Running on Empty

Wednesday, January 16, 2008

Exhortations to be ‚more green” are everywhere. But when green policies and decisions are based on nothing more than a passionate but uninformed desire to save the planet, they often run afoul of the law of unintended consequences. For a prime example, consider the momentum in many parts of the world to reduce carbon dioxide emissions and dependence on imported oil by using more biofuels. Good goals, bad policy.

The European Union seeks to replace 10 percent of its oil consumption with biofuels by 2020. Even China has gotten into the game, aiming for 15 percent. President Bush announced in January 2007 a goal of replacing 15 percent of domestic gasoline use with biofuels (ethanol and biodiesel) over the next 10 years, which would require almost a fivefold increase in mandatory biofuel use, to about 35 billion gallons. In June 2007, the Senate pushed the target to 36 billion gallons by 2022, of which 15 billion gallons is mandated to come from corn and 21 billion from other sources that are more advanced but largely unproven.

With current technology, almost all of this biofuel would have to come from corn because there is no other feasible, proven alternative. However, it is unlikely that American farmers will be able to meet such demands. Because of the inefficiencies inherent in producing ethanol from corn and the relatively meager amount of energy yielded by burning ethanol, the demands on farmland would be staggering. An analysis by the Paris-based Organization for Economic Cooperation and Development suggested that replacing even 10 percent of America’s motor fuel with biofuels would require that about a third of all the nation’s cropland be devoted to oilseeds, cereals, and sugar crops. Achieving the 15 percent goal would require the entire current U.S. corn crop, a whopping 40 percent of the world’s corn supply.

This would do more than create mere market distortions. Even without the increasing pressure on corn production abroad, the irresistible pressure to divert corn from food to fuel in the United States would create unprecedented turmoil.

Another unintended consequence of the intoxication with ethanol production is the pressure on water supplies. According to a report from an environmental advocacy group, three to six gallons of water are needed to produce each gallon of ethanol. Just to process the corn and produce the fuel, the group estimates, 2.6 billion gallons a year could be required from a single large aquifer that extends from Texas to South Dakota, and an additional 120 billion gallons a year would be needed for irrigation to grow more corn.

In the short and medium term, ethanol can do little to reduce the vast amount of oil that is imported, and the ethanol policy will have profound ripple effects on other commodity markets. Corn farmers and ethanol refiners are ecstatic about the ethanol boom, of course, and are enjoying the windfall of artificially enhanced demand. But it is already proving to be an expensive and dangerous experiment for the rest of us. With other countries joining the United States in ramping up biofuel production, mainly of ethanol, world food prices are skyrocketing.

A 2005 law mandates production of 7.5 billion gallons by 2012, about 5 percent of the projected gasoline use at that time. These biofuel goals are propped up by a generous federal subsidy—via tax credits—of 51 cents a gallon for blending ethanol into gasoline, and a tariff of 54 cents a gallon on most imported ethanol, to keep out cheap imports from Brazil. Such subsidies ignore science and economics in favor of politics, and show disdain for free markets.


Thus, it is no surprise that the price of corn has doubled in the past year—from $2 per bushel to $4. We are already seeing upward pressure on food prices: nationally, food prices were up 3.9 percent in April 2007, compared to a year earlier. An Iowa State University study estimates that food prices have already increased by $47 annually per capita, or $14 billion overall. Until the recent ethanol boom, more than 60 percent of the U.S. corn harvest was fed domestically to cattle, hogs, and chickens, or used in food or beverages. Thousands of food items contain corn or corn byproducts. A spokesman for one of California’s largest cattle ranches and feedlots noted that since the end of 2005, the company has experienced a 36 percent increase in the cost of feed, which translates to an additional expense of $101 per animal raised. Reflecting these trends, the National Cattlemen’s Beef Association has demanded an end to both government subsidies for ethanol and the import tariff on foreign ethanol.

The poultry industry is also squawking. The National Chicken Council demands remedies from senators who represent the big Southern poultry states, and the National Turkey Federation estimates that its feed costs have gone up nearly $600 million a year.

Corn farmers and ethanol refiners are ecstatic about the ethanol boom and are reaping the windfall of artificially enhanced demand. But it is already proving to be an expensive, dangerous experiment for the rest of us.

