Economic and Environmental Comparison between Biofuel versus Fossil Fuel - Term Paper Example

Introduction The existing energy sources in the United States are vital to the economic development and progress. In line with this, a significant increase on the demand for energy would mean the need to increase the energy supply coming from different sources of energy. To increase the available energy supply in the United States, the U.S. government decided to spend US$500 billion each year in the development of energy sources alone1. Over the past decades, the U.S. Department of Energy has been relying over the use of different energy sources including: biofuels and fossil fuels2. Examples of biofuels include bioethanol and biodiesel which are derived from feed stocks like sugar cane, sugar beets, and maize / corn3. On the other hand, fossil fuels non-renewable energy resources which includes coal, oil, and gas. With the presence of sufficient supply of energy resources, there will be a national security since the economic output of the country would increase. Considering the fact that biofuels are renewable energy resources which can be replenished within a short period of time, this study aims to investigate whether the promotion of biofuel in replace of fossil fuels can be considered as an economical way of protecting our environment from excessive pollution. Aside from identifying the technology used in biofuel, specific policies on economic and environmental issues with regards to the use of biofuel and fossil fuel will be compared and contrast. Ethanol fuels are generally derived from plants. Since many people believe that biofuels are environmental friendly, some of the most common economic underpinnings like the costs and benefits as well as the overall impact of using biofuels and fossil fuels to the society will be tackled in details. Existing Policy behind the Economic and Environmental Issues Regarding the Use of Biofuels and Fossil Fuels Determined by the federal, state and the local public entities in the United States, existing energy policies in the United States are use to address issues related to the production, distribution, and consumption of energy. In general, energy policies may exist in the form of legislation, international treaties, government support and incentives used to increase investment, taxation, and guidelines to conserve energy. Approximately 86% of the total U.S. energy produced comes from fossil fuel. In line with this, most of the energy produced in the United States includes fossil fuels like: petroleum (40%), natural gas (24%), and coal (23%) as of 20074. Since major environmental detriment and economic changes in the supply and demand for fossil fuels could significantly affect the progress of the U.S. economy, the history behind demand and supply of fossil fuel / petroleum and its environmental consequences serves as a guide in the development of energy policy in the United States. (See Appendix I – Energy Production of Fossil Fuels in the United States on page 13) For instance: Back in 1973, several Arab OPEC nations stopped selling oil to the United States as a protest to the support the U.S. government extended to Israel in the Arab-Israeli “Yom Kuppur” War5. As a negative economic consequence of the Arab Oil Embargo, the United States experienced a temporary shortage in the supply of oil. Other than creating the Strategic Petroleum Reserve (SPR), the Congress passed the Energy Policy and Conservation Act [EPCA] of 19756 which aims to increase the overall oil production by awarding price incentives to oil producers7. Implementing the said energy policy was necessary to prevent the same economic event from happening. In response to the shortage of petroleum supply between 1978 to 1980, the U.S. government decided to allow the market forces to dictate the market prices of domestic crude oil8. With regards to the negative environmental impact of using fossil fuels, the U.S. government implemented the Clean Air Act Amendments of 1990 under the leadership of President Bush9. The said Act requires the local citizens to use lead free gasoline and diesel to solve the air pollution problem. Aiming to promote the use of renewable fuels for transportation, the U.S. government implemented the Energy Policy Act of 200510. Similar to the use of fossil fuels, the concept of biofuels is not new in the United States. To promote the importance of using of ethanol as fuel, the U.S. government implemented the first legislative known as the Solar Energy Research, Development and Demonstration Act of 1994. The said Act opens new door for research and development on converting cellulose and other organic materials and waste products into useful energy or fuels11. Since 1973, the Environmental Protection Agency (EPA) implemented the first regulation which requires the need to reduce the levels of lead in gasoline. Taking it as a challenge to