EU Energy Policy Blog

Ethanol, which seems to reduce greenhouse gases 12 percent compared with gasoline, actually increases greenhouse gases by 14 percent when the effects of the world oil market are accounted for.

Does the production and use of ethanol increase or decrease total greenhouse gas emissions?

Finding out takes two steps.

First, we find how much greenhouse gas emissions ethanol causes compared with the emissions caused by the same amount of gasoline. For my analysis, I use the value of 88 percent., that is, U.S. corn ethanol causes 88 percent as much global warming as the gasoline it replaces.

Second, we assess the impact of U.S. ethanol production on the world oil market. The effect I’m concerned with works like this:

More ethanol use causes
less oil to be imported, which causes
a lower world “oil” price, which causes
more liquid-fuel use world wide.

This same rebound effect occurs when we conserve oil or pump more oil from Alaska. Consuming a gallon less of oil or producing a gallon more of domestic oil reduces imports by a gallon, just as producing a gallon of ethanol does, and the world market follows the same path. In either case, I call this the global rebound effect because cutting back on the domestic demand for oil reduces its price worldwide and causes a partial rebound in the global demand for oil.

Conservation still results in a net reduction in worldwide oil use, but the reduction is less than the amount conserved. The effect operates through the oil market, but remember, the oil market is really a market for all liquid fuels.

For a more concrete look at this effect, let’s work a small example. Suppose that replacing a gallon of gasoline with ethanol results in the world consuming 0.26 more gallons of liquid fuel—mainly oil. In other words, the strength of the global rebound effect is 26 percent.

Now I wish to discover the impact of the global rebound effect on greenhouse gas emissions. As a baseline, we’ll use the figure 100 percent to refer to the amount of greenhouse gas emissions caused by producing and using a gallon of gasoline. Earlier in the chapter we learned that replacing a gallon of gasoline with ethanol reduces emissions from 100 percent to only 88 percent—a reduction of 12 percent. But the resulting global rebound effect increase emissions by 26 percent.

The net effect is a 14 percent increase in emissions world-wide. If this is correct, then ethanol is not green. Making and using ethanol increases total, world-wide greenhouse gas emissions.

The 0.26 value in this example is my best estimate of the actual global rebound effect (see the appendix). So my conclusion stands: U.S. corn ethanol is not green.

The 0.26 value is based on two input values. The first one is from the International Energy Agency (IEA). In its world energy model, a 10 percent reduction in net demand causes the world price of oil to fall 15 percent. This is close to what I have seen in other models.

The second input value is the increase in oil use caused by a decrease in the price of oil. I took this from a July 2007 paper by William Nordhaus, a Yale economist and a leading authority on such matters.

In a nutshell, when conservation or alternative-fuel production reduces the demand for oil, this reduces the world price of oil and causes an increase in demand equal to roughly 26 percent of the initial reduction.

This global rebound effect makes it difficult for alternative fuels to break even with respect to global warming emissions, let alone make a large difference. One promising candidate, however, is ethanol made from cellulose. This is the part of plants that we humans don’t eat because, unlike cows, we each have only one stomach. Early indications are that cellulosic ethanol should reduce greenhouse gases much more—possible by 60 percent. With a 26 percent global rebound effect, we would still be 34 percent ahead. However, that’s not quite half as good as conservation.

Conservation of gasoline—using less—is still a winner, but it saves only 74 percent instead of 100 percent of the greenhouse gases it appears to eliminate.

Steve Stoft

These are excerpts from chapter 10 of my forthcoming book Carbonomics.

APPENDIX: The Global Rebound Effect
Warning: Math ahead. This appendix shows how I derived the value of 0.26 for the global rebound effect.
1. The IEA tells us that a 1 percent reduction, O, in oil use causes a 1.5 percent reduction, P, in the world oil price.
P = 1.5 O.
2. Nordhaus tells us that a 1 percent reduction in oil price causes a 0.24 percent increase, F, in fuel demand:
F = –0.24 P.
3. Combining these two gives:
F = –0.36 O.
4. The change in oil use caused by the increase, E, in ethanol is given by:
O = F – E.
5. Substituting 3 into 4 and gives:
O = –0.36 O – E.
6. A bit of algebra gives:
O = –0.74 E.
7. Add the increase in ethanol, E, to the global reduction in oil, O, to find the effect on total liquid fuel use:
F = E + O.
F = E – 0.74 E = 0.26 E.
If alternative fuel, E, or conservation cuts oil demand by 1 unit, the world liquid-fuel price will fall and cause a global rebound effect of 0.26 units more fuel use.
Producing a gallon of alternative fuel increases total fuel consumption by 0.26, gallons, while conserving a gallon, reduces total fuel consumption, but only by 0.74 gallons.

This entry was posted on Saturday, December 23rd, 2006 at 7:03 pm and is filed under Carbonomics. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.