Aldara da Silva Cesar, Mario Otavio Batalha and Luiz Fernando de O. Paulillo

Abstract The national program for production and use of biodiesel (PNPB) intends to include family farming in this sector. Oil Palm cultivation was deemed as ideal for social inclusion in Brazil’s Northern region, and the social projects linked to this production are pilot projects, with about 185 families. This study, which can be classified as multi-case, uses exploratory bibliographic and documen­tal research techniques as well as interviews with the agents inserted in the chain. The study analyzes the governance structure of the biodiesel production chain in Brazil regarding the social link of palm oil. In light of the transaction cost econom­ics (TCE) theory, this chapter analyzes three key transaction attributes between family farmers and industry, namely frequency, uncertainty, and asset specificity, all classified in this study as high ranking. The institutional environment is decisive for the inclusion of palm oil farmers included by means of formal contracts. However, the biodiesel plants located in Brazil’s Northern region—as well as those planning to begin this business—show trends to verticalize their agricultural activities. Thus, the social fuel seal (SCF) assumes its influence in the operating dynamics of that chain’s social pillar.

Keywords Palm oil • Family farming • Social fuel seal • PNPB • Biodiesel

A. da Silva Cesar (H)

GASA—Grupo de Analise de Sistemas Agroindustriais Departamento de Engenharia de Agronegocios, Universidade Federal Fluminense, Niteroi, Brazil e-mail: aldaracesar@id. uff. br

M. O. Batalha • L. F. de O. Paulillo

GEPAI—Grupo de Estudos e Pesquisas Agroindustriais Departamento de Engenharia de Produfao, Universidade Federal de Sao Carlos, Sao Carlos, Brazil e-mail: dmob@ufscar. br

L. F. de O. Paulillo e-mail: dlfp@ufscar. br

A. Domingos Padula et al. (eds.), Liquid Biofuels: Emergence, Development and Prospects, Lecture Notes in Energy 27, DOI: 10.1007/978-1-4471-6482-1_6, © Springer-Verlag London 2014

1 Introduction

The national program for production and use of biodiesel (PNPB) created a strong domestic demand for biodiesel (Pousa et al. 2007). PNPB’s most important under­taking was the enactment of Law No. 11.097/2005, in which the compulsory addi­tion of biodiesel to petroleum diesel was decreed in 2008 in Brazil (Brazil 2005). Biodiesel was incorporated into the Brazilian energy matrix in 2007 on an optional basis and mandatory in 2008 with the addition of 2 % of biodiesel to petroleum diesel (B2)—this addition is currently set at 5 %. Since then, the sector has rapidly increased in the country.

Brazil produced 2.7 million liters in 2011 and has a twofold capacity for the mandatory requirement. The federal program also established a set of policies to encourage diversification of the energy matrix, promoting the inclusion of family farmers in this sector.

The social fuel seal (SFS) was created to focus on the regional development (Garcez and Vianna 2009), and according to this mechanism, companies must provide conditions (quantity, minimum price, and technical service) via contracts to foster the relationship with small farmers. In contrast, the seal has tributary advantages (tax exemption), allowing access to the ANP Auctions, favoring better financing terms with public banks, plus serving as a positive marketing tool for the companies that have the seal.

The diversification feasibility in the production of raw materials used to manu­facture biodiesel favors Brazilian competitiveness. However, the most widely used raw material for biodiesel production in the country has been soybean. In 2012, soybean oil accounted for 75.24 % of the raw materials used by the plants, while beef tallow and cotton oilseed accounted for 17.19 and 4.53 %, respectively (ANP 2012). However, in Brazil, palm oil for biodiesel production is still very small, accounting for 0.18 % in 2012.

In Brazil, despite its limited participation in the matrix, palm oil was chosen as the ideal oilseed for the north of the country since the beginning of PNPB. Palm oil plantations enable social inclusion due to its high employment rate (one direct job is generated for every 10 ha under oil palm cultivation), with gains such as income generation for farmers, workers’ improved quality of life, inserting man­power in the field, and the expansion of local businesses (Cesar et al. 2013). However, of the 100,371 family farming establishments participating in PNPB in 2011, only 246 are located in the north of the country (0.2 %). Of these, 185 farmers are assisted with palm oil and are heavily subsidized by public actions and partnership with the company that fosters such arrangements (Brazil 2011).

