Biofuels Policies: Costly, Ineffective, Inflationary

More bad news for ethanol emerged today via the OECD’s Economic Assessment of Biofuel Support Policies. The report adds to the growing body of evidence that government support of biofuel “is costly, has a limited impact on reducing greenhouse gases and improving energy security, and has a significant impact on world crop prices.”

The report estimates that biofuel support costs between $960 to USD 1700 per tonne of greenhouse gases (carbon dioxide equivalent) saved.

The reduction of greenhouse gas emissions is a primary reason for current biofuel policies but the savings are limited, the OECD says. Ethanol from sugar cane reduces greenhouse gas emissions by at least 80 percent compared to fossil fuels. However, biofuels produced from wheat, sugar beet or vegetable oil rarely provide emission savings of more than 30 to 60 percent while savings from corn (maize) based ethanol are generally less than 30 percent.

Overall, the continuation of current biofuel support policies would reduce greenhouse gas emissions from transport fuel by no more than 0.8 percent by 2015.

Current biofuel support measures alone are estimated to increase average wheat prices by about 5 percent, maize by around 7 percent and vegetable oil by about 19 percent over the next 10 years.

The report recommends:

• Governments refocus policies to encourage lower energy consumption, particularly in the transport sector, a much less costly way of reducing greenhouse gases.
• More open markets in biofuels and feedstocks in order to improve efficiency and lower costs.
• A clear focus on alternative fuels that maximise the reduction of fossil fuel usage and greenhouse gas emissions.
• Further research to accelerate development of second generation biofuels that do not require commodity feedstocks is suggested.

Taking into account the 2007 US Energy Independence and Security Act and the proposed EU Directive for Renewable Energy, 13 percent of world coarse grain production and 20 percent of world vegetable oil production could shift to biofuel production in the next 10 years, up from 8 percent and 9 percent in 2007, respectively.

The challenges facing US corn-based ethanol producers are documented in a report from NPR’s All Things Considered. Despite higher gasoline prices, ethanol producers are struggling as a result of sharply higher corn prices. The report cites a biofuels deathwatch map from earth2tech.com that identifies 18 US biofuels plants that have either been put on hold or cancelled.

 

Comments

[vmonter]

This raises an interesting question: Who is still thinking ethanol is a good thing?

Algae, baby.

[Subsidy Eye]

Actually, the question should be, more precisely, "Who is still thinking SUBSIDIZED AND MANDATED ethanol is a good thing?"

And the answer is: everybody and anybody with the power to influence policy. President Bush, most of his cabinet, all the governors and senators from the Midwest, and most of its congressional representatives, T. Boone Pickens, Vinod Khosla, the NRDC, security hawks, neo-cons, agricultural populists, Monsanto, ADM, ...

[Subsidy Eye]

... General Motors, the rail companies, the President of the European Commission, his Agriculture Commissioner, the UK Renewable Fuels Agency, the Canadian Government, ...

[Shenandoah]

So OECD thinks we would be better off buying more Saudi oil?

Anyone with any depth of knowledge knows this report is non-thinking think tank output.

We are the leaders in biotech and agriculture-lets not be talked out of that position.

[Tim Plaehn]

...VSE shareholders...

[Subsidy Eye]

... Shendandoah ...

[talli]

The debate over whether biofuels produce positive or negative results for the environment is a very important one.

However, please get off the "subsidized biofuels are bad" trip. The fact is there is no alternative energy solution that is competitive today /without/ subsidies.

In fact, the only reason that technologies such as solar and wind are even approaching parity is because progressive countries like Germany and Japan recognized that despite the very low cost of oil, it remained worthwhile to support these industries. FSLR's huge valuation is in large part due to the German market and the subsidized solar farms that they've built. Spain is a similar story, where power companies are required to purchase energy at .40 Euro/kilowatt.

