Political pressure keeps ethanol cash flowing

By most rational measures, the corn-based ethanol industry should be on its knees. Its six biggest public companies have lost more than $8.7bn (€6.7bn, £5.3bn) in market value in the past three years alone.

The fuel has had little impact on either greenhouse gases or US dependence on foreign oil, in spite of an estimated $80bn in taxpayer subsidies that were supposed to address both issues.

The global financial crisis has given fresh ammunition to critics who say the US can no longer afford such government largesse, and there is no let-up in the clamour to blame biofuels for exacerbating world hunger.

“Everybody’s trying to bad-mouth ethanol,” says senator Chuck Grassley, one of the strongest backers of the fuel, which accounts for enormous numbers of jobs and businesses in his corn-growing home state, Iowa.

Yet such is the enormous political and corporate weight behind the industry that only a brave gambler would bet on it fading away soon.

The candidate who polls predict most likely to win in the November 4 presidential election is Barack Obama, the Democrat and a long-time ethanol supporter from the corn-growing state of Illinois.

Although Mr Obama has paid some lip service to ethanol’s critics, he continues to put the expansion of biofuels at the centre of his energy policies.

Even if he is defeated by his Republican rival, John McCain,who is a staunch critic of ethanol subsidies, the industry’s opponents would still struggle to defeat it.

Ask Rick Perry, the Republican governor of Texas. Worried about the pressure corn prices were putting on livestock producers in his state, he tried to persuade the administration of President George W. Bush temporarily to waive one of the biggest planks in the ethanol edifice: the requirement introduced in 2005 for oil refiners to blend billions of gallons of ethanol with gasoline. The mandate will gradually expand from a target of 7.5bn gallons in 2012 to 36bn gallons by 2022.

The Environmental Protection Agency denied Mr Perry’s request, saying there was no evidence that the ethanol mandates were hurting the economy. It is also hard to imagine that Congress would kill off the ethanol mandates at a time when popular support for alternative sources of energy is on the rise.

Lobbyists who work on the ethanol issue, such as Scott Faber of the Grocery Manufacturers Association, say that Congress is split roughly into three camps on ethanol.

Ethanol’s congressional backers also insist the boost that the industry gives struggling farm towns outweighs the cost to taxpayers. “New houses are being built and the main street looks vibrant, and people are excited and they’re proud of the fact they have an ethanol plant,” says Tom Daschle, the former Democratic Senate majority leader.

Some, such as senator Kay Bailey Hutchison of Texas, believe the mandates ought to be frozen and restructured. Others believe the US ought to pursue aggressively next-generation technologies, such as cellulosic ethanol, which uses grass and leaves rather than just corn kernels. A third camp of farm state representatives stand squarely behind the existing mandates.

Yet there is one significant cause for alarm in the industry: the mounting calls to lift the tariffs that have kept the world’s other large producer of ethanol, Brazil, shut out of the US market.

US oil refiners who combine ethanol and petrol will shortly receive a 45 cent per gallon tax credit, down from a previous 51 cents, but foreign ethanol is subject to a 54 cent-a-gallon tariff.

Foodmakers say allowing Brazilian ethanol would help bring down US petrol prices and help the environment. Ethanol is produced by fermenting sugar into alcohol. Brazilian ethanol is derived from sugar cane, which contains more sugar per unit weight than corn. It is also easier to extract than sugar from corn kernels, making sugar ethanol more efficient.

“The rationale for the tariff has evaporated,” says Mr Faber, of the grocery manufacturers’ group. “Americans are paying $4 at the pump and it is ludicrous that we are not doing everything we can to bring $2 ethanol to the market­place that is significantly better for the environment.”

Proponents of ethanol say lifting the tariff on foreign sources of ethanol would, in effect, mean the US government would be subsidising other countries by allowing them to benefit from the 45 cent tax credit.

“This nation is spending $700bn on imported energy. That is an incomprehensible transfer of wealth. And ethanol is the only thing we have today that is mitigating that haemorrhaging,” says Robert Dinneen of the Renewable Fuels Association.

