Prospects for Second-Generation

ethanol in canada: An Analysis of

economy-wide Impacts
hAwLey cAMPbeLL
Department of Resource Economics and Environmental Sociology, University of Alberta, Edmonton,Alberta

JAMeS rude
Department of Resource Economics and Environmental Sociology, University of Alberta, Edmonton,Alberta

MArtIN Luckert
Department of Resource Economics and Environmental Sociology, University of Alberta, Edmonton,Alberta

FArZAd tAherIPour
Agricultural Economics, Purdue University,West Lafayette, Indiana
Canadian Public Policy 2018.44:259-271.

La production canadienne d’éthanol est actuellement dérivée des céréales. L’éthanol est critiqué du fait
qu’il supplante la production alimentaire et n’apporte pas de réduction importante des gaz à effet de serre.
Selon ses promoteurs, l’éthanol de deuxième génération, tiré de matières lignocellulosiques comme les
arbres à croissance rapide, est plus efficace et réduit les gaz à effet de serre sans compromettre les appro-
visionnements alimentaires. Une industrie de l’éthanol de deuxième génération risque toutefois de ne pas
être rentable en ce qui a trait à la réduction des gaz à effet de serre. Les auteurs étudient les obstacles à la
commercialisation de l’éthanol de deuxième génération, son potentiel de succès et les conséquences, sur le
plan des politiques, de la promotion de la production canadienne d’éthanol de deuxième génération.
Mots clés : cultures énergétiques, éthanol cellulosique, politiques en matière de biocarburants

Canadian ethanol production is currently derived from grain. Ethanol is criticized for displacing food pro-
duction and not significantly reducing greenhouse gases. Second-generation ethanol from lignocellulosic
feedstocks, such as fast-growing trees, are promoted as being more effective at reducing greenhouse gases
without compromising food supplies. However, a second-generation ethanol industry may not be cost-
effective with regard to greenhouse gas reduction. This study examines obstacles to a commercial second-
generation ethanol industry, the potential for success, and the policy implications of promoting Canadian
second-generation ethanol production.
Keywords: cellulosic ethanol, energy crops, biofuel policies

Introduction fuels and alternative energy sources including electricity,

In 2016, Environment and Climate Change (ECC) Canada
began consultations with other levels of government and
stakeholders to create a national Clean Fuel Standard
(CFS). The CFS is to be developed under the Canadian
Environmental Protection Act of 1999 (Government of Can-
ada 1999) and build on the foundation set by the federal
Renewable Fuels Regulations (ECC Canada 2010). The CFS
is to encourage the use of a broad range of lower carbon
hydrogen, and renewable fuels. The current Canadian
Renewable Fuels Regulations require an average renew-
able content of at least 5 percent, based on the volume of
gasoline sold, and an average renewable fuel content of
2 percent for diesel and heating oil sold, also based on vol-
ume sold (ECC Canada 2010). The objective of the CFS is
to achieve an annual reduction of 30 million metric tonnes
of greenhouse gas emissions by 2030 (ECC Canada 2017).

doi:10.3138/cpp.2017-047 © Canadian Public Policy / Analyse de politiques,  September / septembre 2018

