Climate regulation enhances the value of second generation biofuel technology

Commercial scale implementation of second generation (2G) biofuels has long been ‘just over the horizon – perhaps a decade away’. However, with recent innovations, and higher oil prices, we appear to be on the verge of finally seeing commercial scale implementations of cellulosic to liquid fuel conversion technologies. Interest in this technology derives from many quarters. Environmentalists see this as a way of reducing our carbon footprint, however, absent a global market for carbon emissions, private firms will not factor this into their investment decisions. Those interested in poverty and nutrition see this as a channel for lessening the biofuels’ impact on food prices. But what is 2G technology worth to society? How valuable are prospective improvements in this technology? And how are these valuations affected by future uncertainties, including climate regulation, climate change impacts, and energy prices? This paper addresses all of these questions.

We employ FABLE, a dynamic optimization model for the world’s land resources which characterizes the optimal long run path for protected natural lands, managed forests, crop and livestock land use, energy extraction and biofuels over the period 2005-2105. By running this model twice for each future state of the world – once with 2G biofuels technology available and once without – we measure the contribution of the technology to global welfare. Given the uncertainty in how these technologies are likely to evolve, we consider a range cost estimates – from optimistic to pessimistic. In addition to technological uncertainty, there is great uncertainty in the conditions characterizing our baseline for the 21^st century. For each of the 2G technology scenarios, we therefore also consider a range of outcomes for key drivers of global land use, including: population, income, oil prices, climate change impacts and climate regulation. We find that the social valuation of 2G technologies depends critically on climate change regulations and future oil prices. In the base case with no climate policy and higher oil prices, the value of second generation biofuels is roughly $8 billion. With stringent climate change regulations in place, 2G biofuels are worth about fifty percent more.