Keywords

Introduction

Background

The increases in crude oil prices and the concern for environmental protection have spurred the search for renewable alternative sources of oil (Shay 1993; Runge and Senauer 2007; Hazell and Pachauri 2006). As an alternative fuel for diesel engines, biodiesel is attracting greater attention throughout the world. Biodiesel is an environment-friendly alternative to fossil fuel and holds immense potential to assist in meeting the future energy needs of China . As a renewable, biodegradable and nontoxic fuel, biodiesel has low emissions and thus is environmentally beneficial (Krawczyk 1996).

Although biodiesel is a promising fuel, the production of biodiesel is challenged by its cost and the limited availability of fat and oil resources (Ma and Hanna 1999). The present production of biodiesel is only about 4 billion litres per year globally (Rajagopal and Zilberman 2007). Biodiesel has to compete economically with petroleum diesel fuels, and the availability and sustainability of sufficient supplies of less expensive feedstock will be a crucial determinant in delivering a competitive biodiesel to commercial filling stations. One way of reducing biodiesel production costs is to use less expensive feedstock containing fatty acids such as inedible oils, animal fats, waste food oil and by-products of refining vegetable oils (Veljkovic et al. 2006). Fortunately, inedible vegetable oils, mostly produced by seed-bearing trees and shrubs, can provide an alternative.

With no competing food uses, attention has turned to Jatropha curcas L. (JCL), which grows in tropical and subtropical climates throughout the developing world (Openshaw 2000). JCL exhibits great advantages for biodiesel production. However, biodiesel production is still an emerging industry. The commercialisation of JCL in China is fairly recent, with commercial seedling production beginning in 2005. JCL has emerged as a high-potential biodiesel feedstock because of its adaptability to diverse growing conditions. Provincial governments in Southwest China have drafted plans to increase the area of JCL planting by over one million hectares in the next decade (Weyerhaeuser et al. 2007). Due to land availability and natural advantages for the growth of JCL, Yunnan Province aims to build the largest biodiesel base in China. According to ‘The plan for the development of biodiesel feedstock plantation in Yunnan’, the total area of JCL plantation in Yunnan is one million mu (1 ha = 15 mu) at present and will be increased to between 4 and 10 million mu at the end of 2010 and 2015, respectively (Bai 2007).

At present, there are more than 4 million hectares of barren land in Yunnan Province, of which one third is suitable for the growth of JCL. The government strategy for JCL plantation is to focus on these barren lands. Although Yunnan has set an ambitious target of establishing the largest biodiesel base in China and achieving energy independence, there is still a lack of information on the financial and economic performance of biodiesel production.

Biodiesel Production Chain

The biodiesel production chain can be divided into four stages: (1) production of JCL seeds through cultivation, (2) extraction and conversion of biodiesel, (3) distribution and retailing of finished fuels and (4) consumption of biodiesel.

The production of JCL seeds is mainly an agricultural activity in which JCL is grown, harvested and transported to a conversion facility. It involves the establishment and maintenance of JCL plantations and the harvest of JCL seeds and their preliminary treatment. The establishment of JCL plantations includes site preparation, seed treatment, seedling cultivation, nursery management and transplanting. The maintenance of JCL plantations involves irrigation, fertilising, weeding, disease control and pruning. The harvest of JCL seeds includes fruit flickering, drying and transportation.

The processing of JCL seed oil is an industrial activity in which the JCL seed is converted into biodiesel . First, the ripe fruits are plucked from the JCL trees and then are sun-dried and dehusked. To prepare the seeds for mechanical extraction, they should be solar heated for several hours or roasted for 10 min. If chemical extraction is chosen, the shelling of seeds can increase the yield of oil. The oil from JCL seeds is then extracted by mechanical extraction using a screw press or solvent extraction. Since mechanical extraction is more widely used in China , it is assumed that the JCL oil is extracted using mechanical expellers.

The selected expeller specifications for calculation are from a private vegetable oil company. Its processing capacity is 3–5 tonnes of seed per day (in an 8-h period) using power of 7.5 kWh. The equipment for the oil refinery has a processing capacity of 1 tonne of oil per day (in an 8-h period) using power of 7.41 kWh.