 260 Campbell et al.
Currently, ethanol production contributes to more than
80 percent of Canada’s renewable fuel production (USDA,
Foreign Agriculture Service 2016). To date, all Canadian
ethanol production is sourced from agricultural grain
(CRFA 2011). Globally, these first-generation biofuels,
especially ethanol, have been criticized for displacing
food production and escalating commodity prices while
making only modest contributions to GHG reductions
(Searchinger et al. 2008). Second-generation biofuels,
produced using ligno-cellulosic feedstocks from woody
biomass such as trees, grasses, and agricultural residues,
have been advocated on the basis that they should be more
effective in reducing GHGs and do not compete with food
supplies (Tilman et al. 2009). However, the commercial-
ization of second-generation biofuels is proving difficult.
This study analyzes reasons why cellulosic ethanol has yet
to be successfully commercialized in Canada, its future
potential, and the role that it can play in a national CFS.
To understand the potential for success of second-
generation biofuels, the following factors need to
be considered: (a) production costs, relative to first-
generation production; (b) government incentives for both
the supply and demand of ethanol;1 (c) cross-sectoral spin-
Canadian Public Policy 2018.44:259-271.
off benefits (e.g., employment, economic diversification,
and rural development) that could potentially justify the
use of subsidies; and (d) significant contributions to GHG
reductions (Moschini, Cui, and Lapan 2012).
This article examines whether these four factors for suc-
cess are present in the development of second-generation
ethanol production in Canada. Although second-generation
ethanol can be produced from a variety of feedstocks such
as trees, grasses, municipal waste, and agricultural residues,
we consider ethanol production in which the feedstock
is derived from dedicated short-rotation tree crops (i.e.,
poplar) as an illustrative case.2 The analysis that underlies
this article is based on an economy-wide model that links
the agricultural sector to the rest of the economy and ac-
counts for feedback effects throughout the economy. This
particular approach is attractive for studying cross-sectoral
effects because it accounts for competition for land across
alternative uses in an explicit fashion and is able to capture
the economic impacts across the economy. This work builds
on an established model (Taheripour, Tyner, and Wang
2011), with adaptations to account for second-generation
ethanol production in Canada.
We begin by outlining our analytical strategy. Then,
we individually examine the four factors for success of
second-generation ethanol in Canada. Finally, we con-
clude with a general discussion regarding the future of
second-generation ethanol production in Canada.
Analytical Strategy
Understanding the potential of, and constraints on, the
development of a commercially viable second-generation
ethanol sector requires a consideration of the complex
© Canadian Public Policy / Analyse de politiques,  September / septembre 2018 doi:10.3138/cpp.2017-047
intersectoral linkages among biofuels and crops, live-
stock, forestry, and the energy sector. Our approach is an
applied general equilibrium model that simultaneously
addresses linkages across all sectors of the economy and
is built around observed data. The basic elements include
modelling consumer and producer behaviour in as many
markets (factors, goods, and services) as will satisfy com-
plete macroeconomic market clearing across the economy.
The Global Trade Analysis Project (GTAP) is a widely
used general equilibrium model (Hertel 1997). As a col-
laborative effort, parameters for and data on country-level
input–output, production, consumption, bilateral trade,
tax, transport, and protection measures are collected for
each of the countries represented in the model. The struc-
ture, data sources, and parameters of GTAP are described
in several documents (e.g., Hertel 1997).
For our analysis, we make use of a modified version
of the GTAP model, the GTAP-BIO-ADV (Taheripour
et al. 2011). The model was developed to incorporate ad-
vanced biofuels. The initial version of this model included
new US industries to produce ethanol from corn stover,
miscanthus, and switchgrass. These industries use land,
fertilizer, fuel, labour, capital, and transport services to
create feedstocks, which in turn are then used as inter-
mediate inputs that are combined with value added to
produce ethanol. The ethanol is then combined with fossil
fuels to create transportation fuels that are used by other
industries, consumers, and government and are traded
internationally. Because these advanced biofuels are not
yet commercially available, the model is calibrated to
produce very small volumes of advanced ethanol to solve
the complete model. Details on the process of construct-
ing and calibrating the advanced biofuels component of
the model can be found in Taheripour et al. (2011). For
our purposes, the GTAP-BIO-ADV model was modified
to include Canadian hybrid poplar as a feedstock for
cellulosic ethanol production in Canada. This modifica-
tion begins with Canadian cost estimates for producing
hybrid poplar (Campbell 2015), which are incorporated
with the same process of constructing and calibrating
the advanced biofuels component of the model used by
Taheripour et al.
In our analysis, we are especially interested in model-
ling land allocation to compare the interindustry impacts
of first- versus second-generation ethanol production in
Canada. GTAP-BIO-ADV includes explicit representation
of heterogeneous land productivity, which accounts for
differences across regions and adopts an agro-ecology
zoning method. Agro-ecological zones (AEZs) are sub-
divisions of land that are segmented according to their
agro-ecological features, whereby each AEZ has similar
land use potential (Lee et al. 2005). Land use competition
is modelled with two sequential stages. First, land is cat-
egorized as cropland, forestry, or pasture. In the second
stage, cropland is allocated across different uses.
 Prospects for Second-Generation Ethanol in Canada:An Analysis of Economy-Wide Impacts
Land use data are organized by AEZ and land activity
(i.e., crops, livestock, and forestry). Allocated land is im-
mobile across AEZs but can be reallocated across activities
within an AEZ depending on relative returns. The AEZ
categorization allows us to identify the most appropriate
locations within Canada for hybrid poplar growth, limit-
ing land reallocation to a semi-arid boreal climate zone
(Lee et al. 2005).
Investigating the feasibility of a potential advanced
biofuels industry requires a broad-brush approach. We
have chosen a computable general equilibrium model
as an organizational tool to help discover potential
unintended consequences of aggressive promotion of
second-generation ethanol. Specifically, we use this ap-
proach as a quantitative method to assess direct and
indirect land use changes, as well as potential impacts on
prices, production, and trade in closely related sectors.
This approach also allows us to assess whether broader
interindustry linkages are present. However, the model
does not provide sufficient detail to address other relevant
factors that will influence the emergence of the industry,
so additional information is introduced in the next two
sections, and then we return to describe the model results
Canadian Public Policy 2018.44:259-271.
to round out the analysis.
Factors for Success of Second-Generation
ethanol Production
Production Costs
There are several cost components to producing cellu-
losic ethanol in commercial refineries. Some of the major
considerations include the costs of feedstocks, the cost of
capital investment in new refineries, and the operating
costs of maintaining ethanol refineries. We consider each
of these economic obstacles here.
Feedstock Constraints and Costs
Depending on the conversion efficiency and applied tech-
nology in the United States, feedstock costs can account for
32–52 percent of total production costs for second-genera-
tion biofuels (Carriquiry, Du, and Timilsina 2011). There
are two primary feedstock sources of cellulosic biomass:
residues from agriculture and forestry and dedicated
energy crops. Residues from forestry and agriculture are
typically available at low densities across large regions,
making transportation costs high. Champagne (2007)
estimates that Canada could annually produce 5.3 bil-
lion litres of ethanol, based on the recoverable fraction
of crop residues generated in 2001. However, although
these feedstocks show potential, the logistical problems
(collection, storage, and preprocessing) and costs are
considerable. Crop and forest residues are often widely
distributed and have to be collected using an integrated
system at harvest. The collection and delivery methods
vary with the type of residue, location, terrain, available