Thus, in 2004, the PNPB institution definitely promoted building a productive structure and an institutional framework for the production of biodiesel in Brazil. It is important to investigate the type of governance structure undertaken by the palm biodiesel supply chain some years after the implementation of PNPB, which is a key issue in order to study the oleaginous supply from family farming, given the importance assumed by the SFS seal in the operating dynamics of this sector. Within this scope, this chapter examines the governance structure of the biodiesel

production chain in Brazil. This work is divided into five sections, including the introduction. The second section presents the methodological procedures. The third section includes some considerations about the theoretical referential. Next, the fourth section provides the research results, which are divided in the description of the fomented arrangements related to oil palm.

The geographic distribution of the production and consumption of ethanol is related to many factors, such as production destinations, government policies, natural resources’ availability, and environmental regulations. Different world regions can be understood as distinct markets with diverse demands and supply possibilities (Jovanovic 1993). The production, consumption, exports, and imports of ethanol in major countries (including the European Union) that is estimated for 2013 and 2020 can be observed in Fig. 2.

Estimates indicate that the USA is clearly the largest producer and consumer of ethanol and it is followed by Brazil. Upon analyzing these main producers, a difference from the perspective of the increase in production by 2020 is observed. According to the estimate, the increase in consumption will be greater than the increase in production in the USA. Therefore, even though the USA is the world’s greatest ethanol producer, it will eventually have a need for ethanol imports. Because the Brazilian capacity of production by 2020 will be higher than the domestic demand, the surplus of ethanol could be redirected to supply the needs of international markets.

The great potential for production in Brazil might be related to the favorable climate conditions and the appropriate areas for agriculture, which are currently abandoned, uncultivated, or used as extensive pasture. Another contributing fac­tor is the improvement in technology in recent years, which has particularly been applied to feedstock.

Brazil plans to expand the area for sugarcane cultivation from approximately 4.4 Mha (2008) to 8 Mha (2017) by occupying the currently extensive area that is devoted to cultivating pasture (IEA 2010). Today, 50 % of the produced sug­arcane is used for biofuel production. Another destination of the produced sugar­cane includes its use as feedstock and to supply the (domestic and international) sugar market. Furthermore, the Brazilian sugar mill sector can sell bioelectricity produced from bagasse (IEA 2011).

Feedstock is the main cost of conventional biofuels, which accounts for 45-70 % of the total production costs. In contrast, for advanced biofuels, the main factor is the capital costs (35-50 %), which is followed by the feedstock cost (25-40 %) (IEA 2009). In the USA, ethanol is mainly produced from corn. In certain areas, sorghum grain, wheat, and barley are also used as feedstock.

Another important producer and consumer of ethanol is the European Union. The EU is a net importer; and in 2013, estimative indicates it exhibit consump­tion that should be 27 % higher than the production. This perspective indicates a similar condition by 2020 (24 % more imports than what should be produced).

Because the land availability is a potential limiting factor for the production, the improvement of the waste and residues that are produced would play an important role in enabling further development of the biofuel sector (IEA 2011).

The fast growth of the Chinese economy and its potential for maintaining this behavior has led to rising demand for energy. In response to this demand, the search for alternative sources of energy has become a priority for the Chinese gov­ernment (Qiu et al. 2010). Oil deficits and an increasing dependence on oil imports have exposed China to risks due to its reliance on the international oil markets, which has motivated the development of ethanol production (Tao et al. 2011).