persuade more people to support the use of ethanol as fuel, the U.S. government implemented the Energy Tax Act of 1978. The added Federal excise tax of 4 cents per gallon on gasoline was heavily imposed in order to influence a shift from the use of crude oil and gas towards energy conservation by promoting fuel efficiency12. Aside from implementing the Energy Security Act of 1980 which offers insured loans to small-scale ethanol producers, the Congress enacted a series of tax benefits to ethanol producers and blenders to ensure that the supply of ethanol and methanol would meet the expected increase in demand13. To protect the local producers of ethanol from imported products, the Congress imposed a tariff on foreign-produced ethanol between the years 1980 to 198414. Aside from the Crude Windfall Tax Act of 1980 which aims to extend tax credit to the practice of blending ethanol with gasoline15, the Gasohol Competition Act of 1980 was established to ban possible resellers of ethanol. By doing so, the U.S. government is protecting the local producers of ethanol from the local market16. Since people are now aware of the importance of environmental protection, President Obama publicly announced that the U.S. government will allot $150 billion for energy efficiency and carbon reduction policy over the next ten years17. Energy efficiency and conservation are major elements for the improvement of the environmental impact of the energy sector particularly regarding climate change. In line with this, energy efficiency contributes to decrease in dependence and vulnerabilities to foreign oil. Aside from creating five million jobs, Obama believes investing on energy efficiency and carbon reduction policy could result to a more efficient supply of renewable energy sources and significant reduction in the carbon emission as a next stage for economic and environmental development. Existing Technology behind the Economic and Environmental Issues Regarding the Use of Biofuels and Fossil Fuels Fossil fuels are non-renewable resources by nature18. Since there is no available technology that can enable us to easily produce fossil fuels, it is safe to conclude that it is more difficult to increase the supply of petroleum products as compared to biofuels like ethanol. As part of producing cellulosic and hemicellulose ethanol, the use of high-tech enzymatic hydrolysis can enable us to process additional plants and other biomass residues19 into fermentable sugars20. Through the use of Fischer-Tropsch process or other specialized microbes, readily available biomass can be converted into synthesis gas like hydrogen or carbon monoxide and eventually into ethanol as the end result21. This strategy is considered one of the low-cost ways to increase the available supply of fuel-quality ethanol in the U.S. market. (See Appendix VIII – The Path to Ethanol from Cellulose on page 20) Historical Economic Events Related to the Use of Fossil Fuels and Biofuels When going through the economic issues behind the use of fossil fuels, it is important to consider that fossil fuels are non-renewable energy sources22. In relation to the continuously increasing population and energy demand in the United States, the problem with relying too much on the use of fossil fuel is the question behind the long-term reserves of fossil fuels23. The U.S. oil reserves follow an upward trend between the years 1900 to 197024. Since then, the total annual U.S. crude oil reserve has been declining. The problem with the consistent decline in the U.S. crude oil reserve is the fact that people in the United States are heavily relying on the use of petroleum-burning vehicles since the World War II25. With regards to the declining production and crude oil reserves, the total consumption significantly increases more that the production rate. (See Appendix II – Energy Resources Overview in the United States on page 14) It was in 1950 when the overall oil consumption in the United States that exceeded the total consumption of coal26. In line with this, the growing gap between the supply and demand for fossil fuel left the U.S. government with no other choice but to increase its importation of energy resources since the middle of 1950s. This explains the increasing importation trend for petroleum imports since 1960s. (See Appendix III – Energy Resources Overview on Production, Importation, and Consumption on page 15) Based on historical facts, there are many external economic factors that can affect the supply and demand for petroleum products in the United States. Among the historical events that caused shortage in the supply of petroleum products in the world market includes the Iranian Revolution or the Iran-Iraq War during the last quarter of 1978, when OPEC intentional produce less oil with the purpose of increasing the market prices of oil (1980), when Saudi Arabia hold back the production of oil in 1986, when Iraq invaded Kuwait in 