Furthermore, the reason that Brazil got into the ethanol industry in the first place was not to replace oil but to buttress their sugar industry against global fluctuations. A similar argument can be made for the US domestic corn market. Farm subsidies may seem silly today, but 20 years ago during the crash in agriculture they were a critical lifeline.

Building a domestic market for agriculture in domestic energy market /may/ be a good one. That has yet to be determined. But there is a compelling argument for it.

Regarding algae, yes, it's another great idea. But don't get sucked into thinking it has fewer detractions or is any easier to achieve than cellulosic biofuels. Note that all algae production facilities are in the same stage as all cellulosic ethanol plants - demonstration only, loud proclamations by algae companies notwithstanding.

As a result, we've got a long way to go to solve the alternative energy problem, and there will be no silver bullet nor will anything be ideal.

Probably the most wise piece of advice in the document is to advocate for reduced energy consumption. But that's almost as hard as a perpetual motion machine...

[Subsidy Eye]

So, Talli, are all subsidies for anything on which one can hang a label as "renewable" -- even if the degree of renewableness is rather small once all the non-renewable inputs are taken into account -- by definition beyond questioning? And are there not important differences in the way in which government support is provided?

One important characteristic of capital-intensive renewable electricity technologies is that, once built, the energy input is free. Also, the unit cost of electricity tends to fall sharply with cumulative production.

For biofuels, by contrast, the cost of feedstock is the largest element, and as the industry scales up (with the possible exception of sugar cane ethanol in Brazil), those feedstock costs tend to rise. The world prices for vegetable oils are today 3 x what they were just two years ago -- driven, by and large, by the heavily subsidized use of biodiesel. Yes, expanded production could bring down prices, but at what cost to the environment?

Another difference is the way in which the energy sources are subsidized. In the case of ethanol in OECD countries, producers are protected by high tariffs (that is NOT the case for wind turbines or solar cells), yet consumers are shielded by the true cost of the production of those biofuels by subsidies and fuel-tax exemptions that make it appear that the biofuels are no more costly than the petroleum they displace. The higher costs of wind and solar electricity, by contrast, are in many countries passed on to consumers.

Brazil was governed by what was essentially a military dictaorship when it started its Proalcool program. The United States is governed by ... OK, let's not go there.

The point is, they eventually sorted things out, and today the industry is highly competitive without subsidies. In the United States and Europe, the subsidies for producers just keep on giving -- with no end in sight.

If all of the USA's gasoline -- 140 million gallons per year -- were to be replaced with cellulosic ethanol (about 210 billion gallons would be required because of ethanol's lower heat content), subsidized at the rate that will kick in next January ($1.01/gallon), the federal government would be spending $212 billion per year, just to keep the nation's cars running.

And that would be nuts.

[devassocx]

corn(and equivalent) ethanol make no sense to me.

But other bio fuels, including algae appear to make a lot of sense.

Major funding for development of these alternatives could have
a huge payback to our economy.

But it will take time.

[nakedjaybird]

Talli - here's a near perpetual motion machine for you:

a solar PV farm feeding a solar silicon processing faciltiy.

[talli]

Subsidy Eve

The point is not whether subsidies are to be question. The point is whether subsidies fundamentally suggest an artificial market. It's hard for me to think of any modern American market that isn't a result of significant government investment and support, from semiconductors to the Internet.

The subsidies for cellulosics cannot be perpetual, I agree with you there. Just as the subsidies for solar (PV and thermal) cannot be perpetual (although they've been in place for over 25 years...)

Regarding the costs of feedstocks for cellulosics, that is another area of intense research and a critical part of the solution. And there are some strong companies in that area, including Mendel Biotechnologies and Ceres in addition to the giants. Yields per acre are being increased regularly and with that the cost of the inputs will drop. But you're right to point it out as an area of weakness.

Regarding passing the extra cost on to consumers is a good one, but unfortunately not true. Although in Spain there is a cap on the amount of energy that can be produced and still see the exorbitant subsidy:

www.reuters.com/articl...

