Climate change The promise of biofuels always sounded too good to be true. A technology that reduced dependence on oil supplies from unfriendly countries, helped fight global warming and gave an excuse for generous subsidies for a powerful political interest group: little wonder that politicians in the US, Europe and Asia have embraced it enthusiastically.
But in the past few months many claims made for biofuels have been shown to be out of touch with reality. The first-generation biofuels, grain ethanol and biodiesel, are costly, often of questionable environmental merit, and cannot replace more than a fraction of world demand for oil.
Brazilian ethanol from sugarcane, a cheaper and cleaner alternative, is viable domestically but held back by trade barriers. Second-generation biofuels, such as cellulosic ethanol made from plant waste, are still years from commercial production.
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In Europe and the United States, politicians have been keeping the faith. The energy bill going through the US Congress would mandate the use of 36bn gallons of biofuels by 2022, up from 8.5bn next year. European Union governments have agreed a target that 10 per cent of road fuels should come from biofuels by 2020. But dissenting voices have been growing louder.
Claude Mandil, executive director of the International Energy Agency, the rich countries’ energy watchdog, told the Financial Times: “We are positive on biofuels for the simple reason that they are liquids, so they are one of the very few serious alternatives to oil for use as transport fuel.
“But we need to look seriously at the cost, and at the real amount of carbon dioxide abatement that they provide. And the problem, unfortunately, is that biofuel production in the EU and the US does not score very well on those measures.”
The economics of biofuel production have been jeopardised by steep rises in the price of agricultural commodities, such as corn .
Demand from biofuels producers is not the only reason. Falling output and poor harvests due to bad weather are also to blame.
But rising food prices represent a serious threat to the industry. Input prices for feedstock have increased sharply, leading to much smaller profit margins for biofuels companies and problems with obtaining supply.
Investors’ enthusiasm for biofuels companies has been wilting. In the US, last week’s initial public offer of BioFuel Energy, an ethanol producer, was disappointing. In Europe there have been steep falls in the share prices of companies such as Verbio and Biopetrol in Germany and Biofuels in the UK.
At the same time campaigners have been challenging the supposed environmental benefits of biofuels. Total carbon dioxide emissions from corn ethanol are probably only slightly less than those from petrol. Depending on the precise calculation used, the emissions saving may vanish altogether.
Biodiesel produced from palm oil plantations on former rainforest land in Indonesia may even cause more emissions than traditional diesel.
Speaking at an FT energy conference in London on Tuesday, David Miliband, the UK environment secretary, called for an international standard for sustainable biofuels, ensuring they do not contribute to deforestation or compete with food crops. But that would create a further obstacle to the industry’s expansion.
There are two ways in which the economics and the environmental impact of biofuels can be improved: opening up the US and the EU to cheaper, cleaner Brazilian cane ethanol and developing second-generation biofuels. Unfortunately, neither looks very close.
José Sergio Gabrielli de Azevedo, chief executive of Petrobras of Brazil, told the same FT conference on Tuesday that his country had massive potential for expansion. “You can increase biofuel production without jeopardising food production,” he said.
George Soros, the financier, who is investing in Brazilian ethanol, has urged the developed countries to cut their tariffs, and the idea has some support in both the US and the EU. But cutting import duties would undermine the political appeal of the biofuel industry to politicians who serve agricultural constituencies.
Second-generation biofuels are now the great hope. The US government has given up to $385m (€287m, £194m) to fund the development of six pilot plants. Vinod Khosla, the Silicon Valley venture capitalist, biofuel advocate and co-founder of Sun Microsystems, has said he expects cellulosic ethanol to be commercially viable by 2009.
However, Aasari Efiong, a renewable energy analyst at Merril Lynch, says companies have generally told her they see 2012-15 as a more realistic target.
But even in the best-case scenarios, biofuels are a solution only for transport. If overall greenhouse gas emissions are to be cut, similar reductions must be found in other sectors.