1990 causing the market prices of crude oil to increase, the 1997 Asian Crisis, and the massive damage of Hurricane Katrina and Rita on the U.S. petroleum and natural gas infrastructure in 2005 among others27. Since the United States failed to increase the supply of its oil production, a long list of serious economic problems can be associated with the U.S. dependency over the use of petroleum products. Based on economic point of view, once the supply of fossil fuel becomes scarce, there is a strong possibility that the market price of crude oil and other related products would automatically increase. In most cases, the sudden increase in the market price of petroleum products could either directly or indirectly affect the ability of the local businesses to compete in domestic and global markets. (See Appendix V – Supply and Demand Curve when Supply of Petroleum Products is Scarce on page 17) To avoid long-term economic consequences, the prevailing market price for petroleum products should be dictated by the movement in the supply and demand up to the point it reaches the equilibrium point. However, the problem with such a sudden increase in the cost of petroleum products is that the high cost of fuel would eventually cause a serious short-term disturbance in the overall U.S. economic activities. (See Appendix VI – Supply and Demand Curve of Free Market Competition on page 18) To control the long-term negative economic impact of high market prices of crude oil in the global markets, the U.S. government has been promoting the shift from the use of gasoline to ethanol on domestic transportation. As a result of the strong government support that has been extended to the local producers of gasohol or E1028 in the United States, the total number of U.S. motorist that consumes ethanol has been constantly increasing since 200029. This was made possible because of the significant increase in the local production of ethanol and biodiesel for vehicle consumption. (See Appendix VII – U.S. Motor Fuels Consumption, 2000 – 2005 (million gallons per year) on page 19) As result of implementing the Energy Policy Act of 2005, ethanol consumption is expected to reach 11.2 billion gallons by 201230. Because of the positive acceptance in the local market, local producers of gasohol are planning to increase the ethanol blend from 10% up to 85% by volume for E8531. In relation to the increase in the supply of gasohol, local car manufacturers such as Ford, Daimler Chrysler, and General Motors have started producing “flexible-fuel” vehicles like cars, trucks, and minivans that requires the use of E10 and E8532. Environmental Impact with Regards to the Use of Fossil Fuels and Biofuels In the United States, the main sources of pollutants in urban areas are private and public transportation as well as the fuel combustion o fossil fuel33. In general, motor vehicles produce high levels of carbon monoxides and are a major source of hydrocarbons and nitrogen oxides. Every time we burn fossil fuels such as gas, coal or oil, carbon dioxide is released into the atmosphere34. In a natural carbon cycle, carbon dioxide is re-absorbed by plants and trees. Since we are burning tons of fuels each day, plants and trees could not absorb all of the CO2 that has been emitted in the air. The effect of excessive amount of carbon dioxide in the atmosphere contributes to the development of global warming. As a common knowledge, burning of fossil fuels could result to a serious global climate change35. Since the negative health and environmental consequences of burning fuel is not added to the market price of coal, oil, and gasoline, there is a hidden cost behind the act of burning fossil fuels. Amounting to an estimated hidden cost of US$238.72 billion worth of health, social, and environmental damages, Velasquez-Manoff revealed that the act of burning of coal in a coal-fired power plant can release mercury substances, carbon monoxides, nitrogen oxides, sulfur dioxide, and other particles that could cause long-term negative impact on wildlife and human beings36. In relation to burning of fossil fuel, the coal consumption is the biggest source of carbon dioxide emission37. To prevent carbon dioxide emission from causing serious environmental damages, there is a need to leave the unburned coal in the ground so as to sequestrate the carbon present in coal38. Similar to the use of fossil fuels, biofuels can also cause environmental degredation. The problem with the production of corn ethanol is that it uses large amount of fossil fuel which contributes to the increase in environmental pollution39. Since crops are commonly used in the production of biofuels, there is a strong tendency for the need to increase the plantation of these crops. Other than decreasing the supply of available food crops in the market, the quality of air, water, soil and habitats for the wildlife could be negatively affected in the long-run40. The