These effects may only hint at things to come. Any shock to corn yields, such as drought, unseasonably hot weather, pests, or disease, could send food prices during the next few years into the stratosphere. Even Gregory Page, the CEO of agribusiness giant Cargill, a major beneficiary of the ethanol boom, shares these fears: “We just have to be sure that the moreis- better mind-set [regarding ethanol] doesn’t get way out ahead of the capacity of the land to provide the fuel. . . . What we would like to see is some thoughtfulness about what we will do if we have a weather calamity.” Such concerns are more than theoretical: in 1970, a widespread outbreak of a fungus called southern corn leaf blight destroyed 15 percent of the U.S. corn crop, and in 1988, drought reduced U.S. corn yields by almost 30 percent.

It’s easy to disparage oil and coal. Politicians like to say that ethanol is environmentally friendly, but these claims must be put into perspective. Although corn-based ethanol is a renewable resource, it has a far lower energy yield relative to the energy used to produce it—what policy wonks call “net energy balance”—than either biodiesel (such as soybean oil) or ethanol derived from many other plants.

Moreover, ethanol yields about 30 percent less energy per gallon than gasoline, so miles per gallon in internal combustion engines drops off significantly. Adding ethanol also raises the price of blended fuel because it is more expensive to transport and handle. Lower-cost biomass ethanol—for example, fuel from rice straw (a byproduct of harvesting rice), switchgrass, or other sources—would make far more economic sense.

It would make far more sense to import ethanol from Brazil and other countries that can make it efficiently—and also to remove the tariff on Brazilian imports.

Even under the most favorable circumstances, large amounts of ethanol from biomass will not be commercially viable for many years, but we should not hinder such production with government policies that discriminate, by means of corn subsidies, in favor of corn-based ethanol. Government policies should stimulate innovation as broadly as possible and let the marketplace determine winners and losers.

Recent research articles describe the kinds of alternatives that should be permitted to compete with corn-derived ethanol. Researchers at the Samuel Roberts Noble Foundation in Oklahoma reported in Nature Biotechnology the genetic engineering of a new variety of alfalfa that contains less lignin— the substance that imparts mechanical strength to plant stems and woody tissue—than conventional alfalfa. Because the new variant is defective in biosynthesis of lignin, it is more susceptible to digestion by the enzymes used to convert plant material into the sugars from which ethanol is produced; some engineered varieties of alfalfa yield almost double the sugar available from conventional alfalfa. This approach has dual advantages: it promises to reduce the costs and increase the yield of ethanol production from alfalfa, and to reduce the need for environmentally damaging acid in the biofuel refining process.

Any sort of shock to corn yields—drought, unseasonably hot weather, pests, disease—in the next few years could send food prices into the stratosphere.

A research team at the University of Wisconsin described in Nature a catalytic process that converts the simple sugar fructose, which can be obtained directly from biomass or derived from glucose, another simple sugar, into 2,5-dimethylfuran. The advantage therein is that 2,5- dimethylfuran has an energy density—the amount of energy stored per unit mass—40 percent higher than that of ethanol, the only renewable liquid fuel currently made in large quantities. It is also less volatile, and, because it is insoluble in water, easier to obtain in pure form.


American legislators and policymakers seem oblivious to the scientific and economic realities of ethanol production. They tend toward what John Llewellyn, senior economic policy adviser at Lehman Brothers, has characterized as “piecemeal, disorganized policy-making, reminiscent more of Soviet central planning than of modern market economics.” Brazil and other major sugarcane-producing nations enjoy significant advantages over the United States in producing ethanol, including ample agricultural land, warm climates amenable to vast sugarcane plantations, and on-site distilleries that can process cane immediately after harvest. At current world prices for sugar and corn, Brazilian ethanol production would remain competitive even if oil prices were to drop below $30 per barrel, but U.S. cornbased ethanol plants would be losing money at $40-a-barrel oil, even with the subsidy. It would thus make far more sense to import ethanol from Brazil and other countries that can produce it efficiently than to rely on corn—and also to remove the 54-cents-per-gallon tariff on Brazilian ethanol imports.

Another important strategy: encourage a more prominent role for nuclear power, which consumes no fossil fuels and emits no greenhouse gases. (Note that the benefits of even plug-in electric cars are limited by the source of the electricity, much of which is produced from coal or oil.) The good news is that with electricity demand projected to soar more than 40 percent by 2030—not including the potential demand from greater availability of plug-in hybrids and other forms of electric cars—the Nuclear Regulatory Commission expects applications for as many as 11 new nuclear power units this year and for as many as 28 by the end of 2009.

Our politicians may be drunk with the prospect of corn-derived ethanol, but if we don’t adopt policies based on science and sound economics, it is consumers around the world who will suffer from the hangover.