Thursday, February 01, 2007

The Roadblocks to the Ethanol Superhighway

Collateral Damage of Alternative Energy: Part One in a series of postings to consider carefully the potential downsides to various alternative energy strategies that have been touted as sustainable energy solutions.

The ethanol boom in the U.S. has been fuelled by a top down regulatory policy, in part to replace toxic methyl butyl tertiary ether (MBTE ) as an additive to vehicular gasoline, and also as an outright substitute to gasoline in order to wean the U.S. off its dependence on foreign oil, which now account for two-thirds of U.S. oil consumption. President Bush's "20-in-10" policy (reducing gasoline use by 20% in the next 10 years) announced last week in his State of the Union address, under which a target was set to produce by the year 2017 35 billion gallons of alternative fuels (including biofuels like ethanol; but also ominously blatantly less sustainable fuels like gasified liquid coal), will ensure that ethanol will continue to attract investments. Derived primarily from corn, ethanol production in the U.S. is propped by a 51 cents a gallon subsidy to the agent who blends ethanol into gasoline. Furthermore, U.S. corn farmers are further protected by a a 54 cents per gallon of tariffs on imported ethanol (most likely from Brazil, where ethanol is made more cheaply with sugar).

There are big backers to ethanol. Vinod Khosla is the most prominent venture capitalist advocating the ethanol push, predicting that "39 billion gallons of biofuels production is possible in the United States at reasonable cost by 2017 on 19 million acres, and 139 billion gallons by 2030 on 49 million acres. Soon we will be replacing all 150 billion gallons of gasoline that we use on a very small fraction of our agricultural lands." Bill Gates has put some money behind Pacific Ethanol, and big corporations such as Archer-Daniels Midland have invested heavily in seven ethanol plants nationwide. But several stumbling blocks exist:

1. The net energy debate:

Critics of ethanol charge that ethanol production consumes more energy than the ethanol itself provides. Others contend there is a net energy gain of at least 34% (which even if true, doesn't sound like a heck of a net gain, especially considering the fact that crude oil produces 10 times more energy than it takes to extract it). I remain on the fence on this one; there have been reports on both sides of this debate, and I haven't done all the reading (For a good collection of articles on this issue, click here) Vinod Khosla contends in his whitepaper "Is Ethanol Controversial?" that the overwhelming number of studies come out positive, and that in any case technology advances will over time eventually make it net energy positive in a convincing way (think cellulosic ethanol, the Holy Grail of ethanol production from corn husks, wood chips and other agricultural waste, which requires a bit more time to make commercially viable).

2. The food versus fuel debate:

The ethanol boom has created a surge in demand for corn, doubling corn prices over the past year to now over $4 per bushel. Corn just so happens to be one of the most ubiquitous ingredients in North American diets, as Michael Pollan accounts in The Omnivore's Dilemma. The Washington Post, in its review of Pollan's book, notes:

American cattle fatten on corn. Corn also feeds poultry, pigs and sheep, even farmed fish. But that's just the beginning. In addition to dairy products from corn-fed cows and eggs from corn-fed chickens, corn starch, corn oil and corn syrup make up key ingredients in prepared foods. High-fructose corn syrup sweetens everything from juice to toothpaste. Even the alcohol in beer is corn-based. Corn is in everything from frozen yogurt to ketchup, from mayonnaise and mustard to hot dogs and bologna, from salad dressings to vitamin pills. "Tell me what you eat," said the French gastronomist Anthelme Brillat-Savarin, "and I will tell you what you are." We're corn.

To say nothing of the Mexican community, whose staples are corn-based. Tortilla prices surged 14% in 2006 in Mexico (where inflation was just 4%), affecting the poor disproportionately. Not just Mexico, but China, where a moratorium on new ethanol production has been enacted to stem the surge in corn prices. Lester Brown of the Earth Policy Institute warns that the "unprecedented diversion of the world’s leading grain crop [corn] to the production of fuel will affect food prices everywhere. As the world corn price rises, so too do those of wheat and rice, both because of consumer substitution among grains and because the crops compete for land.”

3. The distribution problem:

The geographical situation of U.S. ethanol is that production is concentrated in the midwest, where the corn fields are, but consumed mostly in the coastal regions, where the urban centers are. Existing are not ideal for ethanol transport. First, ethanol is soluble in water, which is a natural occurrence along pipelines. Its mixing with ethanol renders the ethanol unusable in lower ethanol blends or as additives (but not an issue for higher ethanol blends such as E85). Second, gasoline blends that contain more than 10% of ethanol tend to be too corrosive for the pipes and gas pump infrastructure. Thus, ethanol producers have had to rely on rail and truck at a time where rail and truck rates have been increasing due to the tightening of transport capacity (the Wall Street Journal on Feb 1, p. B1, has an excellent article on ethanol's distribution woes). Barak Obama, leading Democratic presidential candidate and a sponsor of new biofuels legislation being introduced to the Senate, admits in a BusinessWeek article: "We've done a better job of focusing on production than we have on distribution."

4. Deforestation:

While it is unlikely that the U.S. government will lift ethanol subsidies and tariffs in the near future, the Bush administration has hinted recently that it would reconsider the tariffs, which would encourage more imports from Brazil. Indeed, because ethanol supplies cannot currently keep up with demand, some 11% of ethanol consumed was imported, two-thirds of it from Brazil. Ethanol in Brazil is derived from cane sugar, creating a shorter supply chain (if derived from corn, the corn has to be first broken down to simple sugars) and resulting in cheaper production. Indeed, the rising costs of corn feedstock and increased transportation costs in the U.S. has made even tariff-imposed Brazilian ethanol ($1.75 per gallon) cheaper that U.S. corn-based ethanol (about $2 ). Indications are that imports will continue to rise (see "Ethanol Imports are Rising" in the Wall Street Journal, Feb 1, p. B1), and this will increase pressure on Brazil ethanol production, spurring increased deforestation to make way for more agricultural land.

An analog in biodiesel with respect to clearcutting and forest fires in Indonesia (see earlier post, and also "Once a Dream Fuel, Palm Oil May be an Eco-Nightmare" in the New York Times, Jan 31, ) is a stark warning of what could happen in Brazil with regards to if current rates of Amazon deforestation were not worrying enough.

The Bottom line: In evaluating the sustainably of ethanol (or any energy source), policy makers must examine its entire supply-chain and life-cycle as well as the risk-risk tradeoffs (in this case the food vs. fuel issue) it presents.