In 2013, China presented a domestic demand for ethanol that was higher than its production. Although the ethanol production is expected to increase, this situ­ation would remain in future years. In 2003, the trade of bioethanol and a gaso­line blend (with 10 % ethanol that is known as E10) was initiated in China (Qiu et al. 2010). According to the Medium — and Long-Term Development Plan for Renewable Energy, which was issued in 2007, China aims to increase the produc­tion of ethanol from non-food-grain feedstock. The predominant feedstock used was corn, which was followed by wheat, but the government committee incentiv — ized ethanol production from a diversity of feedstocks including cassava, sweet potatoes, sugarcane, and sweet sorghum (Tao et al. 2011). Currently, E10 is used in the transport sector in the five provinces (Heilongjiang, Jilin, Liaoning, Anhui, and Henan) and 27 cities in Jiangsu, Shandong, Hubei and Hebei (Qiu et al. 2010).

Similar to China, India is one of the fastest growing economies of the world. Thus, the energy input is a strategic component of the national economic activity in India. To study the financial and operational aspects of E5, the local govern­ment presented three projects in 2003. In 2008, the national biofuel policy made the use of E5 mandatory, and it set a target of E20 for 2017. Today, the production of ethanol amounts to 549 million gallons (which is mainly produced from sug­arcane), but the domestic demand is greater. However, despite the projected increases in the domestic demand by 2020, the amount of ethanol production is expected to fulfill this demand.

As in other countries, the diversification of energy sources is an important objective of Canada. The ethanol feedstock source was 70 % corn and 30 % wheat in 2007. According to Balat and Balat (2009), the country reported the seri­ous intention of increasing the development of corn-based ethanol. In 2008, the Canadian government amended the Environmental Protection Act to require the use of E5 in all ground transportation fuels, which naturally increased the demand for it. Canadian ethanol production represented 74 % of the domestic demand in 2013. The current projection indicates the maintenance of these levels of produc­tion, and therefore, Canada would remain a net importer in 2020.

In general, the estimates show increase in the production and consumption of eth­anol. National biofuel policies tend to vary according to both the availability of feed­stock for fuel production and national agricultural policies. With the introduction of new government policies in America, Asia and Europe, the total biofuel (mainly eth­anol) demand could grow to 33 billion gallons by 2020 (Demirbas 2007).

Due to this increasing demand, fluctuations in prices can be expected. Figure 3 shows the ethanol prices and the global ethanol fuel production in recent years. From 2006, when production reached more than 10 million gallons, to 2012, an increase of 119 % was observed in the total production. During the same period, ethanol prices increased 60 % worldwide. From 2006 to 2009, the ethanol prices oscillated at a low rate, namely, between $1.60 and $1.80 per gallon. The ethanol price reached its highest cost in 2011 ($3.33 per gallon), and then it declined until 2012. The local price (in US dollars) for ethanol, which is presented in Fig. 3, showed a similar trend during this period.

New technologies offer considerable potential growth over the coming decades. However, traditional biofuels are expected to play a key role in ramping up the production in many developing countries. Thus, the associated technology is cost — effective and less complex than is the case for advanced biofuels.

Agriculture and the science community today are actively pursuing renewable energy production. Many research and implementation efforts involve producing ethanol or other liquid biofuels from nonfood agricultural feedstocks in a cost- efficient manner. Various feedstocks are being considered including crop residues,

M. Wlodarz (*)

Department of Management, Technology and Economics, Center for Energy Policy and Economics, ETH Zurich, 8032 Zurich, Switzerland e-mail: marta. wlodarz@gmail. com; wlodarzm@ethz. ch

B. A. McCarl

Department of Agricultural Economics, Texas A&M University, College Station, TX 77843-2124, USA e-mail: mccarl@tamu. edu

A. Domingos Padula et al. (eds.), Liquid Biofuels: Emergence, Development and Prospects, Lecture Notes in Energy 27, DOI: 10.1007/978-1-4471-6482-1_7, © Springer-Verlag London 2014

energy crops (e. g., switchgrass, miscanthus, hybrid poplar, willow, and others), logging residues, and agriculture/forest processing by-products. At the same time, current market penetration barriers (like car capabilities, service stations, and pipe­lines) pose a significant barrier to further ethanol market expansion (Szulczyk et al. 2010; Wlodarz and McCarl 2013).

The main purpose of this chapter is to report on an economic investigation of current and future prospects for agricultural feedstock-based liquid biofuels expansion developing information on:

• Needed cost reductions in cellulosic biofeedstock-based liquid fuels production to make them competitive.

