Spillover effect of India s ethanol blending program. Deepayan Debnath University of Missouri Columbia, MO, USA

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1 Spillover effect of India s ethanol blending program Deepayan Debnath University of Missouri Columbia, MO, USA (Preliminary Version please do not cite) Paper prepared for presentation at the 22nd ICABR Conference Disruptive innovations, value chain and rural development Washington D.C, USA, June 12-15, 2018 Copyright 2018 by author(s). All rights reserved. Readers may make verbatim copies of this document for non-commercial purposes by any means, provided that this copyright notice appears on all such copies.

2 Spillover effect of India s ethanol blending program Abstract In India, the national indicative target of 5 percent blending by 2012, 10 percent by 2017 and 20 percent after 2017 has been recommended in the policy. While, in the context of national food security, the government of India restricts the use of food-based feedstock in the production of biofuels. Molasses is the major feedstock used for the production of bioethanol. Therefore, the policymakers are facing major challenges to draft pathways that could lead to meeting the 20% domestic blending mandate by domestically produced ethanol, other option would be to import biofuel. The implementation of this blending mandate has consequences. We found that additional million ha of land will be required to meet the 20% domestic ethanol mandate, with the assumption that the ethanol is solely derived from molasses. However, it is reduced to 2.46 million ha of land in the case when sugar juice is used as feedstock. This study shows the best way to implement the national ethanol blending program to ensure that it may not have an inverse impact on world agricultural commodity market. Key-words: Bioethanol blending mandate, feedstock uses, simulation modeling, gasoline use, land use change, the ethanol market

3 1. Introduction Beyond US and EU many developing countries are also very committed to using biofuels to reduce their import bills and CO2 emission. China and India are not behind in this race. After backing off from the original biofuels blending mandate target, in 2017 China again propose to impose 10% ethanol blending in the total gasoline mix nationally. India was never left behind when it comes to drafting biofuel policies and most recently the government of India adapted 20% biofuel blending mandate in both petroleum and diesel based fuel. On the other hand, with higher GDP growth rate, India s fossil fuel consumption is growing, which indicate higher ethanol and biodiesel demand to meet the domestic mandate. In the context of national food security, the government of India barred the divergence of food-based feedstock to the production of biofuels. Now the question is does India capable to meet this biofuel mandates in the presence of upward trending non-renewable fuel use by domestically produced ethanol and biodiesel and that too without exploiting food-based feedstock. Other option would be to import biofuel. The divergence of sugarcane to the production of ethanol is barred in India while molasses a co-product derived from sugarcane to sugar production is popularly used to produce ethanol. Increasing the use of ethanol mostly derived from molasses could result in unintended consequences to the global sugar market, where the sugar producers are already facing downward price pressure. In this study, we examine alternative policies in terms of meeting India s national bioethanol mandate obligations and ask: What are the implications of India s bioethanol policy on the world biofuel? Whether domestic feedstock market can meet those demand? We further trace its impact to the domestic and international sugar market as in India major portion of the ethanol has been converted from molasses.

4 2. Background India is the third largest global carbon emitting country. On November of 2016, along with other countries, India has also signed the Paris Climate Agreement and committed to reducing greenhouse gas emission by 33% by 2030 from the 2005 levels, which require the use of the significant volume of renewable fuels within the total transportation fuel matrix. The Government of India (GOI) has introduced the Ethanol Blending Program as early as 2003 with 5% blending rate mandatory across 9 states and 5 union territories and in 2008 the government approved it for all the states. The government envisioned to increase the ethanol blending mandate to 10%. However, with the ever achieved ethanol penetration rate of 3.3% on average across India in 2016, it will be unrealistic to implement 10% ethanol blending in the near future. It also envisages the setting up of a National Biofuels Development Board (NBDB) to develop a roadmap for the use of biofuels in petrol and diesel engines in a time-bound manner, besides taking appropriate policy measures. The national indicative target of 5 percent blending by 2012, 10 percent by 2017 and 20 percent after 2017 has been recommended in the policy. In India, ethanol is mainly produced from sugar molasses a byproduct of the sugar industry as GOI strictly prohibits the use of food-based feedstocks in the production of biofuels. And, the cyclical nature of sugarcane production adds variability to the feedstock (molasses) prices that adds volatility to the ethanol production. However, steady implementation of domestic ethanol use mandate and other government support mechanism including minimum ethanol procurement price can help the sugarcane producers. The Minimum Purchase Price (MPP) for the purchase of bioethanol by the OMCs would be based on the actual cost of production and import price of bioethanol. As per the official policy, the Minimum Support Price (MSP) of biofuels feedstock crops and Minimum Purchase