doi:10.3138/cpp.2017-047 © Canadian Public Policy / Analyse de politiques,  September / septembre 2018
261
machinery, and season. Moreover, excessive removal of
crop residues reduces soil fertility, and forest residues
may serve ecological functions.
Dedicated energy crops, such as fast-growing grasses
and trees, have the advantage of growing at high volumes
and high densities on marginal-quality land. In addition,
as a dedicated perennial, poplar, with rotations of approxi-
mately 20 years, offers additional environmental benefits
as a carbon sink (Jassala et al. 2013) while alleviating
pressures on food production. The idea is that dedicated
biomass feedstocks would be grown on private lands that
are marginal for other productive uses. However, the ex-
perience has been that significant government incentives
are required for these feedstocks to be economically viable,
including subsidies for the establishment and maintenance
of new dedicated biomass cropping systems, as well as
payments for the collection and harvest of existing bio-
mass resources (crop and forest residues) that currently
have no market (Carriquiry et al. 2011).
The US experience is particularly instructive with re-
spect to Canadian potential for using marginal lands to
grow energy crops. The US Biomass Crop Assistance Pro-
gram (BCAP) was introduced as part of the 2008 Farm Bill
(Food, Conservation, and Energy Act of 2008, Pub. L. 110-
234) to complement other incentive programs, including
the Renewable Fuel Standard, and to encourage dedicated
biomass cropping systems on marginal land. To date, the
BCAP has a very low uptake rate for dedicated biomass
plantings of just 49,000 acres of the available 911 million
acres of farmland in the United States (USDA, National
Agricultural Statistics Service 2017). Furthermore, only
4–7 percent of all contracted land is marginal land, and
the remainder is taken from cropland (Barham, Mooney,
and Swinton 2016).
Our analysis considers two scenarios in which we
double current Canadian ethanol production, for an addi-
tional 1.8 billion litres of production. The first scenario
doubles current production of first-generation ethanol
produced from coarse grain; the second scenario uses
hybrid poplar cellulosic feedstocks to produce the targeted
second-generation ethanol. Our model indicates that the
conventional biofuel route requires a total of 628,000
hectares of land (exclusively cropland), and the hybrid
poplar alternative requires 867,000 hectares of land. The
additional land necessary for hybrid poplar feedstock
production versus grain feedstock production reflects
the fact that land is tied up for longer growing periods to
produce a harvestable tree (i.e., 20 years) versus annual
crop production. Approximately 570,000 hectares of the
land required for hybrid poplar production is drawn
from marginal land, and the remaining 297,000 hectares
predicted by the model must come from existing cropland.
Although cropland is still required for adequate hybrid
poplar production, the 297,000 additional hectares are less
than half of the extra cropland (628,000 hectares) needed
 262 Campbell et al.
to grow the incremental 1.8 billion litres of first-generation
ethanol.
Although at first blush there would appear to be a
limitless supply of marginal land in the boreal regions of
Canada, the actual available land mass is a thin border of
land between the treed and cropped zones of western Can-
ada, that is, a small area bordering public and privately
owned land. For instance, in Alberta we calculate only
approximately 1.5 million hectares of this marginal land
and assume a conservative amount (0.5 million hectares)
of additional marginal land available in the rest of the
country. Using more than 40 percent of that marginal land
for biofuels (in the case of Alberta) would have a signifi-
cant impact on agricultural activities, such as pastureland
currently used to produce livestock.
There are several economic obstacles to converting
land to bioenergy crops, including the cost of produc-
tion of hybrid poplar. According to recent input cost
estimates, hybrid poplar production is around $100 per
oven-dried tonne due to costly labour and capital and the
expenses associated with rearing trees (authors’ calcula-
tions; Campbell 2015).3 In addition, government policy
obstacles may influence feedstock supply. For example,
Canadian Public Policy 2018.44:259-271.
current provincial forest policies largely prevent the
growing of non-native tree species (such as fast-growing
hybrid poplar) on public lands (Anderson, Luckert, and
Campbell 2015), and there is uncertainty regarding the
future of biofuel subsidy programs (Campbell, Anderson,
and Luckert 2016). All of these considerations result in a
land supply function that is not very responsive to higher
biofuel returns. Finding reliable sources of high-density
woody feedstocks poses a significant challenge to second-
generation ethanol production.
Capital Costs
The location of ethanol refineries is typically limited to
within 50 miles of the feedstock (Balan 2014). Because
marginal land–based hybrid popular plantations would
not be located near existing first-generation ethanol re-
fineries, cellulosic ethanol plants would have to involve
greenfield investments in new locations. Harvesting,
treating, and transporting large volumes of biomass feed-
stock to a refinery require careful logistical analysis before
plant investment and construction. The optimal size of
an ethanol plant is determined by the trade-off between
increasing transportation costs for feedstocks and de-
creasing average plant costs as plant size increases. Given
the dearth of commercially viable second-generation
biorefineries, the only way to determine scale economies
is with engineering studies, which provide a fairly wide
range of estimates.4 Wright and Brown (2007b) estimate
that an optimal plant’s annual capacity should be appro-
ximately 1.35 billion litres for cellulosic ethanol versus
450 million litres for grain ethanol. Huang et al. (2009)
suggest that optimal production for a cellulosic ethanol
© Canadian Public Policy / Analyse de politiques,  September / septembre 2018 doi:10.3138/cpp.2017-047
plant could be much lower, at approximately 245 million
litres per year.
On the basis of the current state of technology, second-
generation biofuels require high capital costs, more than
five times that of similar-capacity starch-based ethanol
plants (Carriquiry et al. 2011). Wright and Brown (2007a),
using an engineering approach, estimate that a biochem-
ical cellulosic plant with 132-million-litre capacity would
cost US$294 million. In terms of actual expenditures, the
two commercial cellulosic refineries operating in the
United States cost between US$200 (DuPont 2017) and
US$275 million (Poet-DSM 2014).5 Conceptually, it is easier
to compare capital costs based on annual ethanol capacity.
For example, the DuPont cellulosic ethanol plant in Iowa
(which the company recently closed and announced it
plans to sell), cost about US$1.98 per litre (Hirtzner and
Renshaw 2017). As a point of reference, recent per-litre
capital expenditure for first-generation ethanol produc-
tion in the United States has been estimated to be US$0.33,
whereas in Canada capital expenditures range from $0.60
to $0.95 per litre (Coad and Bristow 2011).
Operating Costs
Given the optimal selection of plant location and size,
a further major decision is the type of production pro-
cess. For cellulosic ethanol production, lignocellulosic
feedstocks must first be converted to sugars through
a series of thermochemical or biochemical processes
(Sims et al. 2010). For the purposes of this discussion,
we consider only the biochemical process given that this
currently appears to be the most popular method. The
success of cellulose-to-ethanol biochemical conversion
from lignocellulosic material feedstocks is generally a
function of fibre pretreatment, enzyme selection, and
operating conditions. The breakdown of cellulose into
sugar and then ethanol requires the use of expensive
enzymes. The enzyme cost to produce 1 litre of cellulosic
ethanol is US$0.26 (Markings 2017). Carriquiry et al.
(2011) find that operating costs associated with cellulosic
ethanol plants are between US$0.35 and US$0.45 per
litre, but they see the potential to cut these costs by
as much as two-thirds with improvements in biofuel
conversion technologies. When capital costs are added
to operating costs, it leads to an overall production cost
of approximately US$0.79 per litre of cellulosic ethanol
(Markings 2017).
Government Incentives
Recent estimates of biofuel production costs show that
second-generation biofuels are two to three times more
expensive than petroleum fuels on an energy-equivalent
basis (Carriquiry et al. 2011). Given the significant chal-
lenges to procuring cellulosic feedstock to facilitate an
emerging industry, the high capital costs, and the un-
certainty around technology, some form of government
 Prospects for Second-Generation Ethanol in Canada:An Analysis of Economy-Wide Impacts 263