The JCL oil can be directly blended with diesel or can be made into biodiesel through transesterification reaction with methanol. Because of its viscosity, JCL oil is not suitable for direct use in engines. The high viscosity of JCL oil may contribute to incomplete fuel combustion and the formation of carbon deposits in engines, resulting in a reduction in the life of an engine and low thermal/energy efficiency (Prasad et al. 2000). However, a significant reduction in viscosity can be achieved by the dilution of vegetable oil with diesel in varying proportions (Pramanik 2003). Among various blends, the blends containing up to 30 % (v/v) JCL oil have viscosity values close to that of diesel fuel, and up to 50 % JCL oil can be substituted for diesel for use in a compression ignition engine without any major operational difficulties. Forson et al. (2004) showed that a 97.4 % diesel/2.6 % JCL fuel blend produces maximum values for brake power and brake-thermal efficiency as well as minimum values for specific fuel consumption and thus can be used as an ignition-accelerator additive for diesel fuel.

In this study, biodiesel refers to the blend of JCL oil and diesel, JCL methyl ester (JME) or its blends with diesel. That is, refined JCL oil can be directly used in engines after it is blended with diesel. Nevertheless, the oil’s quality will be better, and there will be fewer long-term problems if it is first converted into biodiesel. This study assessed the costs and benefits for the two end uses.

When the end product is JME biodiesel , the selected production specifications for calculation refer to a biodiesel plant which yearly produces 50,000 tonnes of JME from JCL by transesterification . In the present study, it was assumed that the distance between the oil extraction plant or workshop and the transesterification plant or workshop is negligibly short, and thus no transportation cost is included in calculation.

Although the transesterification process is quite straightforward, the genetic and environmental background of reagents might require the modification of the input ratios of the alcohol reagent and reaction catalyst and alterations to reaction temperature and time, in order to achieve optimal biodiesel production results. Zhou et al. (2006) studied the production of biodiesel using JCL oil and found that the optimal conditions for transesterification reaction were that the molar ratio of JCL oil to methanol is 1:6 and the amount of catalyst is 1.3 % of the weight of the JCL oil, at which the yield of JME was higher than 98 % after a 20-min reaction time at 64 °C. For industrial production, the yields of JME and glycerol were about 96 % and 87 % of JCL oil, respectively (Li et al. 2007). JCL biodiesel has an overall performance close to that of diesel and thus can be used a substitute for diesel (Chen et al. 2006).

The distribution of JCL biodiesel involves the distribution of refined seed oil or JME for blending with fossil fuels. It was assumed the distance between the biofuel plant and the diesel distribution point is 10 km. The biofuel is transported by oil tankers with a carrying capacity of 5 tonnes per trip. The consumption of diesel is 3 l per 10 km when the truck is loaded and 1 l per 10 km when unloaded. Because the shared capital cost and labour cost is negligible, they were not included in the calculation.

The consumption of JCL biodiesel refers to the ultimate end use where the biodiesel enters the fuel tank of a vehicle or other engines. The data of the unit emissions of CO2, N2O and CH4 was taken from the GREET (Greenhouse gases, Regulated Emissions, and Energy use in Transportation) model developed at Argonne National Laboratory (Wang 1999a, b) and other sources, including Agarwal and Agarwal (2007) and Dai et al. (2006). However, since the emissions of N2O and CH4 are low, the emission of CO2 from the combustion of biodiesel was considered neutral because the emitted CO2 is originally from the atmosphere.

Research Questions

Before massive expansion of Jatropha plantation might occur, various economic questions should be clarified. From a private perspective, the main questions are: how much does biodiesel production cost at each stage; and what is the difference in cost when JCL seed yield varies? Is it profitable to produce Jatropha biodiesel for producers at different stages? If not, how much should they be subsidised to promote the production of Jatropha biodiesel? From a societal standpoint, the main questions are: can the production of Jatropha biodiesel be economically justified? What are the main factors affecting its economic feasibility ?

The results of the study undertaken here might provide important information to support policymaking for the promotion of JCL biodiesel . Before rapidly scaling up JCL acreage, a systematic study may also avoid unnecessary costs and reduce financial risk for producers.

Methodology

Data Collection

Data was collected from the areas designated for priority development, including Honghe, Chuxiong, Xishuangbanna and Lincang. The following activities were carried out in order to collect data: (1) interviews with producers and entrepreneurs to understand their role in the biodiesel supply chain from extraction, conversion and marketing including price and cost data at each stage; (2) visits to biofuel plants to become familiar with production processes and obtain information on the capital and labour inputs and outputs of products and residuals; and (3) interviews with experts and visits to research organisations involved in the production of JCL biodiesel.