5 Price (MPP) of biofuels are to be fixed by the Government of India with due consultations with various stakeholders. With regard to MSP, the state governments have been accorded liberty to fix the prices and undertake procurement activities of biofuels. The revised price of ethanol would be fixed at Rs.40.85/- per liter under EBP and will be applicable for the forthcoming sugar season GST and transportation charges will also be payable additionally. The revised price will be applicable during ethanol supply period from 1st December 2017 to 30th November 2018 (CCEA, 2017). India s biofuel blending policies have been studied by many scientists (Beckman et al., 2018; Gunatilake, et al., 2014; Palanichamy et al., 2015; Pohit et al., 2009; Ravindranath, 2011; TERI, 2008; Ray, 2012). Unlike those previous studies, in this study, we not only discuss India s biofuel policies but also trace the consequences of different levels of India s ethanol mandate to the sugar market. As molasses is the major feedstocks used to produce ethanol and higher mandates have an unintended consequence to this market. The primary objective of this study is to determine India s future role in the newly developed biofuels sector and the secondary objectives are to find policy recommendations that would reduce India s dependency on petroleum fuels and reduce carbon emissions and provide buffers to the sugarcane producers during bumper crop years. 3. Economic Model World agricultural commodity production and consumption data used in the model are primarily obtained from USDA-FAS (Foreign Agricultural Service) Production, Supply, and Distribution (PS&D) data set. International biofuels data come from various sources including F.O. Lichts (2018) and USDA-FAS GAIN reports on India biofuels reports (2017) and other

6 Fuel Use (million L) national reports. Macroeconomic data sets are obtained from the International Monetary Fund (IMF) and IHS Markit. 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 Gasoline Ethanol Figure 1. India gasoline and ethanol projections. Source: Gasoline projection (USDA-FAS, 2017); Ethanol projection (FAPRI-MU, 2018) Figure 1 shows the domestic gasoline and ethanol consumption projections for India and it s based on USDA GAIN report and FAPRI-MU International Biofuels Outlook. Within the next 10-years India s gasoline consumption is projected to be more than double, increasing at an average rate of 10% per year. And, the fuel ethanol consumption is assumed at the rate of 3.1% blending rate, which results in 2.3 billion L of fuel ethanol use in India by A structural demand and supply model for India s ethanol and sugarcane market is developed and used for this study (Debnath et al., 2017a, 2017b; Taheripour and Tyner, 2013; Thompson et al, 2010; Thompson et al., 2011; Searchinger et al., 2008). These models solve for the market-clearing price of agricultural commodities taking into account the major existing

7 Fuel Ethanol Use (million L) policies within the major producing and consuming countries. In the general structure of the model, the following identity is satisfied for each country/region and the world and for each commodity: Beginning Stock + Production + Imports = Ending Stocks + Consumption + Exports. 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 Baseline 5% Mandate 10% Mandate 20% Mandate Figure 2. Domestic fuel ethanol use under alternative ethanol mandate scenarios. Four possible India s domestic bioethanol mandate scenarios are i) current level (3.1%); ii) 5% mandate; iii) 10% mandate; and iv) 20% mandate, respectively (as shown in figure 2). In this study, we trace the consequence of each possible bioethanol mandate to the sugar market as in India molasses a co-product of sugar from sugarcane production is mostly used to derive ethanol. 4. Results and discussion Our preliminary results showed that in order to meet the 20% ethanol use mandate, an additional 12.7 billion L of ethanol will be required by 2027 (table 1 and figure 2). This could results in additional MMT of molasses at a conversion rate of MT of molasses

8 required to produce 1 L of bioethanol (Planning Commission, 2003). The conversion of sugarcane to molasses results in 114 MMT of additional sugar production, which can easily plunge the world sugar market downward. In order to meet India s 20% domestic ethanol mandate by 2027, 1.14 billion MT of additional sugarcane will be required which can grow to Mha additional land. Table 1. Ethanol production and the corresponding molasses, sugarcane, and sugar demand to meet different levels of the domestic mandate. Production Ethanol (M L) Molasses (MMT) (MMT) Sugar (MMT) yield (MT/ha) area (Mha) Baseline 3, Ethanol Mandate Production molasses Sugar Area 5% 1, % 5, % 12, , Source: Author s calculation

9 Fuel Use (million L) 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 Gasoline Ethanol 20% mandate Source: Author s calculation However, if the government of India eases the restriction on the use of sugarcane juice in the production of ethanol then a minimum of 2.46 Mha is enough to meet the 20% domestic ethanol use mandate by 2027 (table 2). Table 2. Potential sugarcane required to meet the domestic mandate and the corresponding sugarcane production area. (MMT) Source: Author s calculation 5. Conclusion and summary Area (Mha) Ethanol Mandate 5% % %

10 This study shows the best way to implement the national ethanol blending program to ensure that it may not have an inverse impact on world agricultural commodity market. The different levels of ethanol blending mandates in India will increase the domestic ethanol production. However, meeting the domestic blending bioethanol of 27% has challenges as it will require a significant amount of land to be diverted to the sugarcane production which could result in major direct and indirect land use changes. One of the major consequences could be that it might lead to an increase in prices of other agricultural commodities including rice and wheat. On the other hand, our research shows that the 20% ethanol mandate can be achieved by domestically produced ethanol without a major shift in land use if the government allow the use of sugar juice in the production of ethanol. In either way, the use of domestically produced ethanol in overall India s fuel mix is aligned with the Paris Agreement on climate change mitigation.

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