possible harmful environmental effects of ethanol plants and the possible shortage of food supply has been a common subject of criticism41. Specifically the report of Scharlemann and Laurance noted that the commonly used crops like corn, soy, sugarcane and palm oil in the production of biofuels are not good for the environment42. Between the use of first generation biofuel such as maize / corn and switchgrass, McDermott revealed that the use of algae biofuels can lead to greater net greenhouse gas emissions aside from using more water in its production43. On thop of this, the study of Granda, Zhu and Holtzapple revealed that the use of sugarcane is a better choice than th euse of corn because of its efficiency in both environmental and economical aspect in terms of setting up a cellulosic ethanol infrastructure44. Costs and Benefits of Using Biofuels and Fossil Fuels Motor vehicles that use gasoline or diesel as well as electrical equipments like air conditioners were invented for our personal convenience. However, we cannot deny the fact that these products produce large amount of carbon emissions and create air pollution problems45. In the process of driving these motor vehicles or the continuous use of electronic equipments like air-con and refrigerators, carbon monoxide that is released in the air contributes to the development of global climate change. As a result of global climate change, global warming would cause the sea levels to rise and changes the amount and pattern of precipitation. In the long run, significant changes in the weather and atmospheric condition can lead to profound economic problems46. Even though the U.S. economy is highly dependent on the use of fossil fuels, the costs of burning fossil fuels exceed the economic and environmental benefit. Based on the hidden cost estimate that was reported by Velasquez-Manoff, the total hidden cost of energy production through the use of fossil fuels has amounted to US$238.72 billion worth of health, social, and environmental damages [US$120 billion + US$62 billion + US$720 million + US$56 billion] 47. As compared to the use of fossil fuels, the continuous promotion of biofuels which includes the use of bioethanol and biodiesel has several economic advantages which includes a signficant increase in the domestic production of fuel aside from reducing the U.S. annual expenditure on foreign oil. Likewise, the continuous promotion of biofuel production can lead to the development of more job opportunities not only in the contruction and maintenance of ethanol plants but also in the selling and operation of ethanol production such as farming48. In relation to U.S. government support on ethanol production, the Renewable Fuels Association reported that the ethanol industry alone has opened almost 154,000 work opportunities back in 2005 and is expected to increase over the next few years to come49. Aside from additional US$5.7 billion expected household income, this project is likely to contribute as much as US$3.5 billion worth of tax revenues to the local, state, and federal U.S. government50. Other than the economic benefits behind the continuous promotion of biofuel, the U.S. would gain energy independence, improve developments in rural areas, and reduce the greenhouse gas emission. All these positive outcomes make the biofuel project worth investing. For this reason, President Obama recently released a total of US$28.7 billion worth of budget51 as requested by the Department of Energy for fiscal year (FY) 2010 [US$26.4 annual budget + US$2.3 billion for Department of Energy’s Office of Energy Efficiency and Renewable Energy (EERE)]52. Back in 2005, the estimated capital cost to establish a cellulosic ethanol plant with an annual capacity of 50 gallons was US$375 million as compared to a corn-based plant of the same size which costs around US$67 million53. Despite the absence of short-term benefits like low cost feedstock, waste treatment, and available energy resources, the fact that the U.S. would eventually gain energy independence, improve developments in rural areas, and reduce the greenhouse gas emission makes the promotion of biofuel a challenging project. Discussion The United States is the biggest producer of greenhouse gases next to China54. To ensure that the United States maintain a sustainable development in terms of exploring its available non-renewable resources such as fossil fuels, Singhal and Mehrotra mentioned that the three significant ways to ensure that sustainable development is well-maintained is to make use of renewable resources more than the non-renewable resources, limit the use of available non-renewable resources, and limit air and water pollution out of using these resources55. “Energy efficiency and carbon reduction” this term has been brought up and discussed all over the world56. However, many people still do not know what or how to do this in order to improve the