The data covers the inputs and costs of biodiesel production at each stage, as well as the yield data. Field surveys were conducted in Honghe and Chuxiong prefectures of Yunnan Province, China . The data on seed production was collected from Yuanjiang and Shuangbai counties, and the data on oil extraction was from Erkang Science and Technology Co. Ltd. Secondary data includes the emissions of fuels and fertilisers from the GREET model and other technological inputs and outputs from related journal articles.

Price data for fertilisers, fungicides and herbicides was collected through field surveys. The seed price was obtained by interviewing investors in JCL plantations. The data for capital costs were directly sought from producers at different stages, including hoes, spades, shovels, mechanical expellers, refinery equipment and so on. The labour cost per hectare of JCL plantation was calculated by multiplying the local wage rate with the total hours or days involved. The cost of a hectare of land was considered negligible since JCL plantations would be established on barren/marginal land. The energy requirement per kilometre in transportation, obtained from survey of local drivers, was used as basis for estimating energy use and carbon emissions from transportation at different stages of biodiesel production.

Data Analysis

Both the financial and economic feasibilities of Jatropha biodiesel production were estimated using the cost-benefit analysis method. Due to lack of shadow price information, market prices were used in both analyses. Moreover, only the external value of carbon emission (reduction) is included in the economic analysis.

It was assumed that: (1) the time horizon for the project is 30 years (the life expectancy of JCL is 30–50 years), the number of working days is 330 days per year and the discount rate is 8 %; (2) the spacing in the JCL plantation is 2 m × 3 m, or the tree density is 1,650 per hectare; (3) the seed yield is 1,485 kg per hectare (500 fruits per tree); (4) 1 l of JCL oil is equivalent to 1 l of diesel because 1 l of diesel has a calorific value equivalent to 0.994 l of JCL oil, calculated according to the average calorific values and specific gravities of diesel and JCL oil; (5) the distance between the JCL plantation and oil refinery or fertiliser plants is 50 km, while the distance between the oil refinery and the oil distribution station is 10 km; the carrying capacity of trucks is 3 tonnes and that of oil tankers is 5 tonnes.

The data analysis consists of five parts. First, an explicit cost accounting model, a spreadsheet budgeting model, was first used to estimate the profitability of an activity for a single price-taking agent, such as an individual farmer or processor; and an analysis was then conducted to estimate the financial feasibility of the whole process of biodiesel production from the perspective of producers. Second, the carbon balance was accounted and valued. Third, an economic analysis was conducted by valuing cost and benefit using shadow prices and incorporating the value of carbon sequestration and the value of fruit husks as a fuel substitute for coal. Fourth, the energy efficiency of JCL biodiesel production was assessed (although that analysis is not presented here). Fifth, sensitivity analysis was carried out to identify significant variables affecting the financial and economic performance of JCL biodiesel production.

Financial Analysis

In each stage of production, the unit cost of production in the nth year is given by

$$ {C}_{in}={\displaystyle \sum_{j=1}^J{Q}_{ijn}{P}_{jn}}+{A}_{in}+{D}_{in}+{E}_{in} $$
(3.1)

where C in is the unit function of production at the ith stage in the nth year; Q ij is the amount of the jth input used at the ith production stage; P j is the price of the jth input, such as labour and materials; J is the total number of input used at the ith stage; A in is the abatement cost at the ith stage in the nth year, if applicable; D i is the charge for the depreciation of fixed asset at the ith production stage in the nth year; and E i is the distributive cost at the ith production stage in the nth year. The fixed asset was depreciated using the straight-line average service life method, assuming a salvage value to be 5 % of the total.

For producers at each stage, the financial feasibility was assessed using the following equation:

$$ {\mathrm{FNPV}}_i = {\displaystyle \sum_{n=0}^N\frac{{\mathrm{NCF}}_{in}}{{\left(1+r\right)}^n}} $$
(3.2)
$$ {\mathrm{NCF}}_{in}={q}_{in}\left({P}_i\right)+{\displaystyle \sum_{m=0}^M{q}_{inm}{p}_{im}}-{q}_{in}\left({C}_{in}\right) $$
(3.3)

where FNPV i is the financial net present value of biodiesel production at the ith stage; NCF in is the net cash flow at the ith stage of production in the nth year; N is the project horizon; n is the nth year of the project; r is the discount rate ; q i is annual quantity of products, say, seeds at the first stage and extracted oil at the second stage; P i is the local price of products produced at the ith stage; q inm is the quantity of the mth by-product produced at the ith stage in the nth year; p im is the price of the mth by-product; and M is the total number of by-products produced at the ith stage.