In the case of biofuels in the US, I agree that the tariff on Brazilian biofuels has unfortunately hurt the adoption of biofuels. And I don't necessarily believe that cellulosic biofuels will penetrate the US before it does places where cheap fermentable sugar is easily accessible and the development of large scale ethanol plants is economically rational (ie Brazil and India).

That being said, the argument that we need to subsidize and protect an important but nascent and immature market has plenty of economic precedent, in and outside the US. I agree with all the posters that it may not work, but that doesn't mean it shouldn't be tried.

[Subsidy Eye]

Thank you Talli for the further elucidation of your views. But I still maintain that how much subsidy is provided, and how it is provided, is crucial. One of the crucial points of the OECD study is the extremely poor cost-effectiveness of biofuel-support policies. Their cost for reducing greenhouses gases (from first-generation biofuels) is around $1000 per ton-CO2-eq, which is 20 times or more higher than a wide range of other ways to reduce GHG emissions.

It is not enough to say that all markets receive government support. Many (but by no means all) do, but that support is usually better targetted (mainly at R&D), and not provided for as long as it has been in the case of biofuels. Ethanol in America may be immature -- in the way you probably do not mean -- but definitely not nascent: it has been subsidized and protected from foreign competition for almost 30 years, and still aparently can't survive without that government support. Yes, there ARE theoretical arguments for supporting some infant industries, but there is plenty of emperical evidence of those kinds of policies failing.

One big risk in the case of supporting biofuels -- not present in the case of some of the other industries that you cite -- is that the rents generated by government support get capitalized into the value of arable land, thus locking in the need for continued subsidies. That is already happening. The average price of farmland in Iowa has mounted steadily over the last four years, increasing by 22% between 2006 and 2007 alone. Withdraw the subsidies and mandates for corn ethanol, and the owners of that land take a big hit.

The other big risk is related to what the subsidized demand for biofuel feedstocks does to the price of foodstuffs. The biofuels industry will deny it until the cows come home (except when they are trumpeting the fact that the higher prices for corn and soybeans, driven up by biofuels, obviate the need for federal commodity support payments), but the rapid expansion in the diversion of crops to biofuels over the last four years HAS been a major, if not THE main factor driving up the prices of cereals and vegetable oils around the world -- not just for rich North Americans and Europeans, but even more so for the poor in Africa and Latin America.

[AmesTiedeman]

We can make Bio-Fuels work if we want to. Look at Brazil. They have done just this.
Willie Nelson is making Bio-Diesel in Texas. We can do anything. We are Americans. The costs will drop. Algae may be the way to go. Ethanol, maybe not. But do not count out Bio Fuels just yet. Brazil uses Sugar Cane. The truth is, one solution is not the answer. We need to use many solutions for a Total Solution.

[Subsidy Eye]

Brazil has 1/10 the number of light-duty vehicles as the United States, and almost as much land. They are blessed with abundant rainfall and a warm climate. Perfect for growing sugar cane, the energy and greenhouse-gas balance for which is far superior to corn ethanol grown in North America. And their production costs are far lower. But thanks to a $0.54/gallon import tariff on Brazilian ethanol, exports to the United States are less than they might otherwise be.

Biodiesel made from virgin vegetable oils is a joke. As long as the industry keeps growing, fueled by subsidies, its input costs will grow as well. The federal tax credit for biodiesel is $1.00 per gallon. In Pennsylvania, the state government tops that up with payments of another $0.75 per gallon and in Kentucky the state pays an additional $1.00 per gallon. Even with those prices, many producers (those not exporting biodiesel to Europe, where they can pick up additional subsidies) are struggling to cover costs. Without the subsidies, the U.S. biodiesel industry would all but disappear. Look at Figure 2.2 in the OECD study.

Algae may some day provide a cheap source for fuel. I hope it does. But for the moment it is just another experimental technology. Current subsidies for vegetable-oil-based biodiesel do NOTHING to help that technology along.

[Raimonds1]

What about some facts about biofuel efectivity, for example in SAAB BioPower