iLUC and the cost of carbon abatement (part 2)

A while ago, we wrote about why it’s important to consider iLUC if you’re going to try to make assumptions about the carbon abatement cost of biofuel policies – in that case, because we believed that the IEA had not fully considered these effects in its biofuels roadmap (http://theicct.org/blogs/staff/iea-27-biofuels-and-cost-indirect-land-use-change).

This week, we have a spokesperson from DG Energy at the European Commission noting of the Renewable Energy Directive (RED) that “If we look at the biofuels mix in 2020, the greenhouse gas emission savings are estimated to be 21 percent. This is the case even if no action is taken to mitigate estimated indirect land use change impacts (ILUC).” We think it’s worth exploring what a 21% saving would mean. 

Now, for one thing we have previously noted that the IFPRI MIRAGE modelling that these figures are based on used a much lower value for peat emissions than is indicated by the best available results, and that if you redo the calculation with the improved peat emissions values, then one wouldn’t expect any saving at all (http://theicct.org/ifpri-mirage-2011-modeling-indirect-land-use-change).

But it is also instructive to think about what this 21% average saving would mean for the carbon abatement costs of the Renewable Energy Directive. Now, the UK Department for Transport assumes a ‘cost spread’ (the amount more than fossil fuels that biofuels will cost at the petrol station) that implies a carbon abatement cost of about €250 per tonne of carbon dioxide abated – if the biofuel delivers a 50% carbon saving (c.f. http://theicct.org/indirect-land-use-change-europe). This is already at the high end cost-wise for carbon reduction strategies, but it is generally understood that biofuels are expected to be relatively expensive, at least in the short term. Governments accept that because they are seen to represent one of a limited number of tools available to deal with road vehicle CO2 emissions without needing to change driver behaviour. However, if DG Energy’s expected carbon saving of 21% were realised, this cost would rise by nearly 250% to just under €600 per tonne of carbon abatement. Paying €600 per tonne of abatement is more than is generally acceptable for the current raft of climate policies. In our own modelling of potential emissions scenarios if the MIRAGE modelling is your best approximation for iLUC emissions, we found that you would expect a 5% carbon saving from crop based biofuels if no action on iLUC was taken – in that case the abatement cost for the crop based fuels supplied under the Renewable Energy Directive would be expected to rise to €2,500 per tonne of carbon dioxide abatement (http://theicct.org/indirect-land-use-change-europe, p16).  

This emphasises the point that if biofuel policy is going to be successful, it has to deal with iLUC effectively. We can also compare these costs to the cost of an alternative policy approach to European transport emissions, the proposed 95 g/km fuel efficiency rule. If biofuel policy could be costing European consumers at least €600 per tonne of carbon abatement, how does that compare to tightened vehicle efficiency standards?

For a rough estimate of the cost of the efficiency rules, say that a new car with a typical fuel efficiency of 130 g/km CO2 would drive about 20,000 km in its first year. Since the on-road emissions are about 20% higher than test values, the net annual emissions would be 130*1.2*20/1000= 3.12 tons of CO2. Over its lifetime the vehicle drives about 15,000 km per year on average and does that for maybe 12 years, for a conservative estimate, i.e. about 28 tons of CO2 (for lots of drivers and vehicles this could easily be more).

Now, if this car’s fuel efficiency can be improved to 95 g/km you reduce emissions by about 27%, i.e. around 7.5 tons over the lifetime of the car. An efficiency of 130 g/km equals 5.4 litres per 100 km – so that is about 1300 litres it its first year, i.e. about 1800 EUR of fuel costs (assuming €1.4 per litre and 20% higher fuel consumption on road than on a test cycle). Over the lifetime we are talking of more than €16,000 of fuel. Reducing fuel consumption, and hence costs, by 25% (by meeting a 95g/km standard) saves about €4 ,400 in fuel costs for the consumer. Subtract maybe €1,000 for the technology costs of building the more efficient vehicle, and that leaves you with €3,400 net fuel savings and a carbon dioxide saving of 7.5 tonnes – the consumer actually gets back €450 for every tonne of carbon saved. All in all, that means that if iLUC can’t be prevented, adopting the planned fuel-efficiency standards for cars could well, on average, deliver carbon dioxide reductions for over €1,000 per tonne less than the Renewable Energy Directive – with the efficiency standard expecting to save drivers money at the petrol station, while the RED costs them more.

We can’t always expect climate change mitigation to save us money – but it’s nice when it does. All of these numbers are subject to uncertainties, and they represent expected consumer costs rather than overall cost/benefit to the economy, but they certainly seem to suggest a good case for a strong efficiency standard, and a biofuel policy that avoids indirect land use change.