The influences of taxes or subsidies on the net financial return at the ith stage can be assessed when tax and subsidy are included in Eq. (3.2).

A financial analysis was conducted to estimate the financial feasibility of whole process of biodiesel production. The financial feasibility was assessed by the net present value of the production, which is given by

$$ \mathrm{FNPV} = {\displaystyle \sum_{n=0}^N\frac{P_n{Q}_n+{\displaystyle \sum_{i=1}^4{\displaystyle \sum_{m=0}^M{q}_{inm}{p}_{im}}}-{\displaystyle \sum_{i=1}^4{C}_{in}-{\displaystyle \sum_{i=1}^4{T}_{in}}+{\displaystyle \sum_{i=1}^4{S}_{in}}}}{{\left(1+r\right)}^n}} $$
(3.4)

where FNPV is the financial net present value of biodiesel production; P n is the price of biodiesel in the nth year; Q n is the quantity of biodiesel produced in the nth year; and T in and S in are the tax levied and subsidy given at the ith stage in the nth year, if applicable. Note that T and S appear in the above equation, but they may occur at different stages of production. This means it is possible that a producer at a certain stage is subsidised, while the producer at another stage is taxed.

Carbon Accounting and Valuation

At each stage of the biodiesel supply chain, there are potential environmental impacts such as habitat destruction, carbon sequestration and emissions of liquid and/or solid hazardous gases. Owing to limited time and financial resources, this study considered only the carbon balance in the production chain for JCL biodiesel. Accounting for the carbon balance was conducted from the cultivation of JCL trees to the combustion of biodiesel.

The carbon balance is the sum of the reduced carbon stock minus the added carbon stock in the whole life cycle of JCL oil. The inventory covered all inputs and processes involving net emissions or sinks of the major GHGs (CO2, CH4 and N2O). All emissions from the cultivation of JCL trees, seed transportation and processing, biodiesel transportation and combustion were accounted for. In the first stage, carbon emissions emanate from fuel consumption and fertiliser application and carbon sequestration by JCL plantations. In the second and third stages, carbon is released as fuel is burned. In the fourth stage, carbon is emitted when biodiesel is combusted. Inventory mass emissions were summed and converted into a final global warming potential measured in CO2 equivalent considered over a 100-year timescale: CO2 = 1, CH4 = 23 and N2O = 296 (Styles and Jones 2007).

According to Revised 1996 IPCC Guidelines (IPCC 1996), CO2 emissions from biomass combustion are considered to recycle atmospheric CO2 if biomass is extracted from a sustainable (i.e. replenished) source. These CO2 emissions are therefore excluded from net emission calculations. The combustion of biodiesel in locomotives is assigned a zero emission factor to account for the carbon sequestered during the cultivation of Jatropha trees.

When the end product is JME, glycerine is a coproduct. The carbon emission from synthetic glycerine (9.6 kg CO2-eq. per kg glycerine) was considered a credit to the carbon balance of JME production.

The CO2eq balance is mathematically expressed as

$$ {W}_{{\mathrm{co}}_{2e}}={\displaystyle \sum_{i=1}^4{\mathrm{CR}}_i}-{\displaystyle \sum_{i=1}^4{\mathrm{CE}}_i} $$
(3.5)

where W CO2eq is the CO2eq balance of the life cycle of JCL biodiesel , i is the ith stage of production, CR i is the amount of CO2eq emission reduced at the ith stage and CE i is the amount of CO2eq emitted at the ith stage.

The monetary value of carbon was estimated using an implicit price for tradable emission permits in the international carbon market and then incorporated in the economic analysis.

Economic Analysis

The economic feasibility of biodiesel production was assessed using the following equation:

$$ \mathrm{ENPV} = {\displaystyle \sum_{n=0}^N\frac{P_n{Q}_n+{\displaystyle \sum_{i=1}^4{\displaystyle \sum_{m=0}^M{q}_{inm}{p}_{im}}}+{V}_E-{\displaystyle \sum_{i=1}^4{C}_{in}-{C}_E}}{{\left(1+r\right)}^n}} $$
(3.6)

where ENPV is the economic net present value of biodiesel production, V E is the total environmental benefit and C E is the total environmental cost.