incentive would likely be necessary to promote second-
generation production.
Justifications for government support typically revolve
around market failures. Multiple objectives are routinely
invoked to rationalize biofuels policies, ranging from
finding secure supplies of alternatives to fossil fuels, re-
ductions in GHGs, and more broadly to promote economic
development.
The potential gamut of ways to support the emerging
industry includes incentives to attract land for biomass
production, investment incentives to build refineries,
incentives to increase the share of ethanol in gasoline
blends, support for distribution infrastructure, and
reduced taxes to encourage advanced biofuel consump-
tion. Leach, Doucet, and Nickel (2011) highlight three
options for government financing of biofuels: production
subsidies, capital grants with no repayment conditions,
and repayable capital grants. Canadian federal and prov-
incial governments have made use of all three of these
financing options (Campbell et al. 2016). Early federal
and provincial programs included excise tax exemptions
and investment incentives for ethanol plants. Later, direct
supports and market-dependent loans were introduced to
Canadian Public Policy 2018.44:259-271.
Similar federal programs were offered in subsequent
years. Currently, there are no capital expenditure sub-
sidies, but if past programs were to be renewed, then
second-generation capital costs could be as high as five
to seven times the cost of recently built first-generation
plans (Stephen, Mabee, and Saddler 2012).
Perhaps the most significant development for the
Canadian ethanol industry was the announcement of
new federal and provincial mandates for renewable fuel
mixtures (Renewable Fuels Regulations). This demand-
side support effectively ensures that Canadian ethanol
producers have a market in which to sell their product.
Five provinces have introduced blending mandates:
Alberta, British Columbia, and Ontario required a 5 per-
cent ethanol blend in gasoline; Saskatchewan requires a
7.5 percent blend, and Manitoba requires an 8.5 percent
blend.
Figure 1 shows the growth of first-generation pro-
duction, the level of subsidies, and targets for blending
mandates. Since 2006, Canadian ethanol production has
increased from approximately 0.3 to 1.8 billion litres
(Campbell et al. 2016). The “biofuel boom” corresponds
to a period with several government-backed low-interest

