FINANCIAL REPORTING ON BIO-FUELS

Chinmay Shah ACCT 401/501

Fall 2011

FINANCIAL REPORTING ON BIO-FUELS Chinmay Shah ABSTRACT Biofuels are liquid fuels which can be produced from agricultural biomass. Agriculture-based biofuels include bioethanol, biodiesel, biomethanol, methane, and bio-oil components. Various agricultural residues, such as grain dust, crop residues, and fruit tree residues, are available as the sources of agricultural energy. Bio-energy from biomass, both residues and energy crops, can be converted into modern energy carriers. Bioethanol is derived from renewable sources feedstock, which are typically plants such as wheat, sugar beet, corn, straw, and wood. Biodiesel is a nonfossil fuel alternative to petrodiesel which can be obtained from vegetable oil and animal fats by transesterification. Bio-oils are liquid or gaseous fuels made from biomass materials, such as agricultural crops, municipal wastes, and agricultural and forestry by-products via biochemical or thermochemical processes. The environmental performance of road transport improves by use of it, including decreased greenhouse emissions: substantial reduction in emission of unburned hydrocarbons, carbon monoxide and particulate matter. Factors related to social and economic aspects like employment generation, utilisation of wasteland, diversity of agriculture land, food prices, reduction in imports fossil due to use of bio-fuel and energy prices can have significant impacts on bio-fuel development. Food security will be affected by the conversion of agricultural land for bio fuel plantation and cause indirect change in land-use pattern.

INTRODUCTION

World-wide production of bio-fuel has been increasing rapidly in the last decade, but the viability of first-generation bio-fuels, which are produced primarily from food crops such as grains, sugar cane and vegetable oils, has been increasingly questioned over concerns such as displacement of food-crops, effects on the environment and climate change. Second-generation bio-fuel have potential to provide benefits such as promote rural development and improve economic conditions in emerging and developing regions by making use of wasteland. At the same time second-generation bio fuel production could become unsustainable if they compete with food crops for available land. Second-generation bio-fuel are not yet produced commercially, but a considerable number of pilot and demonstration plants have been announced or set up in recent years, with research activities taking place mainly in developing countries like India, Brazil, Indonesia.

Major drivers for increase production and demand of bio-fuel are the increase in oil price, the heightened worldwide concern over global climate change, improvement of energy security and a decreased dependency on unstable oil suppliers, and benefits to agriculture and rural areas and an opportunity for increasing economic development in many developing countries, due largely to the abundant availability of wasteland and cheaper costs of labor. Bioenergy, the energy from biomass, has been used for thousands of years, ever since people started burning wood to cook food or to keep warm, and today, wood is still our largest biomass resource for bioenergy. Many countries in the developing world still use wood as their primary fuel (Demirbas and Demirbas, 2007). Wood is one of the carbonaceous fuels. The carbonaceous fuels are responsible for over 80% of the worlds energy production. Figure 1 shows carbon, hydrogen, and oxygen contents of fuels.
Accounting point of view for Biofuels

A typical biomass to biofuel lifecycle emission accounting framework depicts a linear lifecycle process from feedstock to end use. The linear approach is represented in emission studies of corn (Farrell, et al., 2006), energy crops and agricultural residues and fast growing trees and forest residues. CARB used a modified version of the Greenhouse Gases, Regulated Emissions, and Energy Use in Transportation model. The methodology used by GREET applies a simplistic view of the benefits of using forest biomass for biofuel in which the residue is treated as a waste product that does not interact with the rest of the forest system.

Crises also may affect environmental quality in developing countries, but these potential effects can be complex and dependent on certain initial conditions in specific countries. One factor is environmental regulation. In countries with a relatively high degree of regulation, the crisis could lead to environmental deterioration if the enforcement of standards is weakened in an effort to reduce the impacts of the crisis. Where there is relatively little effective environmental regulation, on the other hand, the crisis could lessen pressure on the environment due to reduced economic activity. However, these influences are difficult to separate out from other factors such as the effects of the crisis on the composition of output, and ongoing trends in the composition of energy consumption. Several overlapping arguments have been offered in support of green stimulus programs, all of which in one way or another emphasize the green aspect. One argument is that particular green stimulus activities can have equal or greater effects on job creation and near-term economic activity compared to other stimulus activities. In other words, the activities are seen to be win-win in terms of recovery from the crisis and putting in place more environmentally sustainable investments for the longer term. Another argument holds that with a presumption of greater global demand over time for various forms of green technology, green stimulus investment now can provide a first mover advantage that will allow the country to take a stronger competitive position in meeting that demand. In this case, the activities are seen to be win-win with respect to environmental protection and economic advance over the

longer term, in addition to whatever short-term stimulus effects are provided. Accounting Framework The accounting for various credits may seem counterintuitive at first. While they generally arise in the tax laws and may be claimed on an income tax return, a number of features can make the credits more equivalent to a government grant or subsidy. Companies must therefore analyze each credit to determine its accounting. Two threshold options for the accounting for credits are available: (1) the credit falls within the scope of income taxes, and is accounted for in determining income tax expense or (2) the benefit does not fall within certain categories and is accounted for in determining pre-tax income. Even in the latter case, however, the accounting may not always be the same. For many of these new or recently modified tax credits, the realization of the economic benefit does not depend on the existence of taxable income. Where the credits are accounted for in determining pre-tax income, a variety of possible income recognition models may apply, depending on the specific attributes of the benefit. Another example where the accounting follows an income tax model is the recently authorized tax credit Build America Bonds. These are bonds issued by state and local authorities (to finance targeted stimulus infrastructure) which include transferable federal income tax credits. The tax credits can be sold by the holder of the bond until the tax credit is earned. However, after the tax credit is earned it no longer can be sold and it is not refundable. Therefore, the tax credit can only be realized through the income tax return and it is dependent on taxable income.

CONCLUSION The implications of biofuel production and feedstock choices for land use and biodiversity are important, ranging from effects on individual fields to watersheds (which can be as big as the 48% of the US that drains into the Gulf of Mexico) to potentially the entire world. The complexity of these issues calls for a systematic approach to understand the interactions between other forces, bioenergy production, and land-use changes. The many implications of biofuel and cropping system choices also require use of multiple indicators of sustainability costs and benefits at the different relevant spatial and temporal scales. There are ways in which biofuels can be developed to enhance their coexistence with biodiversity. Landscape heterogeneity can be enhanced by interspersion of land uses, which is easier around production facilities with smaller feedstock demands. The development of biofuel feedstocks that yield high net energy returns with minimal carbon debts, or that do not require land for production, should be encouraged. Competing land uses (including food, fiber, and biofuel production, biodiversity protection, and urban and suburban expansion) should be

subjected to comprehensive analysis and planning, so that incentives can be directed where they will do the most good. Finally, the opportunity to design bioenergy feedstock systems to optimize socioeconomic and ecologic benefits must build from the growing scientific understanding of effects of bioenergy choices at different scales, quantitative metrics, and ways to deal with environmental tradeoffs.

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