[Terrapreta] [Gasification] new studies on GHG footprint ofbiofuels darkens the picture

[MMBTUPR at aol.com]

          from         Lewis L Smith

It was recently pointed out by an alert participant in this DG that ethanol 
for fuel is typically the JOINT product of an operation which also produces 
important amounts of high-protein, low sugar animal feed.   This observation 
raises an important issue with regard to determining the optimum size of a typical 
project and therefore with regard to determining the "cost" of producing 
ethanol, since manufacturing operations tend to exhibit economies of scale. In 
other words, unit costs tend to decline as the volume of output increases.

In the traditional manufacturing operation, either the plant produces one 
product or produces several products on separate lines [ as in a soup factory ]   
under circumstances where most of the costs which are common to more than one 
product are also fixed costs.   That is, these "joint costs" do not vary with 
volume over a very wide range of output.

Under these circumstances, the optimal volume for a particular line or 
particular operation is the point at which the incremental cost of production of one 
additional unit equals the market price of that same unit. Given the fact we 
now have an optimum volume for each product, we can allocate the fixed costs 
across products, and safely talk about the "cost" of each product in economic 
terms.

[ For convenience, we assume that the producer has no influence over the 
price of his or her products. That is, "the market" sets the price of each, and 
the producer is a
"price taker". ]

However, there is another situation which has the following characteristics. 
Joint costs are important and a substantial amount of them are VARIABLE. 
Examples of this situation include ethanol-from-corn plants, most petrochemical 
plants, all oil refineries, all slaughter houses and many plants producing 
biological products and/or pharmaceuticals.

In such cases, following the above optimization rule is a sure road to 
bankruptcy, as any refinery or slaughterhouse employee with only a high-school 
education will be glad to tell you. In brief, DO NOT sell gasoline at its 
incremental cost per gallon or hamburger at its incremental cost per pound. PERIOD !

In such situations, one should follow the following optimization rule. The 
per unit incremental contribution of all products [ taken together ] to all 
joint costs — after deducting all product-specific costs from all product revenues 
— should equal the per unit sum of all of the incremental joint variable 
costs incurred in producing them.

For dealing with bankers, stockholders and taxing authorities, this situation 
obviously calls for even more cost allocations than our first situation and 
indeed, accountants are very clever in coming up with convincing ones. 

However, it should be noted that in the current situation, any allocations of 
joint costs are essentially arbitrary. Moreover, if the parameters which 
characterize operations are unstable,   any change in the price, volume and/or 
product-specific costs of any one product has the potential to   "upset the whole 
allocation apple cart". And if it does so, a single "cost" of ethanol in 
economic terms may not exist in a meaningful sense.

The above also applies when we seek to determine the cost of ethanol in BTU's 
rather than in $$$.

Given the above, the best way to compare ethanol and gasoline may be to 
evaluate the costs and benefits of various configurations of the entire US economy, 
incorporating different patters of ethanol, production, grain production and 
refinery operations, in terms of both BTU's and $$$.

In any case, I suspect that not many people touting a "cost" for ethanol have 
taken the above into account !   If my conjecture is correct, then all 
statements about the "cost" of ethanol should be taken "with a big grain of salt".

If you understand differential calculus, I have a paper which explores this 
subject in some detail, which I can send to interested parties by snail mail.

Cordially.    ###




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