• The effects of renewable fuel mandates and carbon dioxide credit prices.

• The effect of infrastructure barriers on market penetration.

• Tipping points that stimulate cellulosic ethanol.

• Impact of carbon pricing on bioethanol production.

1 Literature Review

The possibility of second-generation biofuels production from agricultural materials has been explored by many (Tyner 1979; Apland et al. 1982; McCarl and Schneider 2000). Bioethanol from crop residues, wood residues, and energy grasses can pro­vide GHG offsets with potentially lower demand shocks in the food commodity markets. Farrell et al. (2006) found that bioethanol production on the large indus­trial scale will definitely require further development of the lignocellulosic etha­nol production technology. The need for further improvements in the biochemistry of reactions and cheaper enzymes is recognized by many (EPA 2009; Dwivedi et al. 2009; Babcock et al. 2011; Lau and Dale 2009). Wlodarz and McCarl (2013) showed that processing costs need to decrease by at least 25 % to make cellu­losic ethanol production economically viable. Chovau et al. (2013) analyzed the cost of cellulosic ethanol production and they claim that lignocellulosic ethanol will become more economical and environmentally attractive than corn ethanol. Littlewood et al. (2013) indicate production modes utilizing less costly agricultural residues, e. g., sugarcane bagasse (Alonso-Pippo et al. 2013), are preferred from an economic standpoint. Governmental subsidies or carbon emission pricing mecha­nisms (Schneider and McCarl 2003) also increase the viability of lignocellulosic bioethanol production.

There are some studies which investigate the possibility of drop-in liquid fuels such as butanol or methanol (Lee et al. 2008; Green 2011; Qureshi and Blaschek 2000; Ezeji et al. 2007). Drop-in fuels do not have corrosive characteristics so they do not require major infrastructure adjustments. Both service points and distribu­tion networks are appropriate for drop-in fuels dissemination.

The biofuel industry has experienced remarkable growth over the last decade. Global production has tripled from about 18 billion litres in 2000 to about 60 billion litres in 2008 and has continued to grow after a slight pause in 2007-2008 (Kristoufek et al. 2012; Mandil and Shihab-Eldin 2010). However, production and consump­tion of biofuels worldwide returned to growth in 2010. According to US Energy Information Agency (EIA) data, total world biofuel production increased nearly six­fold over the 2000-2010 period, that is, from about 18 billion litres to about 104 billion litres. Supply is currently dominated by bioethanol, which accounted for approximately 75 % of total biofuel production in 2010 (Mandil and Shihab-Eldin 2010; Moschini et al. 2012). Similar figures are also reported for biofuel demand. Despite the growth in the biofuel industry, global consumption of biofuels in 2012 represented 3 % of total fuel consumption (IFPEN 2012), i. e. 55 million tons oil equivalent, of which 73 % is bioethanol consumption. Global production and con­sumption of biofuels, over the 2000-2011 period, are presented in Fig. 1.

At present, biofuel production and consumption are concentrated in a small number of countries or regions, with the United States, Brazil and the EU being particularly salient. Bioethanol has been the leading biofuel in the United States (from corn) and in Brazil (from sugarcane), whereas biodiesel is the preferred biofuel in Europe (from [1]

bioethanol production (thousand barrels per day) bioethanol consumption (thousand barrels per day) biodiesel production (thousand barrels per day) biodiesel consumption (thousand barrels per day)

Fig. 1 Global biofuels production and consumption (2000-2011) (US EIA 2013)

rapeseed oil) (Moschini et al. 2012). In 2006, the United States surpassed Brazil as the world’s largest bioethanol producer and consumer and, by 2010, was producing 57 % of the world’s bioethanol output. The EU follows as the third major producer (Mandil and Shihab-Eldin 2010; Moschini et al. 2012). By way of contrast, the EU is the largest producer and consumer of biodiesel. Over the period of 2009-2011, the EU accounted for about 60 % of global biodiesel production and about 70 % of global biodiesel consumption. The production and consumption levels in these three regions over the 2009-2011 period are summarized in Tables 1 and 2.

