Lifecycle economic analysis of biofuels: Accounting for economic substitution in policy assessment

This paper develops a lifecycle economic analysis (LCEA) model that integrates endogenous input substitution into the standard lifecycle analysis (LCA) of biofuel that typically assumes fixed-proportions production. We use the LCEA model to examine impacts of a pure carbon tax and a revenue-neutral tax-subsidy policy on lifecycle greenhouse gas emissions from cellulosic ethanol using forest residues as feedstock in Washington State. In a model allowing for input substitution in the cellulosic ethanol feedstock, conversion, and transportation process, we consider energy source substitution (woody biomass for coal in the cellulosic ethanol conversion plant and biodiesel for diesel in feedstock production and feedstock and ethanol transportation) as well as substitution of capital and labor for energy in all stages of the lifecycle. We find that ignoring endogenous input substitution by using standard LCA leads to substantial underestimation of the impact of carbon tax policies on carbon emissions. Both tax policies can substantially reduce carbon emissions by inducing substitution among inputs. The revenue-neutral tax-subsidy policy reduces emissions more effectively than the carbon tax policy for carbon tax rates currently in place throughout most of the world. It stimulates substitution of woody biomass for coal and biodiesel for diesel at much lower tax rates when accompanied by corresponding subsidies for reduced emissions from renewable sources.