increase ethanol capacity. A complete list of government
support for ethanol production in Canada is provided in
the Appendix.
In terms of investor incentives, the Canadian experi-
ence started in 1992 with the National Biomass Ethanol
Program (Laan, Litman, and Steenblik 2009). The program
offered loan guarantees up to a credit limit of $140 million.
loans and grants for capital expansion, commercializa-
tion, and volume-based subsidies to biofuel producers.
The beginning of this period also corresponds to a surge
in crude oil prices. The investment incentives and strong
crude oil prices stimulated the construction of biofuel
refining plants, but it was the blending mandates that
ensured expanded production by creating a legislated

2,500 0.30

2,000 0.25

0.20

$ per Litre
Millions of Litres

1,500
0.15
1,000
0.10

500
0.05

0 0.00
81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15
19 19 19 19 19 19 19 19 19 19 20 20 20 20 20 20 20 20

Cumulative Capacity National Target Subsidy Support

Figure 1: Canadian Ethanol Production, Blending Mandate, and Subsidy Support over Time
Source: Authors’ calculations.

doi:10.3138/cpp.2017-047 © Canadian Public Policy / Analyse de politiques,  September / septembre 2018

 264 Campbell et al.
market for ethanol and thereby providing assurances for
future ethanol demand.
Conceptually, ethanol mandates can be thought of
as an implicit subsidy on ethanol that encourages the
substitution of biofuels in vehicle fuel blends (Lapan
and Moschini 2012). By requiring ethanol to be mixed
with gasoline, government effectively creates a guaran-
teed market for ethanol mandating, which is an implicit
subsidy to the producers of ethanol. Within this context,
a relevant question is whether, and to what extent, the
incentive effects of this guaranteed market pass upward
through the supply chain to attract land for biomass
feedstock production.
The first-generation production subsidies that stimu-
lated the rapid expansion of Canadian ethanol production
are now expiring, because the targets for meeting the
current blending mandates have been reached. If the
desire is to change the direction of the ethanol industry
toward cellulosic ethanol, then new types of subsidies
are needed to replace the current cohort. These subsidies
might include new incentives for plant construction and
commercialization. However, given the increased costs as-
sociated with second-generation production, the previous
Canadian Public Policy 2018.44:259-271.
level of support is not likely to lead to sufficient product-
ive capacity to satisfy the increased demand associated
with any increase in mandates. The CFS will eventually
subsume the current renewable fuel regulations. Because
CFS emission reduction requirements are on a life-cycle
basis, second-generation ethanol production may be more
effective in reducing carbon emissions. Simply increasing
the blending requirement without additional policies will
result in more first-generation ethanol production (see
“Model Results and Interindustry Effects”). At this time,
it is difficult to predict the exact incentives for second-
generation production without knowing the specifics of
how CFS regulations will be implemented. Alternative
incentives could include a call by biofuel industry stake-
holders for exemptions for cellulosic ethanol from federal
and provincial fuel taxes.
The US experience is in line with the high costs of
increasing cellulosic ethanol in our simulations and
also helps to illustrate a potential outcome of Canadian
efforts to create incentives for the construction of
second-generation plants. The major incentive for the
construction of US biorefineries has been loan guaran-
tees from the US Department of Energy (DOE) and the
US Department of Agriculture. The DOE loan program
guaranteed the construction of six commercial-scale
biorefineries (Hayes 2013). Of the six plants, only one,
Poet-DSM, is currently commercially viable, and it re-
ceived a loan guarantee of $80 million on a US$275 million
investment. Subsequently, Poet-DSM declined the DOE
loan guarantee, but received an additional US$100 mil-
lion in grants to support the costs of engineering and
construction (Poet-DSM 2014).
© Canadian Public Policy / Analyse de politiques,  September / septembre 2018 doi:10.3138/cpp.2017-047
There are several lessons here for future Canadian
policy. Second-generation ethanol plants cost more than
conventional biorefineries. More than just cost considera-
tions inform the decision to invest in capital equipment.
Investors face a risky technology and numerous uncer-
tainties with respect to markets and policies. Probably
the best approach to stimulate investments to construct
second-generation plants is with a production mandate,
which provides assurance as to the size of future ethanol
demand. Nonetheless, it is unlikely that an advanced
ethanol sector will develop in Canada before one is firmly
established in the United States. The status of the US in-
dustry is still very much uncertain.
Model results and Interindustry effects
Our analysis considers a doubling of ethanol produc-
tion in Canada, which would increase ethanol content to
approximately 10 percent, an amount that matches the
“blend-wall,” or the maximum amount of ethanol that
most vehicles can safely use given current vehicles. The
model of the GTAP database used is the 2004 version 7.
Although the data appear dated, commodity prices for this
period are remarkably close to recent prices since 2015.6
The basic elements of consumer and producer behaviour
are described with 43 goods (10 primary agriculture) and
19 regions. The standard assumptions of the GTAP model
(Hertel 1997) apply, including a static model with perfectly
competitive markets. First-generation ethanol is assumed
to be produced entirely from corn.7
Mechanically, the model is solved by forcing ethanol
production to double and asking what implicit ethanol
subsidy is required to support this production. The model
keeps adjusting until there is sufficient incentive to achieve
the increase in ethanol production. When the additional
ethanol production is fulfilled with conventional first-
generation ethanol, we find the required subsidy to be
$0.63/litre. When the increased production is met through
cellulosic ethanol from hybrid poplar feedstock, a much
larger subsidy is required: $0.27/litre as a direct produc-
tion subsidy plus $0.87/litre as an implicit or blending
subsidy. The much higher subsidy rate for cellulosic
ethanol accounts for the additional incentives required
to attract land for biomass production.
Our model can address some of the broader issues of
economic development that are sometimes used to jus-
tify biofuel expansion. Justifications for first-generation
ethanol policies include support for agriculture and rural
development. Because ethanol (and most biodiesel) is
made from agricultural crops, there is a solid link between
farmers and the biofuel industry. Increased biofuel pro-
duction would therefore increase demand for agricultural
production. In general, the modelling results indicate that
if biofuel mandates were doubled with first-generation
production, interindustry impacts would be negligible
beyond the primary agriculture and forest sectors, with
 Prospects for Second-Generation Ethanol in Canada:An Analysis of Economy-Wide Impacts 265

little or no induced consumption effects driving the rest
of the economy.
One of the primary arguments for supporting cellulosic
ethanol is that biomass feedstock can alleviate some of
the cropland pressures that first-generation feedstocks
have caused. When we consider doubling ethanol pro-
duction with second- versus first-generation feedstocks,
more wheat and oilseed acreage is taken away for first-
generation production than with cellulosic ethanol. The
shift in acreage is due to a GTAP-BIO-ADV assumption
that first-generation ethanol is sourced from coarse-grain
feedstocks.8 Coarse-grain-based ethanol production re-
quires higher quality land, unlike cellulosic feedstock,
which can use lower quality marginal land. However,
although hybrid poplar can be grown on marginal lands,
the total land required to support a 100 percent increase in
ethanol production is greater than that required by grains
to produce the same amount.
Table 1 shows the results of our GTAP-BIO-ADV
simulation analysis in percentage of change relative to the
baseline. Two scenarios are considered, a first-generation
simulation in which all of the additional production comes
via starch-based feedstocks and a second-generation
Canadian Public Policy 2018.44:259-271.
simulation in which the additional production comes via
cellulosic feedstocks. Doubling ethanol production via
first- versus second-generation processes yields markedly
different outcomes for coarse grains (corn and barley) and
ruminant (cattle) production. Coarse grain production
increases by 9 percent with first-generation production,
with a 6 percent increase in price, whereas it contracts by
just over 1 percent with second-generation production
with a price increase of less than 1 percent. In this case,
the popular land is being drawn from marginal land that
does not affect cereal production but does affect cattle
grazing. Cattle production declines by 1.5 percent, with a
price increase of 2 percent, because of second-generation
production, whereas it declines just more than a quarter
of percentage point with conventional production. This
difference can again be attributed to the fact that the model
shifts marginal-quality land previously used for livestock
to accommodate hybrid poplar production to produce
second-generation ethanol. Changes in exports reflect the
changes in production but are larger in percentage terms
given that not all grain is exported.
Other grains and oilseed production decrease as land
is drawn away for biofuels production. However, second-