Of particular importance is that the industry is very much reliant on first — generation fuels (explained in Sect. 2 in chapter “Environmental Issues in the Liquid Biofuels Industry”). While these are generally produced from food crops (such as sugar cane, sugar beet or corn in the case of bioethanol, and vegetable oil derived from oleaginous crops in the case of biodiesel), they also have a variety of other commercial applications (such as stock feed in the case of corn, or use in industrial products such as cosmetics and engine lubricants, in the case of vegeta­ble oils). The cost-effectiveness of first-generation fuels is therefore closely tied to the global price of the feedstock used—a price set not only by demand for these feedstocks for energy, but also for other purposes.

HHI is defined by the sum of squares of the participation of each company when compared to the industry’s total size. This index considers all the companies in the industry and is calculated as follows:

N

HHI = £ Pi2 (2)

i=1

where P is the market share of firm i in the market and n is the number of firms. The Herfindahl-Index (H) ranges from 1/N to one, where N is the number of firms in the market. Equivalently, if percents are used as whole numbers, as in 75 instead of 0.75, the index can range from 10,000/n, when companies have an equalitarian participation in the market, up to 10,000 (monopoly). The HHI increases according to the increase of inequality among the companies belong­ing to the industry, thus being a good indicator of the market situation. Do note that the company size is considered by its squared participation (Pi), i. e., smaller companies have a smaller role in this index. Thus, the higher the index, the more concentrated the market is, and, as a consequence, smaller the competition among companies is.

According to Usdoj (1997), the market is not concentrated when the HHI value is under 1,000, it is moderately concentrated between 1,000 and 1,800, and it is highly concentrated when it reaches a value higher than 1,800. This research sought to use the companies’ integrality, where we used secondary data regarding the biodiesel production in m3 from January 2005 to December 2012.

The ‘environmentally friendly’ rhetoric with respect to biofuel production and consumption, such as that advanced by Shapouri et al. (1995, 2002), has often been disputed, most emphatically by Henke et al. (2005) and Patzek et al. (2005). Some have suggested that, up until this point, the net contribution of biofuels to reducing global GHG emissions might have been negative (Eggert et al. 2011), mainly as a result of (1) land-use changes (LUC) and (2) deforestation in tropi­cal areas, particularly so as to allow the planting of biomass used for biofuel pro­duction (Searchinger et al. 2008; Fargione et al. 2008). Moreover, Anderson and Fergusson (2006) contend that biofuels, regardless of type, cannot be regarded as truly carbon neutral (or even carbon negative) when the stages of production, transportation and processing are taken account. Patzek et al. (2005) accepted this contention after a meta-analysis of a wide array of previous studies.

To gain a deeper insight into whether biofuels represent an improvement over conventional liquid fuels with respect to their overall GHG footprint, it is necessary to consider the entire biofuel life cycle, including the production phases. In addition to the tailpipe emissions discussed earlier, these include (1) type of feedstock, (2) processing of feedstock and (3) the cultivation and harvesting of the feedstock.

1.2 EU Biofuel Policy Scenario

In the European context, two political decisions have had a fundamental role in the biofuels expansion: the Directive 2003/30/EC and Directive 2009/28/EC (RED). The objectives of RED policy in 2009 included the following: increasing farm income, improving environmental quality, and increasing national energy security.

A large variety of biofuel support policies are in place in EU member states, rang­ing from command and control instruments such as standards and shares, economic and fiscal measures, such as tax exemptions, to information diffusion. This implies that market demand is created by policies, as the production costs of biofuels lie above those of fossil fuels. This can be done through basically two instruments: sub­sidization or prescription of a mandatory production. Under the first scheme, biofuels are subsidized in order to reduce the price level to that of fossil fuels (or below). The second approach consists of prescribing a specific quantity of biofuels to be supplied by fuel suppliers on an obligatory basis (blending or use target mandates).[9]

The first option is implemented by the following: (a) tax reduction scheme, which has proven successful although it has caused important revenue losses for the government and (b) support to the cultivation of agricultural feedstock production by the Common Agricultural Policy (CAP). Unfortunately, in 2011, both of measure budgetary support were deleted. The second option (use target mandates) provides that fuel suppliers are obliged to achieve a certain biofuel share in their total sales. Currently, the latter measure is working.

