A
new study from the University of Illinois concludes that
learning-by-doing, stimulated by increased ethanol production, played an
important role in inducing technological progress in the corn ethanol
industry. It also suggests that biofuel policies, which induced ethanol
production beyond the free-market level, served to increase the
competitiveness of the industry over time.
The
study, co-written by Madhu Khanna, a professor of agricultural and
consumer economics at Illinois, and Xiaoguang Chen, of the U. of I.
Energy Biosciences Institute, quantifies the role that factors such as
economies of scale, learning-by-doing, induced technological innovation
as a result of rising input prices and trade-induced competition played
in reducing the processing costs of corn ethanol in the U.S. by 45%
while also increasing production volumes 17-fold from 1983 to 2005.
“The
purpose of this article was to see if we could disaggregate the extent
to which various factors contributed to a reduction in cost,” Khanna
said. “The existence of learning-by-doing has been empirically validated
for many technologies, including other forms of renewable energy. But
in the case of corn ethanol, the main contribution of this paper was to
see if there were some missing variables that had affected the estimate.
We found that the impact of learning-by-doing in reducing the
processing costs of dry-mill corn ethanol from 1983 to 2005 was twice as
high as previously estimated.”
For a retrospective analysis, a long time-series of data is necessary, the researchers say.
“The
main limitation to conducting a retrospective analysis is that it takes
20 years to get 20 observations,” Khanna said. “Looking forward, what
this suggests is that one can expect similar cost reductions through
learning-by-doing with new technologies and that there is, in fact, a
case for providing government support for nurturing new innovations in
energy.”
“If
we think about what it might mean for second-generation biofuels, it
suggests a need to continue mandates despite all the skepticism about
their efficacy,” Chen said. “This definitely shows that government
mandates that accelerate production to higher levels than would
otherwise occur can induce cost reductions in the future.”
The
study also concludes that the tariff on Brazilian sugar-cane ethanol
imports made the corn ethanol industry more competitive, but only
slightly.
“On
the one hand, because the tariffs protect the domestic corn ethanol
industry they can induce more domestic ethanol production, which can
contribute to lowering costs,” Khanna said. “But on the other hand, it
also reduces competition, which reduces the incentives for the corn
ethanol industry to be as efficient as it might have been otherwise. We
found the latter effect offset the benefits of the larger domestic
production induced by the tariff.”
The researchers also say the learning-induced cost reductions are flattening out.
“The
reduction in cost is approaching its limit,” Chen said. “Additional
reductions in production costs of corn ethanol, simply based on
learning-by-doing, will become a lot more harder to come by because they
would require very large additional production over already-high
current levels. The gains from learning are largest for an infant
industry in its initial stages of growth; the justification for policy
support decreases as the industry expands.”
“Our
estimates show that each doubling of cumulative corn ethanol production
decreased its unit costs by 25 percent,” Khanna said. “But there’s an
upper limit that has been reached to increasing corn ethanol production
because of the concerns about its impact on food prices. So we may never
get to that level where we see further reductions in costs as a result
of an increase in total production – not because the technology has hit a
wall, but simply because current policy does not allow production to
expand to that level.”
Other
factors such as the rising prices of energy and labor did serve to
lower processing costs, but the effect was not statistically
significant.
“One
of the standard theories about induced innovation is that higher input
prices will lead the industry to become more efficient and lower costs,”
Chen said. “But we didn’t find any strong evidence of that here despite
the increase in energy prices and labor costs. Instead, we found it’s
really experience and learning-by-doing that’s working.”
“The
demand for those inputs is not very responsive to prices, so that’s not
where industry would make significant improvements,” Khanna said. “I
think it’s improving the process of conversion, and improving conversion
efficiencies; that’s where the real gains came from.”
The study will be published in the May issue of the journal Energy Policy.
Explaining the reductions in U.S. corn ethanol processing costs: Testing competing hypotheses