generation production is able to mitigate the production

loss by 20–25 percent between scenarios. Qualitatively,
table 1: Simulation Results the results for both scenarios follow the same direction,
% but the orders of magnitude are smaller with second-
generation production. The impacts for non-ruminants
Price Output Net Export (hogs and poultry), forestry, and oil and gas are all small.
Simulation Change Change Change The impacts for an aggregate other industry and services
First-generation simulation sector are not different from zero.
Wheat 0.58 −3.01 −2.56 An additional motivation for government support of
Coarse grains 6.11 8.97 −21.13 ethanol is to increase economic opportunities for rural
Oilseeds 0.83 −2.41 −2.37
communities, although this is often defined by govern-
ments in vague terms. In agricultural communities,
Other ag goods 1.12 −2.03 −5.38
increases in farm income seldom translate into rural
Forestry 0.00 −0.02 1.49
development; that depends on broader issues such as
Ruminant 0.29 −0.29 −3.45
infrastructure and the attractiveness of living in the com-
Non-ruminant 0.30 −0.33 −0.47
munity (OECD 2010). The location of ethanol refineries
Other industries and services −0.01 −0.02 0.27 will be at least partially determined by infrastructure,
Welfare change −$937,053,156 but the development of the industry will also determine
Second-generation simulation the development of infrastructure. Indeed, most North
Wheat 0.40 −2.24 −1.92 American ethanol production facilities are located in rural
Coarse grains 0.80 −1.15 −2.12 communities near agricultural feedstock sources. In the
Oilseeds 0.64 −1.91 −1.94 United States, the dense concentration of facilities in the
Other ag goods 0.37 −0.81 −1.68 Midwest allows ethanol producers to take advantage of
Forestry −0.08 0.00 4.08
shared infrastructure and gain agglomeration effects.
Canada, however, presently lacks the critical mass of
Ruminant 2.00 −1.53 −26.97
ethanol facilities to see any agglomeration effects; there
Non-ruminant 0.16 −0.47 −0.22
are relatively few small-sized refineries, which are spread
Other industries and services 0.01 −0.02 −0.89
across the country.
Welfare change −$1,526,400,330
Regardless, even in the case of doubled ethanol
Note: Ruminants include cattle; non-ruminants include hogs and
production in Canada, direct job creation from refinery es-
poultry. Ag = agricultural.
tablishment in rural communities would be minimal. The
Source: Authors’ calculations.
Canadian Renewable Fuels Association has estimated that

doi:10.3138/cpp.2017-047 © Canadian Public Policy / Analyse de politiques,  September / septembre 2018

