, which would
benefits to an economy that has already made the reduce GHG emissions by about 123 million tons
transitional investments necessary to replace a of carbon dioxide equivalent.27 At $20 per ton of
large amount of crude oil with cellulosic ethanol carbon dioxide equivalent, the economic value
in the national fuel supply. The costs of making to the U.S. economy of reduced GHG emissions
the transition occur only once. Therefore, it is would be about $2.5 billion per year. This benefit
likely that the present discounted value of the is in addition to the other favorable findings, such
stream of benefits, starting at $12.6 billion per year as $12.6 billion in additional consumption.
in 2020, will exceed the one-time transition costs.
The reduction in U.S. carbon dioxide emissions
may not correspond to reductions in carbon
Detailed Description of the Market for
Cellulosic Feedstock dioxide emissions worldwide. Diversion of U.S.
agricultural production to ethanol production
A complete forecast of the future cellulosic etha-
(whether corn based or cellulosic) may lower
nol market would ideally contain the effects of
the worldwide supply of agricultural products. If
increased cellulosic ethanol production on the
agricultural acreage in the rest of the world must
industries that provide cellulosic feedstock, like
increase to compensate, converting non-agricul-
the agriculture and forest product industries. For
tural land (e.g., forests) to agriculture use could
example, one significant issue with cellulosic etha-
release carbon dioxide into the atmosphere.
nol is related to concerns that energy crops would
displace corn. Because one major feedstock for Our analysis does not consider changes in
cellulosic ethanol would be corn stover—meaning emissions regulated by the U.S. Environmental
that demand for cellulosic feedstock in the form of Protection Agency or emissions requirements that
corn stover should add to corn demand—it would would result from using 30 billion gallons of etha-
be helpful to model the demand for cellulosic nol (10.5 billion gallons of corn-based ethanol and
feedstock explicitly and to show the extent to which 19.5 billion gallons of cellulosic ethanol) in motor
demand for corn would change. The simplified fuel. When mixed into conventional fuel, as in the
facsimile of the U.S. economy used in this study is most prevalent mixture of E10 (with 10 percent
based on industry data published by the U.S. gov- ethanol mixed), ethanol can have higher volatile
ernment. Because no cellulosic feedstock industry organic compound emissions, which can contrib-
yet exists, no data exist on which to base an indus- ute to formation of ground-level ozone (smog).
try simulation. Other research programs are under Reformulated gasoline with ethanol added must
way in the DOE and USDA to develop economic be chemically altered—by removing highly
tools to analyze the cellulosic feedstock market. volatile chemicals like butanes and, sometimes,
pentanes—so that volatile organic compound
Energy in 2020: Cellulosic Ethanol 13emissions do not increase. However, any mixture Although the benefits of lower gasoline prices
with more than 20 percent ethanol, including E85, would primarily help consumer demand, in
is less volatile then gasoline. If 30 billion gallons turn boosting all industries in the U.S. economy,
of ethanol are to be used in transportation fuel, it certain industries would be affected more than
is likely that a good proportion of the fuel mixture others. The U.S. crop-producing sector could see
will be sold as E85. The additive market for etha- its output rise by about 4.3 percent over baseline
nol would be saturated at 10 percent of gasoline projections. Industries using feed grains as an
consumption, or about 14 billion gallons, so the input, such as livestock producers and meat-pack-
other 16 billion gallons would have to be sold as ers, could see their costs rise and their output fall.
E85. When vehicles are designed for E85 and meet As U.S. demand for crude oil falls, U.S. petroleum
Tier 2 exhaust and evaporative emission stan- producers would see their output fall as prices
dards, the U.S. Environmental Protection Agency decline, while producers of motor fuels would
does not foresee the need to propose new exhaust benefit from lower input costs.
or evaporative emission standards. By 2020, virtu-
ally 100 percent of the pre-Tier 2 in-use light-duty
vehicle fleet (i.e. cars, pickup trucks, and SUVs)
will have been replaced with vehicles that meet
Tier 2 standards.
