COMMENT FROM RON STEENBLIK

Director of Research

Global Subsidies Initiative of the International Institute for Sustainable Development

Geneva

Dan Sperling's commentary provides a good overview of the state of biofuel developments and use in the transport sector.

Let me take Dan’s second question first, however, as it bears most generally on how the topic should be approached. He asks, “Which of the biofuels hold the most promise for the transport sector?”

The answer should be, “Nobody knows for certain.” Oh, sure, producers of ethanol and biodiesel will claim that their fuels hold the most promise, if for no other reason than that they have a head start. And, as to be expected, companies working on butanol or so-called “renewable diesel” or any of a number of other liquid fuels made from biomass will argue that the future is theirs. Nothing wrong with that.

The problem is that policy makers are listening, and betting their (actually, the public’s) money already on particular fuels. Even a bet on biofuels generally is a bet on a narrow range of transport options. Who can really know whether other ways of propelling private automobiles may emerge as cheaper and technologically superior in the next decade? Yet, by providing heavy subsidies, and setting ambitious mandates for biofuels, in some cases as long as 15 years into the future, policy makers in several countries are acting as if they have already decided which technology will come out on top.

I respectfully disagree, therefore, with Dan Sperling’s acceptance of the view — proffered by the ethanol industry and the politicians representing their districts — that "corn ethanol could be a stepping stone to more promising biofuels." Those more promising biofuels include, of course, ethanol made from ligno-cellulosic materials, and other fuels synthesized from biomass. But if the future is butanol, or octanol, or other synthesized fuels that can be mixed with or easily substituted for petrol or diesel without having to change storage and distribution infrastructure, or vehicle engines, then no stepping stone is needed: the market will easily absorb these fuels as increasing supplies become available.

If, on the other hand, the future is truly ethanol — a corrosive fuel with a high octane value but energy density two-thirds that of petrol — then one has to ask also which is the main roadblock: economic production from waste ligno-cellulosic sources, or the capacity of the fuel distribution system to handle it, and the vehicle fleet to use it? The latter certainly could become constraints, but subsidizing first-generation biofuels seems a costly way to overcome them. Assuming a breakthrough is achieved on the production side (and forecasts of when that will happen vary tremendously), the process of enlisting farmers to start growing new feedstocks, to identify suitable production sites and construct new plants will take many years: time enough for the rest of the system to adjust.

One may argue that, because of the time it takes for vehicle fleets to turn over, it would be desirable, by the time that large volumes of cellulosic ethanol become available, for a significant proportion of the petrol-using fleet already be flex-fuel vehicles — i.e., vehicles capable of running on blends containing high percentages of ethanol (up to 100% in the tropics or 85% in temperate climates).

OK, but what then is the appropriate roll of public policy? I would argue it is to educate, not to subsidize: let individual consumers weigh up the probabilities that it would be to their advantage to own an FFV. Instead, what several OECD countries are doing is artificially skewing the car market towards the production and ownership of FFVs. The results can be perverse. The policy in the United States, for example, grants manufacturers of FFVs generous credits against corporate average fuel-economy (CAFE) standards, even though most of the vehicles once they leave the dealer's lot run on petrol. And these vehicles tend to be big: many are equipped with 5.3-litre engines. The National Ethanol Vehicle Coalition even sells a sticker that owners of FFVs can affix to their vehicle's bumper. It reads: "Ethanol Guzzler". And I do not think the NEVC means it as an ironic joke.

A case could even be made that the way that government financial support for corn ethanol is currently being provided (in the USA and to a lesser extent Canada), it may actually delay the emergence of a cellulosic-ethanol industry. For one, the corn ethanol plants have occupied the main niches available for ethanol plants in the U.S. Midwest (and southern Ontario). And only the larger ones are likely to be worthwhile making the added investment required to process cellulosic feedstocks. In any case, the feedstock in the U.S. Midwest is likely to remain corn -- other parts of the corn plant, as well as the kernels, but still corn. Short of subsidizing the transition, there is too much investment in corn-harvesting technology, DDGS production (which benefits from special tax breaks), and DDGS consumption (including the relocation of cattle feedlots) for corn to cede its dominance in the Midwest to switchgrass or miscanthus. Outside of the corn belt, people speak of using woodchips. But there are other claims on those biomass resources, not least power generation. It is the opportunity cost of the feedstocks and the land on which they grow that matters, not just production costs.

As for biodiesel, the first-generation technology (transesterfication of fats or oils) is certainly not a stepping stone to second-generation technologies, which are radically different. Moreover, as Dan Sperling notes, the industry has been a victim of its own success: prices for all feedstock oils and fats (tallow included) have risen sharply over the last two years. It survives as more than a niche fuel market (which it would be if it depended just on used cooking oil) only because of subsidies. Big ones.