The production of biodiesel is economically feasible if the ENPV is positive. If the ENPV is greater than the FNPV, provision of subsidy could be justified.

Results

Financial Analysis of JCL Oil Production

The financial analysis is composed of two parts: first, the financial feasibility of the different stages of JCL oil production when the seed producer and oil producer are independent; and second, the financial analysis of JCL oil production when the entire production is handled by a single producer.

Seed Production

The production of JCL seeds starts from seedling cultivation to seeds delivered to oil extraction plants and involves activities that include transplanting, site preparation, tending, seed collection and drying, husk removal and transportation.

Assuming a base yield of 1,485 kg per hectare (500 fruits per tree), the total cost at the seed production stage is 73,609 yuan per hectare. The main costs are associated with fruit drying and husk removal, fruit collection, fertilisation, fungicide spraying and weeding.

To estimate the revenue of seeds, the present price of JCL seed, 2 yuan per kg, was used. Using Eq. (3.2) the financial net present value at seed production stage (FNPV) was calculated to be −8,425.46 yuan per hectare. A breakeven price at the seed production stage (i.e. the price that the producer would need to receive to cover all operating, overhead and establishment costs of production of JCL seed) was calculated as 2.6 yuan per kg.

The results show that the production of JCL seed is not financially feasible. The FNPV tends to increase as the seed yield is improved. When the price of seeds is 2 yuan per kg, the FNPV will be positive only if the seed yield is higher than 3 tonnes per hectare. Efforts to reduce the cost of seed production, particularly labour cost, could enhance seed profitability.

The FNPV is also highly sensitive to any change in seed price. When the seed yield is 1,485 kg per hectare, the breakeven price of seed is 2.6 yuan per kg. At the present seed price of 2 yuan per kg, the FNPV is negative. Obviously, if a target for using biodiesel is established, the gap would have to be bridged by a government subsidy on seed production, as long as there is an economic justification for such a subsidy.

JCL Oil Extraction

When mechanical extraction is used, the oil extraction stage begins with heating seeds into refined JCL oil. When the seed yield is 1,485 kg/ha, the total cost of the processing of JCL seeds is 2,321.91 yuan per tonne. The major cost comes from the purchase of the seeds which accounts for 86.13 % of the total cost, while the sum of all the other costs accounts for only 14.87 %.

The oil percentage ranges from 32.2 to 40.2 % in seeds when oil is extracted using an engine-driven expeller, but this yield comprises only crude oil . According to a survey at an oil extraction plant of Erkang Science and Technology Co. Ltd., the yield of refined oil is about 30.4 %. Based on the specific gravity of JCL oil, the cost of producing 1 l of JCL oil is calculated to be 6.99 yuan per litre when the seed price is 2 yuan per kg.

Subsidies Required for JCL Oil Production

Subsidies would be required for both JCL seed producers and processors if a biodiesel output target is to be achieved.

At the seed production stage, subsidies can be provided based on the weight of seeds or the area of JCL plantation. Assuming that both the seed producers and processors receive a margin of 10 %, the two kinds of subsidies are shown in Table 3.1. Subsidies are required when the seed yield is lower than 3 tonnes per hectare. The required subsidy tends to decrease as the seed yield increases.

Table 3.1 Subsidies required for the production of JCL seeds
Full size table

At the oil extraction stage, subsidies can be based on the volume of JCL oil. According to the average calorific values and specific gravities of diesel and JCL oil, it was calculated that 1 l of diesel has a calorific value equivalent to 0.994 l of JCL oil, so 1 l of JCL oil is equivalent to 1 l of diesel. As previously calculated, the breakeven price of JCL oil is 6.99 yuan per litre when the seed yield is 1,485 kg per hectare. Based on the present local price of diesel, 5.89 yuan per litre, the subsidy is 1.88 yuan per litre when a margin of 10 % is assumed. An increase in the price of diesel may provide an incentive for investors in JCL oil.

Full-Chain Financial Analysis of JCL Biodiesel P roduction

When production chains of both JCL oil and JME are operated by single producers, the financial feasibility is shown in Table 3.2. Both JCL oil and JME can be end products. The results reveal that the FNPVs of the production of the two end products are negative. That is, production is not financially feasible for JCL oil or JME.