 266 Campbell et al.
645 direct jobs would result from approximately 2 billion
litres of annual production (Office of the Auditor General
of Canada 2007). Our model produces a similar value of
approximately 655 direct jobs.9 Indirect and induced jobs
have been estimated to be much higher—approximately
6,000 jobs (Office of the Auditor General of Canada 2007).
On the basis of our analysis, this appears to be an overesti-
mation. Indirect jobs from ethanol production are likely
to be negligible, based on our results, given the small
interindustry impacts associated with ethanol production.
Welfare effects in GTAP-BIO-ADV are measured
as equivalent variation.10 Not surprisingly, the overall
welfare implications of increased ethanol production
in Canada appear to be minuscule on a gross domestic
product (GDP) basis. In the case of doubling production
with first-generation ethanol, welfare is reduced by ap-
proximately $1.5 billion, or 0.09 percent of total GDP. With
ethanol produced from hybrid poplar biomass, welfare
declines by approximately $2.5 billion, or 0.15 percent of
total GDP. These welfare decreases can be attributed to the
necessity of government subsidies to create incentives for
production, which create inefficiencies in the market and
move the economy away from its equilibrium, reducing
Canadian Public Policy 2018.44:259-271.
welfare.
reducing Greenhouse Gas emissions
The most prevalent rationale for promoting biofuels is
arguably that they help reduce a negative externality
that is generated from carbon emissions associated with
burning fossil fuels. According to NRCAN (2016a), first-
generation ethanol achieved approximately 35 percent
less carbon dioxide (CO2) emissions relative to gasoline.
Alternatively, advanced biofuels (including cellulosic
ethanol from hybrid poplar) are defined as biofuels that
achieve at least a 50 percent GHG emission reduction
(Advanced Biofuels Canada 2017). Indeed, studies find
that advanced biofuels reduce GHG emissions of up to
80 percent (McCarl 2008). There are several estimates of
how much GHG reduction is provided by Canadian bio-
fuel production. According to the Office of the Auditor
General of Canada (2007), 2 billion litres of ethanol pro-
duction would reduce GHG emissions by approximately
2.9 megatonnes. Similarly, an Ecofiscal Commission report
on Canadian biofuel production asserts that ethanol pro-
duction reduced annual GHG emissions (CO2 equivalent)
by 2.2 megatonnes between 2010 and 2015 (Canada’s
Ecofiscal Commission 2016). On the basis of our analysis,
doubling ethanol production and displacing an additional
1.8 billion litres of gasoline with first-generation ethanol
could reduce CO2 emissions by approximately 1.4 mega-
tonnes.11 These emission reductions were calculated using
the CO2 emissions from gasoline and ethanol estimated
by NRCAN (2016b). By doubling ethanol production with
second-generation ethanol, CO2 emissions are estimated
to be reduced up by to 3.3 megatonnes per year relative to
© Canadian Public Policy / Analyse de politiques,  September / septembre 2018 doi:10.3138/cpp.2017-047
gasoline. In 2015, Canada’s reported CO2 equivalent was
722 megatonnes (ECC Canada 2016); the calculated emis-
sion reductions represent 0.19 percent and 0.46 percent of
Canada’s total emissions.
The cost-effectiveness of biofuels as a method of re-
ducing GHG emissions has recently been questioned. It
is important to remember that it is not just the technology
behind the production of biofuels that influences these
costs; it is also the policies that stimulate biofuel produc-
tion that greatly influence the cost efficacy of biofuels in
reducing carbon emissions. For example, both historic
renewable fuels standards and emerging carbon taxes will
affect the adoption of biofuels. Canada’s Ecofiscal Com-
mission (2016) estimates that Canadian ethanol policies
are a costly means to reduce GHG emissions, ranging from
$180 to $185 per tonne. Our simulations produce similar
results, with first-generation ethanol production of 1.8 bil-
lion litres costing about $190 per tonne. Second-generation
ethanol, however, is much costlier, at approximately $345
per tonne of CO2 reduced.
As for emerging carbon tax policies, one question is
whether a carbon tax would improve the economics of
biofuels. A carbon tax would have negative economy-
wide impacts on the costs of production, especially for
fossil fuel–producing and energy- and carbon-intensive
manufacturing industries. These effects, in turn, would
reduce the total demand for all fuels. Because ethanol is
blended with other fossil fuels, its demand could decrease
as well. However, the carbon tax could spur increased
demand for biofuels with lower GHG emissions to be
blended with gasoline. In the short run, this increase
would likely be limited to approximately 10 percent (the
blend wall of most current vehicles), although over time
an increase in flex-fuel vehicles could emerge, allowing
higher biofuel percentages. Note that a carbon tax would
have to be implemented such that the ethanol content in a
gasoline blend is recognized as being a less polluting fuel.
If, however, the carbon tax was applied as a flat rate across
both components of the fuel, then ethanol producers
would be at a disadvantage given that production costs
exceed those of gasoline. A carbon tax could also lead to
a further increase in ethanol utilization if all or part of the
revenue from the carbon tax is used to subsidize biofuels.
With the implementation of a carbon tax, the net
impact, therefore, is an empirical question regarding
whether the economy-wide depressed use of all fuels
is greater or less than substitutions of biofuels for fos-
sils fuels (again, this is highly dependent on how the
carbon tax is imposed on biofuels versus fossil fuels).
Our model considers a $30 per tonne revenue-neutral
carbon tax that is applied equally across all fuel com-
ponents and broadly across the economy. Our results
indicate a negligible increase in ethanol utilization after
the carbon tax is implemented. However, similar model-
ling approaches indicate that, if instead of compensating
 Prospects for Second-Generation Ethanol in Canada:An Analysis of Economy-Wide Impacts
taxpayers, 10 percent of the carbon tax is reinvested as
an ethanol production subsidy, then ethanol utilization
would increase by almost 7 percent (Timilsina, Csordas,
and Mavel 2011).
overall Assessment and conclusions
The road to a national clean fuel standard involves
several choices. The range of low-carbon fuel choices
includes electricity, hydrogen, and biofuels (ethanol and
biodiesel). Biofuels are currently attractive because they
are renewable, they are compatible with current vehicle
infrastructure, and the energy is storable. However, chan-
ges in technology, consumer acceptance, and government
policy will ultimately determine what role biofuels will
play in the mix of low-carbon fuels.
To date, first-generation (starch-based) ethanol has
dominated renewable fuel production. However, large
opportunity costs with respect to land use changes that
penalize food production and a very heavy reliance on
government support have led researchers and policy-
makers to search for an alternative. The long-promised
commercialization of second-generation ethanol produc-
tion offers potential improvements over first-generation
Canadian Public Policy 2018.44:259-271.
ethanol. The objective of this article is to assess the po-
tential for success of a poplar-based second-generation
ethanol industry in Canada.
Success depends on controlling production costs and
encouraging investment in biorefineries and the associ-
ated infrastructure. Controlling production costs involves
maintaining a reliable source of feedstocks at low cost and
controlling operating costs. Capital investment depends
on future expected profitability relative to costs. Investors
also face a risky technology that has not been proven in
commercial ventures and numerous uncertainties with
respect to markets and policies. To date, ethanol produc-
tion in North America has relied on government support,
and development of second-generation ethanol will no
doubt require continued support, with the open question
being how much.
Government policies may improve incentives for
investments in a second-generation industry, but ap-
proaches undertaken vary greatly with respect to how
well they will explicitly address tangible market failures.
Certainly, reducing environmental externalities is the
primary justification. There has been a certain amount
of excitement about the potential for second-generation
ethanol to significantly reduce carbon emissions. We find
that if 1.8 billion litres of Canadian gasoline were to be
replaced with ethanol, CO2 emissions could be reduced
by up to 3.3 megatonnes per year. However, the cost-
effectiveness of this approach is questionable because of
the subsidies necessary to compensate for the cost dis-
advantages of second-generation ethanol. Carbon taxes
have the potential to create incentives to increase the use
of ethanol, but results indicate that this increase is only
doi:10.3138/cpp.2017-047 © Canadian Public Policy / Analyse de politiques,  September / septembre 2018
267
likely to be significant if part of the taxes are invested in
subsidizing ethanol. So other, hopefully complement-
ary, objectives are necessary to motivate governments to
intervene sufficiently to ensure the commercial success of
second-generation ethanol.
It is possible that commercial volumes of second-
generation ethanol production will create positive
economic spinoffs that help to justify the necessary
government support. There is both good news and bad
news on this front. First, the good news is that the distor-
tions caused by subsidized production do not have very
large negative impacts on other sectors in the economy.
Interindustry effects of doubling ethanol production
from either first- or second-generation ethanol would be
largely confined to agriculture and forestry sectors. The
bad news is that spillovers are so small that they cannot
have a positive impact on other sectors of the economy.
The only real hope for economic development in rural
communities, especially in northern regions and com-
munities hit hard by a contraction in the forestry sector,
is that second-generation ethanol incentives would spur
investment and employment in rural areas with sluggish
economic activity. However, commercial ventures will
have to optimize utilization costs through selection of
plant locations and sizes that may not benefit these com-
munities. Unlike Iowa, current low production intensities
in Canada make it unlikely that first- and second-gener-
ation refineries will coexist with existing infrastructure
and the associated synergies. Even if such joint facilities
become feasible, it is not known whether they would be
located in disadvantaged communities and utilize woody
biomass as a feedstock.
Although second-generation ethanol does not compete
directly with food, dedicated cellulosic energy crops
would still compete for scarce agricultural land. In Can-
ada, doubling current production with second-generation
ethanol from dedicated energy crops is estimated to
displace production on 297,000 hectares of cropland and
570,000 hectares of grazing land. The implicit subsidy that
would be required to double ethanol production would
be costly, whether that production comes from first- or
second-generation biofuels.
Clearly, obstacles must be overcome before second-
generation ethanol is able to establish a dominant role
in the mix of low-carbon fuels necessary to establish a
national clean fuel standard. Governments have to choose
wisely before aggressively promoting the sector.
Acknowledgements
This work was supported by a research grant from Bio-
fuelNet. The authors have no other relevant affiliations
or financial involvement with any organization or entity
with a financial interest or a financial conflict with the
subject matter or materials discussed in the article apart
from those disclosed.
 268 Campbell et al.
Notes
1 Note that production costs of cellulosic ethanol and govern-
ment support for the industry are not mutually exclusive.
Indeed, government support will become unnecessary as
production costs in the industry decrease.
2 Gonzalez et al. (2012) compare the financial returns of
woody fibers with switchgrass and corn stover. They found
woody fibers more attractive. Maung et al. (2013) discuss
the substitutability between alternative feedstuffs and
found that many of the same issues occur across feedstocks.
Therefore, many of our results generalize to other purpose
grown feedstocks.
3 We assume a 20-year rotation period with costs compound-
ed to year 20 (Campbell 2015).
4 There are no commercial-sized cellulosic ethanol plants in
Canada. In the United States, there are currently only two
cellulosic ethanol plants producing more than 2 million gal-
lons per year (“US Ethanol Plants” 2017).
5 A third commercial-sized refinery that produces 25 million
gallons per year was constructed in Hugoton, Kansas, by
the Spanish company Abengoa Bioenergy. Plant construc-
tion cost US$500 million (Gies 2014). In 2016, Abengoa Bio-
energy went into bankruptcy, and the plant is not currently
operating (Sapp 2017).
6 For instance, there is a 4 percent difference between crude
Canadian Public Policy 2018.44:259-271.
oil prices and recent prices and a 5 percent difference for
broader commodity prices.
7 The GTAP-BIO-ADV model only uses corn to produce eth-
anol. This is the case for 78 percent of Canadian-produced
ethanol, but the remainder is produced from wheat. This
is not a drastic assumption because the alternative feed-
stock is feed wheat. Producers typically do not intention-
ally set out to produce feed wheat, so increased ethanol
mandates would not necessarily cause more wheat to be
produced.
8 If the model were adjusted to incorporate wheat feedstocks,
the reduction in wheat acreage might be slightly mitigated.
9 This number includes direct jobs in the biofuels sector and
does not net out the minimal job losses in other sectors as
the economy adjusts through factor reallocation.
10 It is important to note there are a number of other externali-
ties that these calculations do not consider. These include
potential environmental benefits associated with ethanol
production, as well as additional economic changes that
could change the policy landscape for renewable fuels.
11 Note that the GHG emissions accounted for in the GTAP-
BIO-ADVF model are only CO2 emissions associated with
the combustion of fossil fuels.
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© Canadian Public Policy / Analyse de politiques,  September / septembre 2018 doi:10.3138/cpp.2017-047
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 Prospects for Second-Generation Ethanol in Canada:An Analysis of Economy-Wide Impacts 271