The European Union climate and energy package from 2008 nullifies or updates much of the previous legislation. Its implementation will have a profound impact on how biofuels are used and the level of market penetration achieved in the future. The package aimed achieving the 20-20-20’s objectives: 20 % reduction in emissions, 20 % renewable energies, and 20 % improvement in energy efficiency by 2020.

Within the package, the Renewables Directive (RED) has arguably the high­est significance with regard to biofuels. The Directive deals with biofuels in sev­eral ways, of which the most noteworthy is the mandatory target which states that 10 % of final energy consumption in transport should be met by renewable energy by 2020. Another important aspect of the Directive is the mandatory sus­tainability criteria to which all biofuels are subject. This aspect, in particular, has received high publicity, and its detailing in the Directive has left serious questions open regarding indirect land-use change and potential clashes with trading laws (Amezaga et al. 2010; European Federation for Transport and Environment 2009).

Regarding the sustainability criteria, the RED ensures that the production of raw materials for biofuels does not lead to losses of high carbon stock land such as wetland, forested areas, and peatland; and high land biodiversity such as primary forest and other protected areas including grassland. EU production shall, in addi­tion, comply with certain agricultural and environmental requirements. In particu­lar, biofuels are required to ensure a saving of greenhouse gas emission of at least 35 % when compared to the replaced fossil fuel. This minimum saving would be increased by 50 % in 2017 and by 60 % in 2018 for new installations. The emis­sions shall be calculated over the entire life cycle of the biofuels and include, if any, carbon losses from conversion of land for biofuel crop production.

Currently, similar sustainability requirements were set in the Fuel Quality Directive 2009/30/EC on the specification of petrol, diesel, and gas oil, which pro­vided also a 6 % reduction in greenhouse gas (GHG) emissions from road trans­portation fuels by the blending with biofuels.

Only sustainable biofuels, domestically produced or imported, will be eligible to be counted against the target and for any other public support.

In June 2010, the European Commission announced a set of guidelines explain­ing how the Renewable Energy Directive Verification, on compliance with the sustainability criteria for biofuels and bioliquids, should be implemented (COM (2010)160/01; COM (2010) 160/02; and Decision 2010/335).

In addition, the European Commission was asked to come forward with propos­als by the end of 2010 to limit indirect land-use change. The RED criteria, in fact, exclude some important GHG emissions such as the indirect effects, for example, on land use. For this reason, on October 17, 2012, the Commission published a proposal of directive issued as COM (2012) 595 aiming at limiting global land conversion for biofuel production (include indirect land-use change, ILUC) and to raise the climate benefits of biofuels used in the EU.

The proposal (named ILUC proposal) should amend both the Renewable Energy Directive (2009/28/EC) and the Fuel Quality Directive (98/70/EC). With these new measures, the Commission would limit the use of food-based biofuels and include ILUC2 emissions when assessing the greenhouse gas effect of biofu­els. The use of first generation of biofuels to meet the 10 % renewable energy tar­get of the Renewable Energy Directive will be limited to 5 %. The intention of the proposal is to introduce three ILUC emission factors (for cereals 12 g CO2 eq/MJ, sugars 13 g, and oil crops 55 g). The high ILUC factor especially for oil crops could disqualify most biodiesel made from rapeseed, soybeans, as well as palm oil (first-generation biofuels).

The sustainability criteria proposed by the EU, which aim to combat the envi­ronmental problem, have been subject to widespread criticism and extensive dis­cussion. Social criteria and indirect land-use change are hot topics, both of which are not dealt with in the Directive and face similar difficulties (Amezaga et al. 2010). Both are recognized struggles but how to quantify their effects and incorpo­rate them into policy remains a serious issue. For this reason, the proposal ILUC, nowadays, is largely called into question by European stakeholders.

