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by Joshua Kagan

As if humanity needed a reminder of the environmental, economic, and energy security issues associated with our collective dependence on petroleum, the BP Gulf of Mexico disaster brought the point home with a vengeance. Some of my more progressively minded friends have made statements like, "Well, at least the silver lining is that offshore drilling is dead and biofuels will be adopted quicker."

Which led me to ponder, will biofuels actually be deployed faster in the aftermath of the disaster? And if so, is that really a good thing?

The U.S. is the largest consumer of oil in the world, accounting for roughly 22% of the global market. Not surprisingly, it is also the largest biofuels market in the world. From 2000-2010, corn ethanol production grew from less than 2 billion gallons to an expected 12 billion gallons in 2010. Given that a gallon of ethanol contains two-thirds the amount of energy contained in a gallon of gasoline, ethanol will displace about 6% of the 140-billion-gallon U.S. gasoline market in 2010.

Ethanol (and to a lesser degree, biodiesel) has gone mainstream, provides thousands of jobs, and now displaces several percentage points' worth of gasoline and diesel consumption. Yay for biofuels!

Well, not so fast.

Any conversation that highlights biofuels as a potential replacement for petroleum must be grounded in the specific generation of biofuels that one is discussing. While "advanced" biofuels will be discussed later in this piece, we need to first come to a recognition of the fact that first-generation biofuels like corn ethanol and biodiesel cannot ever possibly replace petroleum.

Why?

In 2010, the U.S. will utilize 30% of our corn crop to displace 6% of our gasoline consumption (see The True Cost of Corn Ethanol). Even if we utilized 100% of our corn crop for ethanol production, we would still only grow enough to offset a fraction of our gasoline needs. And this says nothing about our diesel or jet fuel consumption. Additionally, corn ethanol production is energy intensive. The processes of growing, harvesting, transporting, pre-treating, fermenting, and distilling it all require copious amounts of fresh water, nutrients, pesticides, and energy. There is no scientific consensus on whether more energy (and GHGs) goes into or comes out of the corn ethanol production process. Furthermore, ethanol cannot be used in blends above 10% without modification to one's engine and the fuel is largely incompatible with much of the trillions of dollars' worth of petroleum infrastructure currently in use in the U.S.

Additionally, the U.S. will soon hit its "blend wall." The EPA has determined that only blends of 10% ethanol are safe in unmodified gasoline engines. That is, if there are 140 billion gallons of gasoline consumed in the U.S. market, only 14 billion gallons of ethanol can be blended. Yet, in 2010, more than 12 billion gallons will be produced. Under the Energy Independence and Security Act [EISA] of 2007, the U.S. is required to blend increasing amounts of corn ethanol into the gasoline supply, reaching a level of 15 billion gallons in 2015. Either the EPA will soon increase this blend limit (which will create a whole slew of other problems, like vehicle warranties being capped at 10% ethanol blends -- see Ethanol and the Looming Blend Wall), or the U.S. will have to figure out a way of quickly converting vehicles, pipelines, and service stations to accommodate "E85" blends of gasoline, an undertaking that could cost billions of dollars.

While pro-ethanol lobbyist groups like the Renewable Fuels Association and Growth Lobby (whose constituents are the recipients in more than $5 billion worth of direct corporate welfare annually) continue to espouse the merits of corn ethanol, I have yet to meet anyone without a financial stake in the industry who seriously believes that corn ethanol is a viable long-term solution.

One danger that can occur with environmental catastrophes like the BP disaster is the emergence of a herd-like mentality: "We need alternatives now! Let's invest in biofuels by giving more money to the ethanol industry."

Although first-generation biofuels account for more than 99% of U.S. biofuel production, there are several hundred companies developing third- and fourth-generation "drop-in" biofuels whose chemical compositions mimic the molecular characteristics of petroleum (see Third and Fourth Generation Biofuels: Technologies, Markets and Economics Through 2015).

These companies are using a plethora of non-food-based feedstock and technology pathways that include: algae, metabolic enhancement of bugs to secrete fuels, thermo-chemical processes like pyrolysis, hydroprocessing, and gasification, and other exotic methods like Joule's "solar-to-fuel" process.