Table 3.2 Full-chain financial analysis of JCL biodiesel
Full size table

The major cost in the production of JCL oil or JME is incurred at the seed production stage. As an extension of JCL oil, the transesterification reaction involves additional costs. However, as a coproduct of JME, glycerine shares 8.1 % of the total cost according to credits for allocation which are determined in terms of the market values of JME and glycerine. As a result, the FNPV of JME is slightly higher than that of JCL oil.

When the production chain, beginning with seedling cultivation to end products of JCL oil or JME, is operated by single producers, subsidies can be provided according to the amount of JCL oil the producers produce. The subsidy rate can be determined according to the breakeven price of the end product. The analysis revealed that, assuming a margin of 10 %, the difference between the breakeven prices or required subsidy rates of JCL oil and JME is insignificant.

The production process for JME begins with the pretreatment of JCL oil and continues with the transesterification of the oil and the refinement of JME and glycerol. Based on a production line with an annual capacity of 50,000 tonnes of JME, the inputs were taken from Li et al. (2007). Excluding the cost of seed oil, the cost of production of JME is 674.68 yuan per tonne, among which the major expenditures are methanol, catalyst, electricity, NaOH and coal. Since glycerol is a coproduct of JME, the costs shared by JME and glycerine were found to be 615.31 yuan per tonne of JME and 59.37 yuan per tonne of JME, respectively, by allocating credits between JME and glycerol according to their market values.

As a coproduct of JME, glycerol contributes around 8.1 % of total revenue. Based on the market values of JME and glycerol, the total cost was allocated by assigning 91.9 % to JME and 8.1 % to glycerol. According to the outputs and shared costs, the breakeven prices of JME were calculated to be 8.91 yuan per litre. If they purchase JCL seeds to produce JME, producers should be provided with a subsidy rate of 4.01 yuan per litre, assuming a margin of 10 % of the breakeven price.

Carbon Balance for JCL Biodiesel

When different technology options are chosen, the carbon balance of the end product will differ. Analysis of the carbon balances for end products of JCL oil and JME follows below.

When JCL oil is directly used by blending it with fossil diesel, its life cycle carbon balance is as shown in Table 3.3. The production and use of JCL oil has a positive carbon balance. JCL plantations and JCL oil are major contributors to the carbon balance. As coproducts of JCL oil, the combustion of fruit husks can also reduce carbon emission s when they are used as a substitute for coal.

Table 3.3 Life cycle carbon accounting for JCL biodiesel
Full size table

The major GHG emitters are the application of fertilisers and the transportation of seeds and fertilisers. Although a lot of direct energy is used in the oil extraction stage, the GHG emissions are relatively small.

The production process for JME is an extension of that for JCL oil. The carbon sources of the former differ from that of the latter starting with the transesterification reaction. The life cycle carbon balance of JME is positive, similar to that of JCL oil.

Intuitively, more GHG will be emitted for the production of JME because more inputs are used. However, as a coproduct of JME, glycerine adds a credit to the life cycle carbon balance of JME because it can be considered a substitute for synthetic glycerine. Consequently, the life cycle carbon balance of JME is higher than that of JCL oil.

Economic Feasibility of the Production and Use of JCL Biodiesel

The economic feasibility study included the carbon value and the value of fruit husks and seed shells, where fruit husks and seed shells are considered to be substitutes for coal. According to Xing and Wang (2009), the price of CER in China ’s CDM market was around €10/t or 91.8 yuan per tonne. This was the most recent price since the global financial crisis although it was previously much higher. The fruit husks were first converted to the coal equivalent based on their calorific value, and then the coal price, 450 yuan per tonne, was used as the proxy price of fruit husks since fruit husks are not traded in the market.

Table 3.4 shows that, when no other external values are included, the ENPVs of JCL oil and JME are both negative, with the former slightly higher than the latter. The total value of carbon emission reduction and fruit husks is 7,800 yuan per hectare, which is an important external benefit in the production of JCL biodiesel . However, the ENPVs are slightly lower than zero, and there is good potential for providing an economic justification for the production of JCL biodiesel if the production technology is improved.