This article conducted qualitative descriptive research, using the case study research method. The case under analysis in this study is the agricultural link of the biodiesel production chain in Brazil, with a focus on oil palm family farmers. Thus, the study can be classified as multi-cases with personal and in-depth interviews.

The primary data collected included interviews with 27 professionals, con­ducted from February 2010 to February 2011. Of these key players, six respond­ents were from public agencies, two were bank professionals, three represented the opinions of the biodiesel companies, five were companies producing oil palm and other derivatives, two were representatives of family farmers’ associations, and nine respondents belonged to the agricultural production chain.

Biodiesel, which is also known as fatty acid methyl ester (FAME), is produced from the transesterification of vegetable oils or animal fats with the addition of methanol (Lin et al. 2009). This type of biofuel contains no petroleum products, but it is compatible with conventional diesel engines and can be blended in any propor­tion with fossil-based diesel fuel to create a stable biodiesel blend (Lin et al. 2011).

Commercially, these blends are named B5, B20, or B100 to indicate the per­centage of the biodiesel component in the blend with petrodiesel (these percent­ages are 5, 20, and 100 %, respectively). Some of the main countries in grain production have established various stages of implementing or expanding the man­datory blending of biodiesel in motor fuels. This type of policy is crucial for the establishment of the biodiesel industry (Janaun and Ellis 2010).

Figure 4 presents an estimate of biodiesel production, consumption, exports, and imports for 2013 and 2020.

In 2010, the European Union (EU) was the leading biodiesel market with a pro­duction share of 52.8 %, and it was followed by the Americas with 33.9 % and Asia with 3.5 % (Sawhney 2011). Thus, the EU is the world’s largest biodiesel industry and market (Yusuf et al. 2011). Currently, each state has set different targets and regulations, but the average biodiesel blend is estimated at 5.75 % (IEA 2011).

The US production of biodiesel is smaller than the European production and shows important differences. Soybean oil is the most commonly used feedstock in the USA, and it is followed by rapeseed oil and soy oil. A stable consumption of 1 billion gallons per year is estimated from 2013 to 2020, and the production will tend to increase. This pattern will ultimately create export opportunities for the US biodiesel industries.

Argentina is a major exporter of biodiesel, which is produced almost exclu­sively from soybeans. The country has an export-oriented industry that is respon­sible for the estimated increase of biodiesel production and exports from 2013 to 2020. B7 was recently introduced in the domestic market (IEA 2011). However, the country’s exportable surplus is projected to increase 13 % from 2013 to 2020.

In Brazil, most of the biodiesel production is meant to satisfy the domes­tic demand, which is motivated by government policies. Nevertheless, a slight decrease in domestic consumption can be expected by 2020, as shown in Fig. 4. Biodiesel producers expect to gradually increase the demanded biodiesel volume from B7.5 to B10 in 2014 and to B20 by 2020. Currently, the net exports’ projec­tions remain at modest levels and will not exceed 60 million gallons by 2020.

The dominant feedstock is soybean oil, although Brazil is investing in alternative vegetable oils to produce biodiesel.

The source for biodiesel production is chosen according to the appropriate raw materials’ availability in each region or country. In Malaysia and Indonesia, coco­nut oil and palm oils are used for biodiesel production. The combined biodiesel production in Indonesia and Malaysia is expected to increase approximately 20 % by 2020, and both countries are net exporters. Their domestic production growth is limited by small domestic demand, high feedstock prices, and strong competi­tion from the Indonesian availability in the export markets. The Malaysian govern­ment has started to implement a B5 policy (IEA 2011). However, the domestic consumption is expected to remain stable.

A few other countries are considering the introduction of biofuels policies, which could create an additional global demand for vegetable oils and grains. This new demand would potentially influence both the grain and oilseed processes and these commodities’ availability for food, livestock, dairy, and poultry production.

In this context, algae may represent a promising alternative to grain oil, as they can be produced in many locations with enough sunlight. The most significant dis­tinguishing characteristic of algal oil is its conversion into biodiesel: The conver­sion rate is up to 50 % (Demirbas 2007). For traditional biodiesel, key areas for improvement include more efficient catalyst recovery, improved purification of the coproduct glycerin, and enhanced feedstock flexibility (IEA 2011).