environment. According to the World Energy Council, energy efficiency includes all changes that result in a reduction in the energy used for a given energy service such as heating, lighting or level of activity57. In line with this, reduction in the energy consumption is not necessarily associated with technological changes. It can also result from a better organization and management or improve the economic efficiency of existing biofuel technology. It is a common knowledge that the act of burning fossil fuels can lead to serious environmental damages which is usually disregarded in the market price of crude oil and gasoline. Although the U.S. government is currently promoting the use of biofuel as a better alternative source of energy, there are quite a number of studies and significant individuals that criticized the need to shift from the traditional use of fossil fuels to biofuels58. Velasquez-Manoff argued that we should also take into consideration the possible increase in climate change due to the fact that there is a need to convert biomass into biofuels and that the act of converting biomass into biofuels require extra energy to convert maize / corn into biofuel59. Other than paying too much attention with alternative sources of fuel, there is a need for the U.S. government to consider the growing demand for food supply around the world. In line with this, the production of crops for biofuel should not compete with the local food production aside from genuinely reducing the greenhouse gases. Velasquez-Manoff and Fargione, Hill and Tilman have the same argument with regards to the environmental consequences of heavily promoting the use of biofuel. Since land conversion releases the carbon stored in soil and vegetation, the study of Fargione, Hill and Tilman explained that excessively converting land for biofuel production related to palm oil and soybean plantation purposes could significantly increase the net carbon emission especially in tropical forest and peatland rainforest60. This is true since land conversion releases the carbon stored in soils and vegetation. To avoid increasing the carbon emission, it is advisable to make use of abandoned or ‘marginal’ cropland for crop plantation purposes61. This strategy is more beneficial since a positive carbon offsetting effect will be achieved when using abandoned land. As a result, we can easily reduce the negative environmental and social consequences of greenhouse gas. Even though the use of maize / corn in the production of ethanol can provide us additional 25% energy gain with 12% reduction in greenhouse gases like nitrate and phosphate62, Hill, Nelson and Tilman revealed that the use of soybeans in the manufacturing of ethanol is better than the use of maize / corn since the production of biodiesel from soybeans will provide a total of 93% more usable energy as compared to maize / corn. Likewise, the use of soybeans can also reduce the total greenhouse gas emissions by 41% as compared to diesel from fossil fuel63. Conclusion In terms of the environmental and socio-economic benefits between biofuel and fossil fuel, the use of biofuel is more advantageous than the use of fossil fuels since continuous promotion of biofuel can open more work opportunities for Americans, improve the development in rural areas, gain energy independence from global sellers of petroleum products, increase household income and tax revenues for the local, state, and federal government. Rapid and heavy promotion of biofuel could lead to the development of environmental disturbances. Therefore, it is crucial for the U.S. government to continuously strengthen its R&D. By conducting more studies concerning the carbon dioxide emission, the U.S. government and Congress will have a basis when developing and implementing policies that could effectively counteract the health and environmental consequences of excessive environmental pollution. *** End *** Appendix I – Energy Production of Fossil Fuels in the United States Source U.S. Energy Information Administration g Appendix II – Energy Resources Overview in the United States Source: U.S. Energy Information Administration c Source: U.S. Energy Information Association f Appendix III – Energy Resources Overview on Production, Importation, and Consumption U.S. Consumption Summary Source: U.S. Energy Information Administration c Appendix IV – U.S. Residential and Commercial Consumption of Energy Resources Source: U.S. Energy Information Administration c Appendix V – Supply and Demand Curve when Supply of Petroleum Products is Scarce Appendix VI – Supply and Demand Curve of Free Market Competition Appendix VII – U.S. Motor Fuels Consumption, 2000 – 2005 (million gallons per year) Source: U.S. Energy Information Administration e Appendix VIII – The Path to Ethanol from Cellulose Source: Winters Bibliography "Business Week." 25 February 2005. 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