The Ethanol Trap: Why Policies to Promote Ethanol as Fuel Need…

The Ethanol Trap: Why Policies to Promote Ethanol as Fuel Need
Rethinking
For the Commentary by Doug Auld, click here.

Notes on Methodology

This note documents the methodology and assumptions for the empirical results in Tables 3 and 4 in the Commentary The
Ethanol Trap: Why Policies to Promote Ethanol as Fuel Need Rethinking by Douglas Auld.

The calculation of taxpayer costs associated with provincial and federal ethanol programs requires assumptions for: energy
content and demand; ethanol production levels; and, subsequent total CO2 emissions. These methodological assumptions are
shown below.

Energy Content and Demand:

        Corn ethanol is estimated to contain 0.023 gigajoules (GJ) of energy per litre, whereas regular gasoline has 0.035 GJ
        per litre. These are higher heating value estimates from Davis and Diegel (2007).

        Gasoline energy demand at the national and provincial levels is projected to grow at the same rate to 2012 as their
        respective annual averages from 2001 to 2007. (Note: averages are from Statistics Canada Catalogue no. 45-004-X.)

Ethanol Production:

        Federal and provincial renewable fuel content mandates are met by corn and wheat ethanol production, rather than
        other production methods.

        From 2007 to 2009, estimated ethanol production and subsidies or fuel tax exemptions are based on the actual and
        expected production capacities of ethanol plants either currently operating or under construction, as indicated on the
        website of the Canadian Renewable Fuels Association. For 2010 and thereafter, domestic ethanol production meets
        ethanol demand under mandate requirements. National production is the sum of each province's production, based
        on the amount needed to satisfy the higher of currently proposed national or provincial mandates applicable in a
        given year. For example, estimated ethanol demand in Manitoba in year 2010 will be 8.5 percent of total gasoline
        demand, based on the provincial requirement. In contrast, ethanol demand in Alberta in 2010 will be 5 percent of
        total gasoline demand to satisfy the federal content mandate.

CO2 Emissions:

        Regular gasoline emits 99.56 kg/GJ of CO2 equivalent (Samson et al. 2008).

        The production and use of corn ethanol emits 78.43 kg of CO2 equivalent per GJ of energy. This is the sum of 62.03
        kg/GJ in CO2 emissions and 16.40 kg/GJ in N2O expressed in the equivalent amount of CO2 emissions (Samson et
        al. 2008).

        The emissions offset from ethanol are thus calculated as the difference between regular gasoline and ethanol; or,
        21.13 kg/GJ of CO2 equivalent (99.56 kg/GJ ­ 78.43 kg/GJ).
See Samson et al. (2008) for further details on emission assumptions. Note that estimates of GHG emissions from ethanol can
differ dramatically based on assumptions of production methods (Farrel et al. 2006).


Costs from Subsidies and Credits:

         Estimated producer credits were reduced to production-level thresholds in provinces where credit limits exist and
         where plant-level production size estimates were available. Otherwise, the maximum available credit was assumed
         for other producer credit programs.

         Research and capital grants are equally distributed over available years.

         The cost of federal capital loans is the opportunity cost of interest-free federal capital loans, again spread over all
         years of the program. Foregone interest revenue is calculated over a 10-year period using the 10-year Government of
         Canada bond yield in March 2008 (3.46 percent).

         The lower energy content of ethanol-blended gasoline means that more fuel will be consumed to meet the same
         energy needs. Therefore, gasoline sales tax revenue ­ applied on a per-litre basis ­ will increase. This increase in tax
         revenue is not subtracted from the total subsidies to ethanol production.

Full references for studies cited above are listed in the Commentary.