Appendix

Table A.1: Summary of Canadian Ethanol Support

Jurisdiction Duration Program Amount

Provinces Mid-1990s–present Excise tax exemption Time periods vary by province and exemptions vary
from $0.09/L–$0.25/L.
Alberta 2007–2011 Biorefining Commercialization and Grants ($54 million) to support renewable bioenergy
Market Development Program, Bioenergy projects.
Infrastructure Development Program
2007–2016 Bioenergy Producer Credit Program Between 2007 and 2011, $38 million was disbursed to
bioenergy producers.
British Columbia Mid-1990s–2010 Excise tax exemption $0.145/L.
Federal 1992–2008 Excise tax exemption $0.085/L to $0.10/L.
2003–2007 Ethanol Expansion Program 7-year interest-free loans for plant construction
or expansion. Estimated subsidy value of
$2.5–$11.4 million/year.
2006–2008 Biofuels Opportunities for Producers Funding for business plan creation.Total subsidy value
Initiative of $10 million.
2007–2012 ecoAgriculture Biofuels Capital Repayable loans for building or expansion of biofuel
plants. Estimated subsidy value of $2.3–$12.3 million
per year.
2008–2017 ecoENERGY for Biofuels Program Available to any existing or proposed renewable fuel
Canadian Public Policy 2018.44:259-271.

producers who applied by 31 March 2010; $0.08/L for

2011–2012 (declining rate over life of the program).
Total of $1 billion available.
Manitoba 2008–2015 Ethanol Fund Grant Regulation Available for licensed ethanol producers in Manitoba;
$0.15/L (declining rate over life of the program).
Ontario 2007–2017 Ontario Ethanol Growth Fund Subsidy amount depends on the market price of
ethanol, corn, and crude oil; maximum of $0.11/L;
maximum of $0.10/L capital grant.Total of
$520 million available for the program.
a
Excise tax exemptions were available in Alberta, British Columbia, Manitoba, Ontario, and Quebec.
Source: Adapted from Campbell et al. (2016).

doi:10.3138/cpp.2017-047 © Canadian Public Policy / Analyse de politiques,  September / septembre 2018