Table 3.4 Economic feasibility of JCL biodiesel production
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Sensitivity Analysis

Sensitivity analysis assesses risks by identifying the variables that most influence a project ’s economic feasibility and quantifying the extent of their influence. The analysis was conducted by varying the value of certain variables. These included biodiesel price, yields of JCL seeds, discount rate and total cost .

Sensitivity of Financial Feasibility

As a determinant of biodiesel output, seed yield has a significant effect on the FNPV. The FNPVs tend to increase as the seed yield is enhanced, as shown in Table 3.5. Because the marginal cost is higher than the marginal revenue, the FNPVs are still negative even when the seed yield is as high as 3,861 kg/ha. Since the unit cost of JME is higher than that of JCL oil, changes in seed yield have a bigger effect on the FNPV of JCL oil than that of JME. The gaps between the FNPVs of two end products increase as the seed yield improves. When the seed yield is lower than 1.66 t/ha, the NPV of JME is higher than that of JCL oil. The contribution of glycerine to the NPV is higher when the seed yield is lower and tends to decrease as the seed yield increases.

Table 3.5 Financial feasibility of producing JCL biodiesel
Full size table

The FNPV is also affected by the discount rate , representing the opportunity cost of investment . The FNPVs tend to increase as the seed yield is improved. However, the NPV of JME is more sensitive to a change in the discount rate than that of JCL oil. When the discount rate is 6.8 %, the production of JME and JCL oil will yield the same NPV. The NPV of JME is lower than that of JCL oil when the discount rate is lower than 6.8 %, and the relationship reverses when the discount rate is higher than 6.8 %.

The FNPVs of JCL oil and JME are also very sensitive to changes in the production cost. That is, a slight change in production cost will result in a sharp decrease in the FNPVs of both end products. Thus, more effort should be made to reduce the total cost to enhance the financial feasibility of the production of JCL biodiesel . In particular, major efforts should be focused on the seed production stage because more than 80 % of the total cost is incurred at the seed production stage.

Sensitivity of Economic Feasibility

Despite many other external benefits that the production of JCL biodiesel may bring, only the values of carbon emission reduction and fuel coproducts were considered. The value of carbon emission reduction was based on the price of CERs (Certified Emission Reductions) in the CDM (Clean Development Mechanism) market. Fuel coproducts refer to the fruit husks, which were valued according to the price of coal based on the amount of calorific value. Because the carbon balance and coproduct output is affected by the seed yield, the economic value is thus affected by seed yield.

The ENPV increases as the seed yield increases; it becomes positive if the seed yield is higher than 2.27 t/ha for the production of JCL oil and 2.46 t/ha for the production of JME. Since they tend to increase as the seed yield is improved, the values of carbon emission reduction and fruit husks play an important role in making the ENPV positive. Positive ENPV may provide an economic justification for providing subsidies to producers.

The gap in ENPVs between the end products of JCL oil and JME is small. However, the gap between the ENPV of the two end products tends to become larger as the seed yield increases. Obviously, from an economic perspective, it is more desirable to produce JCL oil as a final product when the seed yield is high. However, the long-term effects of JCL oil on engines are unknown.

Other factors may also affect the ENPV, but their effects are the same as their effects on the FNPV and carbon balance. Thus, only the effect of changes in seed yield was analysed in the study.

Conclusions and Policy Implications

JCL seeds can be used to extract oil for direct blending with fossil diesel or be further processed into JME through transesterification reaction. This study assessed the financial and economic feasibilities of the production of these two end products using a cost-benefit analysis method.

The results show that, at the current level of technology and management, the production of JCL biodiesel is financially and economically not viable, noting that external values other than that of carbon emission reductions were not included. However, if seed yield can be improved to above 2.46 t/ha, it would be economically feasible to produce either of the two end products.

To promote the development of the JCL biodiesel industry, government support is indispensable. When JCL seed and oil is produced by different producers, the required annual subsidies are about 881.66 yuan per hectare for seed producers and 2.68 yuan per litre for oil producers when the seed yield is 1,485 kg/t and the diesel price is 5.22 yuan per litre, assuming a margin of 10 % for producers. When JME is the end product and producers purchase JCL seeds to produce JME, about 4.01 yuan per litre should be made available to producers to make enough revenue and break even on costs. If the seed yield is higher than 1,485 kg/t, the compensation rate for producers at different stages of the production chain tends to decrease. In particular, no compensation is required if the seed yield is higher than 3,267 kg/t and the seed price (i.e. 2 yuan per kg) prevails. If the production chain is run by a single producer, then compensation rates for the end products of JCL and JME are 3.97 yuan per litre and 4.01 yuan per litre, respectively.

