Energy in 2020: Assessing the Economic Effects of Commercialization of Cellulosic Ethanol

Executive Summary

U.S. dependence on imports of crude oil has steadily increased for three decades. One way to reduce this dependence is to increase domestic production of renewable fuels such as ethanol. This report examines the effect on the U.S. economy in 2020 if advances in technology allow cellulosic ethanol to become commercially viable and if cellulosic ethanol production becomes adequate to allow total ethanol production to reach 30 billion gallons (including 10.5 billion gallons of corn-based ethanol). In this report, “oil” and “crude oil” are used interchangeably, unless otherwise noted. Our findings, based on production of 19.5 billion gallons of cellulosic ethanol in 2020, indicate the following:

• Compared with current projections for 2020, U.S. crude oil imports would be 4.1 percent lower than projected, amounting to a difference of about 460,000 barrels per day. Furthermore, the worldwide price of oil and the domestic U.S. fuel price would be 1.2 percent and 2.0 percent, respectively, lower than projected.
• The annual benefits to U.S. consumers of in creased cellulosic ethanol production would be $12.6 billion in 2020. Expressed in terms of today’s economy, that amount is equivalent to about 40 percent of the gains in real income that would accrue to the United States from eliminating all restraints on imports.
• The primary beneficiaries of commercially viable cellulosic ethanol production would be crop-producing U.S. industries and their suppliers. The increase in output over baseline projections from these sectors would range from 2.4 percent to 4.3 percent in 2020. U.S. agriculture could gain 20,350 jobs at the expense of other sectors.
• Conversely, lower prices for crude oil would hurt U.S. oil producers, although the motor fuel producing industry would benefit from lower input prices.

Two critical factors that influence our impact assessments are our assumptions on (a) the cost-competitiveness of cellulosic ethanol and (b) the volume of production of cellulosic ethanol in 2020. Sensitivity analysis indicates that the U.S. economy would benefit even if we assume that cellulosic ethanol is only cost-competitive when world oil prices are $60 per barrel, rather than the $50-per-barrel assumption used in the base scenario. Our findings further suggest that the benefits are roughly proportional to the volume of cellulosic ethanol produced domestically. In a best-case scenario where enough cellulosic feedstock is available to produce 49.5 billion gallons of cellulosic ethanol in 2020 and the world price of crude oil is $50 per barrel, U.S. crude oil imports in 2020 would be lowered by 1.2 million barrels per day over baseline projections and U.S. agriculture would gain 54,000 jobs compared with current baseline projections.

Our analysis does not take into account all factors determining the costs associated with additional cellulosic ethanol use, such as the transitional investments necessary to replace crude oil with ethanol in the U.S. fuel supply. Similarly, this report does not address all the economic benefits associated with expanded cellulosic ethanol use, such as reduced greenhouse gas (GHG) emissions resulting from decreased petroleum consumption. Given that transition costs are likely to be incurred only once, whereas the benefits would accrue each year, the value of the stream of benefits from cellulosic ethanol production likely exceeds the one-time transition costs.

This report assesses the impact of cellulosic ethanol production from a U.S. economy-wide perspective. The report uses a computable general equilibrium model that tracks 500 industry sectors.