The world biodiesel price (Central Europe FOB) and the biodiesel price for this fuel when it is bought directly at a plant show similar trends in Fig. 5.

From 2007, when approximately 3 million gallons of biodiesel were produced, to 2012, an increase of 104 % was observed in the total produced amount. In the same period, the world biodiesel price increased by 49 %. The cost of biodiesel

fuels varies depending on the feedstock, the geographic area, the variability in crop production from season to season, the price of crude petroleum, and other fac­tors (Demirbas 2007). Increasing crude oil prices and the mandates in Argentina, Brazil, the EU, and the USA have led to price increases throughout the period under consideration. In 2011, a high biodiesel price ($5.75) per gallon occurred, and there was a small decline in 2012. Below, we briefly outline the history of the two major producers of biofuels that stand out in the current scenario: Brazil and the USA.

FASOMGHG contains accounting procedures which calculate GHG emissions, sequestration, and bioenergy offsets by the forestry and agricultural sectors includ­ing land use changes. Usage of crop residues and energy crops for the ethanol or electricity production replaces gasoline and coal-related emissions. At the same time, hauling and biomass processing produce emissions, also accounted for in the model. All GHGs are converted to a carbon dioxide equivalent (CO2e) basis using 100-year global warming potential (GWP) values (Beach et al. 2010). Table 1 pro­vides examples of GHG categories.

CO2e pricing (or GHG pricing) is modeled as a market payment for the reduction in net emissions (i. e., a reduction from baseline emissions or an increase in sequestration or bioenergy offsets). It also serves as a tax on net emissions increases such as an increase in hauling emissions associated with bioenergy production. GHG payment variables are created which pay a per ton price to the change in each GHG account relative to the baseline. The GHG payments can be either positive or negative in each account based on the net change in GHG (Beach et al. 2010). Table 2 presents the GHG prices in dollars

Carbon emissions from agricultural use of fossil fuels Carbon sequestered in agricultural soil Carbon sequestered in trees Carbon sequestered in forest products

Carbon emissions from gasoline use offset by conventional ethanol production

Carbon emissions in hauling for conventional ethanol production Carbon emissions in processing of conventional ethanol production Carbon emissions from gasoline use offset by cellulosic ethanol production

Carbon emissions in hauling for cellulosic ethanol production Carbon emissions in processing of cellulosic ethanol production Methane emissions from enteric fermentation by animals Methane emissions from animal manure Nitrous oxide emissions from crop fertilization Nitrous oxide emissions from animal manure

Source Adapted from Beach et al. (2010)

Table 2 GHG prices used in GHG prices used in the model (in $/ton of CO2e) the model (GHG price signal)

$0

$1

$5

$12

$15

$30

$50

$100

per ton of CO2e (in terms of their global warming potential[13]) which are used in the model.

GHG payments are designed to internalize the negative externality arising from GHG emissions. Not only do they provide incentives for use of agricultural and bioenergy activities that reduce net GHG emissions, but also they can make emis­sion efficient ethanol production more profitable by adding revenue streams. The magnitude of these GHG payments is determined by the amount of GHG emission offsets provided.

The GHG prices, used in this study, range from $0 per metric ton of CO2e to $100. Currently, carbon trading and CO2e prices are in effect in the European Union, under the European Union Emission Trading Scheme. Between 2005 and 2007, the GHG price peaked at $40 per ton. In 2008-2012, the price fluctuated between $9 and $40 per ton. The lowest carbon price happened in January 2013 at $4 per ton. The USA also had a voluntary trading system called the Chicago Climate Exchange. This exchange operated between October 2003 and July 2010 with a price in the range of $0.05-7.50 which subsequently closed. According to EPA estimates, the carbon price would need to rise from about $20 per ton in 2020 to more than $75 a ton in 2050 for the CO2 level in the atmosphere in 2050 to be 83 % less than it was in 2005 (Feldstein 2009). These higher carbon prices will be transmitted into higher prices of carbon dioxide intensive goods and services. Feldstein (2009) argues that the burden of higher carbon prices would mostly fall on households.