For both end products of JCL oil and JME, the major costs are incurred at the seed production stage, which accounts for more than 80 % of total costs. In detail, these costs are from the purchase of fertiliser, fruit collection and drying, husk removal and weeding.

Based on the above-mentioned results, the life cycle of the financial and economic performance of JCL biodiesel can be improved in the following areas: (1) at the current level of oil extraction technology, since much oil is still in the seed cake after pressing, oil yield could be improved by optimising the production process; (2) seed yield can be improved through the selection of high-yield seed varieties and genetic improvement; (3) the creation of machines for dehusking and fruit collection would reduce the cost of seed production; (4) the labour cost of fruit collection can be reduced by cultivating high-yield and dwarf varieties; (5) financial and economic feasibility can also be improved by developing high-value-added products from coproducts – for example, the seed cake can be used to produce foodstuff and pesticides, and glycerine is an important raw material for some high-value pharmaceuticals, such as antivirus medicines. In particular, other positive external values could be generated when biodiesel production is coupled with ecological restoration. The results of the study have the following policy implications:

China ’s Renewable Energy Law, which was passed by the Congress on 28 February 2005 and took effect on 1 January 2006, laid a solid foundation for the production of JCL biodiesel . This law shaped an integrated renewable energy policy framework by providing a set of directives encouraging renewable energies, including national renewable energy targets, a special fiscal fund, tax relief or exemption, and public research and development support as well as education and training. Although it provides a framework, China’s Renewable Energy Law requires relevant governmental authorities to formulate specific measures for the production and use of biofuels , especially JCL biodiesel, which is targeted for promotion by many provinces.

Despite its lack of financial feasibility , the production and use of JCL biodiesel as a labour-intensive economic activity could generate many job opportunities and increase farmers’ income. The positive carbon balance and significant energy efficiency of JCL provide a way for governments to respond to climate change and energy security. These outcomes are consistent with governments’ expectations and thus have important policy implications for policymakers.

In 2006, the State Administration of Taxation announced that biodiesel would be exempt from consumption tax. In 2008, the Ministry of Finance, State Administration of Taxation and National Development and Reform Committee jointly announced that 90 % of the income tax on biodiesel would be reduced. In the same year, the Ministry of Finance and the State Administration of Taxation enacted a policy that if more than 70 % of the raw material of biodiesel is from plant oil and waste animal fat, the value-added tax would be refunded to producers. Within this policy context, no tax was assumed for the production and consumption of JCL biodiesel. The results show that to promote the industrialisation of JCL biodiesel, tax exemption is not enough.

Although China has set up a directive to subsidise woody feedstock producers of 3,000 yuan per hectare (China Daily 2007), it is clearly insufficient to make up the loss in JCL seed production. Moreover, the government has set up the subsidy rate for bioethanol plants, but no policy is yet available for the subsidisation of biodiesel plants. The experience of other countries shows that government support plays a critical role in the promotion of biofuels . For example, to improve the competitiveness of biofuels, many countries, such as Germany and France (Manuel and Peters 2007), levy a consumption tax on gasoline and diesel and reduce or exempt tax on biofuels. Mandatory blending obligations can also be adopted to promote biofuel production.

Considering that most of the provinces that are putting a great deal of effort into promoting JCL biodiesel are poverty stricken, there is an opportunity to integrate rural development with the production of JCL biodiesel. In particular, as the cost accounting shows, the production of JCL biodiesel is labour intensive and can be integrated with government strategies for rural development, such as job creation and poverty alleviation.

The production and use of JCL biodiesel can greatly reduce GHG emissions . This positive environment performance has significant implications for China ’s commitment to carbon emission reduction, that is, for the carbon emission per unit of GDP in 2020 to be 40–45 % lower than that of 2005 (set before the Copenhagen Climate Change Summit). To substitute fossil fuel with biofuel could be an effective measure in the implementation of China’s energy saving and emission reduction programme.

The effect of reducing GHG emissions is a positive externality which can provide partial justification for government to subsidise JCL biodiesel producers. The economic performance of JCL biodiesel can be greatly improved if it is possible to integrate the development of the biodiesel industry with CDM projects. However, such integration requires new mechanisms and institutional arrangements.