Most of these companies are producing at lab or pilot scale, with costs several dollars per gallon higher than petroleum (or even ethanol). Some of you might be tempted to say, "Well, if they can't compete on price, then they are not a viable alternative."

While I share with you a belief that markets and not policymakers should decide which technologies succeed and fail, one could make the counterargument that the price of fossil fuels does not fully reflect the costs that society has to pay associated with changed weather patterns, increased healthcare costs from polluted air and water, degraded natural resources, and increased national security costs due to the rise of Petro-States.

Additionally, when policymakers have previously stacked the deck towards one technology class (ethanol) over another (algae), one could make the argument that sound public policy would provide a level playing field for the market to determine which technologies to adopt. In the case of advanced biofuels, capital is required to facilitate the jump from lab to pilot to demonstration to commercial.

Unfortunately, in the wake of the BP disaster, I have yet to hear one word mentioned about increased funding for advanced biofuels. Someone within the Obama Administration needs to take ownership of this problem. While ARPA-E, the Biofuels Interagency Working Group, and the funds provided under the American Recovery and Reinvestment Act [ARRA] are good first steps, they are akin to putting out a towering inferno with a water gun.

The following three additional catalysts would be helpful to spur the adoption of advanced biofuels (in the absence of a carbon tax):

  • Create a special tax on oil companies' profits and set aside the funds to provide both debt and equity financing for advanced biofuels companies. No using the money for local museums, the creation of "Cat Appreciation Day," or any other pork. The billions raised should be appropriated 50%-50% to late- and early-stage projects. Companies that have proven their technologies and are shovel-ready on demonstration- or commercial-scale projects, but cannot access frozen debt markets should not have to face bankruptcy. Likewise, there are a number of geeks with science projects in basements who have technology that might actually save the world. Or amount to nothing. But complacency won't solve our problems. Rather than just rely on Vinod Khosla and a handful of his colleagues who actually have the kahunas (regardless of what you think of their judgment) to invest in early-stage ventures, the government should provide matching funds to leading cleantech VC investors or create a government VC fund. If it is willing to invest hundreds of billions of dollars in moribund firms like GM, Citigroup (NYSE:C), AIG, etc., why shouldn't the taxpayer potentially reap the benefits of our investments in advanced biofuels?
  • Eliminate all subsidies for corn ethanol. Believing that corn ethanol will replace petroleum is like a rat thinking it is makes progress on the treadmill with each rotation of the wheel. Given the inherent scarcity of available tax dollars, every tax dollar provided to the corn ethanol industry is a dollar not invested in advanced biofuels. This idea, although practical, would be very controversial considering the stranglehold that Big Agriculture (ADM, Monsanto (NYSE:MON)) and Big Ethanol (RFA, Growth Energy, POET Energy, ADM) have over the Senate. Corn ethanol is subsidized in so many ways it is hard to keep track. Among the obvious ones to eliminate are the $0.45/gal "blender's tax credit" for petroleum refiners to blend ethanol and the $0.54/gal tariff on imported Brazilian ethanol. These provisions expire at the end of 2010 and every day I receive an email from the propaganda wing of the Renewable Fuels Association [RFA] clamoring about the Armageddon consequences that will occur if their corporate welfare is discontinued. Yet, when did corn ethanol become "too big to fail?" If the industry with 12 billion gallons of production cannot compete without $5.5B of subsidies, maybe it isn't a good idea for them to be in business. You cannot have capitalism without bankruptcy, otherwise you get moral hazard. And while I prefer to keep Americans employed, why is Middle Eastern oil preferable over Brazilian ethanol?
  • Create a $100M X Prize. The government should provide $100M to the first company that delivers 10 million gallons of drop-in jet, diesel, or gasoline with a verified levelized cost under $2.50/gal that reduces life-cycle GHGs by at least 60% compared to petroleum. The prize should be technology neutral but the winning biofuel should not be derived from food-based feedstocks, cropland, or fresh water. Once success is completed at this scale, the government should repeat the prize with larger dollar, volume, and GHG reduction targets with lower cost goals.

Disclosure: No positions

Source: Will the BP Tragedy Spur Faster Adoption of Biofuels?