Conclusions
The benefits to the U.S. economy would be
significant if the DOE’s target to lower the cost of
producing cellulosic ethanol to $1.07 per gallon
were met. The additional consumption that U.S.
consumers would enjoy is about 40 percent of
the consumption benefits that would result from
unilaterally eliminating all U.S. trade barriers,
according to the U.S. International Trade Com-
mission’s 2004 import barriers report 28 and about
half of the real income benefits that would result
from worldwide merchandise trade liberalization,
according to a World Bank study.29 Producing 19.5
billion gallons of cellulosic ethanol would lower
both the domestic cost of fuel and the worldwide
price of oil and would lower U.S. crude oil imports
by 4.1 percent over baseline projections, or
460,000 barrels per day, in 2020. Even if the $1.07
per gallon target is not fully met, the benefits to
the U.S. economy would still be significant.
14 U.S. Department of Commerce, International Trade AdministrationTechnical Appendix: Methodology analysis are interpreted as differences between
variables of interest (GDP, consumption, domestic
The simulation discussed in this report was fuel prices, world oil prices, and so forth) in the
undertaken using a computable general equilib- alternate and base scenarios.
rium model called USAGE that was developed
at the Centre of Policy Studies, Monash Univer-
The Base Scenario
sity, in collaboration with the U.S. International
Trade Commission. The theoretical structure of At the macro level, the DOE reference case pre-
USAGE is similar to that of the MONASH model dicts the following:
of Australia.30 However, in its empirical detail • Very strong growth in U.S. exports (236 per-
(500 industries versus 100, with specifications cent between 2004 and 2020, or 7.9 percent
capturing particular features of many industries), per year)
USAGE goes far beyond MONASH. The basic
model describes the interaction of a detailed U.S. • Strong growth in U.S. imports (112 percent be-
economy with a “rest of the world” region.31 tween 2004 and 2020, or 4.8 percent per year)
The USAGE model uses input-output tables • Normal growth in real U.S. GDP (66 percent
released by the Bureau of Economic Analysis to between 2004 and 2020, or 3.2 percent per
describe the physical requirements of industries year)
at the six-digit Standard Industrial Classification • Normal growth in U.S. employment (15 per-
level. The model also uses equations to describe cent between 2004 and 2020, or 0.9 percent
supply and demand responses to price changes per year)
and investment opportunities. The model is
based on data from the U.S. economy in 2004 and • Normal growth in U.S. investment (83 percent
is updated to incorporate more recent data as it between 2004 and 2020, or 3.8 percent per
becomes available. However, the basic structure year)
of the U.S. economy does not change much from • Subdued growth in U.S. private consumption
year to year. (57 percent between 2004 and 2020, or 2.9
Alternate simulations can be carried out with the percent per year)
USAGE model by simulating a future economy • Very subdued growth in U.S. public consump-
using whatever data are available and by com- tion (27 percent between 2004 and 2020, or 1.5
paring this “base scenario” to a future economy percent a year)
with changes incorporated into it (the “alternate
scenario”). Those changes can be policy related or Variables that are not provided by the 2006 AEO
technology related, or they may relate to any other macroeconomic assumptions are generated
exogenous parameter that creates a deviation from trends from a historical simulation of the
from the base scenario. The difference between USAGE model. The model is forced to track data
the two scenarios is interpreted as the effect of from 1992 to 2004, generating trends for technol-
implementing the change. The different scenarios ogy and consumer preferences as well as trends
are both simulated as if the economy has reached in the positions of world demand curves for U.S.
long-run equilibrium, assuming a natural rate of exports and world supply curves for U.S. imports.
employment. Those trends are used in the 2020 base scenario.
Importantly for this exercise, the simulation uses
In this study, the 2020 base scenario was simulat- historical trends in U.S. agricultural prices, which
ed using macroeconomic forecasts in the Energy have been declining fairly consistently for the past
Information Administration’s Annual Energy several decades.
Outlook 2006. The alternate scenario changes the
model to allow additional cellulosic feedstock to With regard to energy, the most important aspects
be used as an input into the motor fuel industry of the DOE reference case for our purposes are
for no more than 19.25 billion gallons of cellulosic those concerned with the motor fuel industry.
ethanol (replacing 12.9 billion gallons of gasoline) For this industry, the DOE sees strong growth in
at prices that are competitive when crude oil costs prices and slow growth in output. The price index
$50 per barrel or more. The main results of the for domestically produced motor fuels (including
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