In the U.S. State of Kentucky, a medium-sized producer of biodiesel from virgin agricultural materials (e.g., soybean oil or tallow) benefits from a state subsidy of $1.00 per gallon ($0.26 per litre), the normal federal tax credit of $1.00 per gallon (paid to blenders but raising the price at which the producer can sell its biodiesel) and the small producer's tax credit of $0.10 per gallon. Adjusting for the lower energy density of biodiesel compared with mineral diesel, that adds up to $2.33 per gallon ($0.62 per litre) of diesel equivalent — or 90 per cent of the average, pre-tax, wholesale (excluding distribution and marketing margins) price of petroleum diesel in the United States as of 10 December 2007. Subsidy rates in several other OECD countries are of similar magnitude. What that means, in effect, is that governments are willing to spend almost as much for their drivers to use biodiesel as it would have cost them simply to buy mineral diesel on the international market and give it away to them, for free.

Will second-generation biodiesel eventually save the day? Who knows. There is a lot of excitement (and, let's be frank, hype) surrounding algal biodiesel. If somebody can get it to perform as advertised, great. And if you want to bet your mortgage on it, good luck. But I wouldn’t bet the future of road transport on it.

Are countries right to set volume-based targets for biofuels?

No! Volume (or percentage) targets – biofuel mandates, for short – are about the most blunt instruments that countries could have devised to promote biofuel use. The industry loves them, of course, which is why it has lobbied so hard for them. Mandates effectively establish a floor on the amount of biofuels sold in a given year, providing insurance against adverse changes in market conditions, such as a rise in feedstock prices, or a fall in diesel or petrol (gasoline) prices.

One of their biggest problems is that the mandates risk being around for a very long time. As U. of Illinois Professor David S. Bullock explains in a recent paper on "Ethanol Policy and Ethanol Politics" in the United States, the “irreversibility of bringing factors into ethanol production causes the subsidy policy to act like a political ratchet. It is easy enough politically to cause the subsidy to go up: corn farmers and ethanol producers influence their congressional representatives, and everyone refers to energy self-sufficiency and rural job creation. But once in place, it may well become politically infeasible to bring the subsidy back down. For, after the economy is finished building new ethanol factories, in response to the subsidy, what then?” What then, is that the plants become hostage to fortune: withdrawing the subsidy would mean stranded investments, and in rural areas where the plants are major local employers, a lot of stranded people, with homes that they cannot sell.

Nobody expects, after setting an obligation to meet 10 per cent of all transport fuel needs with biofuels in 2020, that in 2021 policy makers will say, “Good job! Next year, of course, you’re on your own.” Rather, if history is any guide, the biofuels industry will continue to pressure for ever-higher shares of the transport fuel market, and governments will grant them their wishes.

The industry says that the mandates are needed to “provide stability and reduce uncertainty” for investors. Well, what industry wouldn’t like such a guarantee if they can get it? (I know plenty of family restaurant owners who would love the government to pass a law requiring that, say, one-third of all meals be eaten outside the home.) The point is that, by mandating biofuels, the risks do not disappear: they are simply transferred to other people – drivers, consumers of foods that compete with biofuels and, where biofuels are both mandated and subsidized, taxpayers.

But this is not just a fairness issue. Fulfilling many of the higher, longer-term mandates could well prove even costlier than meeting current ones. And if optimistic forecasts for developments in technology fail to materialize, the world could be facing within a decade the dilemma of having to decide between either repealing the mandates (and probably use a lot of taxpayers’ money to compensate the industry for the U-turn in policy), or enduring even greater pressure on food prices or (dwindling) natural habitats.

Which brings me to the third question: Are subsidies designed to reduce CO₂ emissions best used for biofuel production; if not, where should they be targeted?

Numerous studies ranking various technological and behavioural changes show that subsidizing first-generation biofuels at current levels of subsidization are inefficient. A recent study by McKinsey & Company for the German government (Levers for Greenhouse Gas Abatement in the Sectors—Abatement Potentials and Costs for 2020), shows a relatively large potential for reducing CO2 emissions at costs of 50 euros per tonne of CO2-equivalent or less. Most of the investments below this threshold are in sectors other than transport (note: the Earth does not care whence the CO2 is issued), but even in the area of transport, the study identifies many technologies and behavioural changes (e.g., keeping tyres properly inflated) that cost far lower per tonne of CO2-equivalent avoided than biofuels. Our own studies, by the way, estimate that support for biofuels is currently at least $250 per tonne of CO2-equivalent avoided for most fuels in most countries. And in arriving at those numbers we do not take into consideration GHG emissions associated with land-use changes, which would boost the values even higher (or even imply that the subsidies are increasing life-cycle GHG emissions).

It may still be good value to subsidize R&D on biofuels. But that is not what most of the current subsidies (and market price support – transfers from consumers to producers) are supporting. The vast majority of taxpayer and consumer money being spent on biofuels in OECD countries is supporting not research, nor even the use of relatively low-GHG forms of biofuels (like ethanol from Brazilian sugar cane), but production of biofuels with modest (at best) GHG profiles within their borders.

Now, let’s talk about that.