Environmental Lifecycle Assessment for Policy Decision-Making and Analysis

A key argument in the societal debate against polices tosupport biofuels is that production of these alternative fuelsmay in fact consume more energy than they generate andemit more greenhouse gases than they sequester (Fargione etal., 2008; Searchinger et al., 2008; Rajagopal and Zilberman,2007; Farrell et al., 2006; Pimentel and Patzek, 2005). Metricslike net energy value, net carbon value and net petroleum offsetare the basis for comparing the various fuels and are the sourceof these debates. The technique that underlies the calculation ofthese metrics is called lifecycle assessment or lifecycle analysis(LCA).A central aspect of LCA (described in detail in the nextsection) is it assumes linear technologies and produces outcomesthat are numbers – how many units of energy are neededto produce a liter of ethanol fuel from a ton of corn. But as basiceconomics suggests, under reasonable conditions of somesubstitution between inputs and processes in production, thisratio is not a number but a function of prices. For instance,with energy being a ubiquitous input to production, a change inthe relative price of different energy sources or with respect toother inputs will induce adjustments in the form of fuel switching,substitution between capital, energy and labor etc. Thisswitching can occur at several levels in the production chain ofa commodity. This will obviously alter the net carbon indicatorfor a fuel in the future.Also current LCA outcomes change only if the physicalquantities of various inputs such as quantity of coal or electricityused in calculating LCA change. In other words, today LCAis capable of answering, how does a 10% decrease in the shareof natural gas in the average electricity mix decrease the netcarbon value of ethanol? But it is not capable of answering, ifnatural gas prices increase by 10% what is the impact on thenet carbon value of ethanol? Obviously the latter is more intuitiveand useful way of framing the question than the formerfrom a policy standpoint. In this paper, we introduce a frameworkwhich can be used to derive LCA indicators directly as afunction of underlying economic parameters and make it easierto simulate the impact of policies like pollution taxes and fuelmandates which in one way or another ultimately alter the relativeprice of commodities.Next we provide some background on current LCA literature.We then introduce a micro-economics based LCA that integratesprices directly into the lifecycle framework. We pointout some implications of our model with simple illustrations.We finally describe directions for future work.