In the longer term, ethanol proponents are hopeful that improvements in corn genetics and progress in the commercialisation of cellulosic ethanol technologies, which use waste materials rather than food stocks to produce the fuel, will render arguments about ethanol’s role in rising food prices moot. Monsanto and DuPont are among the companies working on new corn variants that have the potential to ease prices by dramatically increasing the amount of corn that can be harvested from a single acre.

Meanwhile, ethanol companies and venture capitalists are pumping millions of dollars into research and development of cellulosic technologies.

Poet, one of the biggest US ethanol producers, has started building a test facility for ethanol made from discarded corn cobs – a by-product of corn processing. By 2011, the company hopes to begin industrial-scale production.

For the time being, however, cellulosic ethanol remains an unproven technology.

“Cellulosic is still behind the starting block,” says Bruce Scherr, chief executive of Informa Economics, an agriculture research group. “I haven’t seen evidence that it will commercialise at the rate we’ve been expecting.”

Mr Scherr says the industry is likely to struggle to meet even the modest 0.6bn gallon cellulosic ethanol requirement set to take effect next year under a 2007 law that expanded the renewable fuel mandate.

Even if cellulosic technologies can be brought to market quickly, they could present logistic challenges. Switchgrass, one commonly floated corn alternative, is among the plants that can be most easily converted into ethanol. But to grow enough switchgrass to replace corn as a source of ethanol would require the number of acres of switchgrass under cultivation to surpass those of corn and soyabeans by a large margin, according to one analyst.

“All the alternatives to corn have individual problems,” the analyst says. “For the time being we are stuck with corn ethanol – and the market knows that.”

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THE BIG QUESTIONS SURROUNDING ETHANOL

1. Is it to blame for higher food prices?

Ethanol and other biofuels are to blame for 75 per cent of the increase in food prices ... or for just 3 per cent, writes Javier Blas.

The striking difference between the two estimates – the higher by a prestigious agricultural economist at the World Bank, the lower by the White House – underlines the deep disagreement over whether biofuels have boosted demand for corn and other crops so much that they have become a primary cause of the soaring food prices seen around the world in the past 18 months.

So who is right? It depends on which food prices are measured: retail or wholesale.

Ethanol proponents tend to focus on retail prices, because they have not risen as fast as wholesale prices, which have gone up dramatically.

The reason for the disparity is that food commodities represent only a fraction of final prices paid by consumers in wealthy countries.

In the US, for example, only 19 per cent of the retail cost of food is linked to agricultural commodities while labour costs represent 38 per cent, advertising 12 per cent and energy 7.5 per cent.

So while the price of a packet of cornflakes might have increased, the cost of the corn in each flake will not necessarily be the main cause.

Bob Dineen, president of the Renewable Fuels Association, insists that “what’s been driving food prices is the skyrocketing price of energy”.

In developing countries however, food can make up to 80 per cent of the total retail cost of, say, a bag of corn sold at a street market in Addis Ababa.

Still, most studies now conclude that although biofuels are not the only reason food prices are high, they are a big factor.

The United Nations’ Food and Agriculture Organisation, once ambivalent in the food versus fuel debate, now says biofuels contribute “to higher prices for agricultural commodities in general, and for the resources used to produce them”.

Additional reporting by Stephanie Kirchgaessner and Kevin Allison

2. Has it cut US dependence on foreign oil?

When George W. Bush, the president, in 2006 called for the US to stop being “addicted to oil” from unstable parts of the world, such as the Middle East, few were happier than the corn-based ethanol industry, writes Javier Blas.

One of the main arguments of its advocates was that the fuel would become a home-grown alternative to foreign oil.

Today, Americans are choosing to buy less fuel from Saudi Arabia and other foreign countries but it is unclear if ethanol is the main reason behind the reduction.

The country’s net oil imports will fall this year to 9.64m barrels a day, down from 10m b/d in 2007 and the lowest in five years, say forecasts from the US department of energy.

The fall has more to do with lower economic activity and drivers cutting car use in response to record oil prices than to ethanol, which makes up less than 6 per cent of total US petrol consumption.

The country’s foreign oil dependency is expected to fall from 60 per cent to 50 per cent in 2015, according to the department of energy. This is partly because of high oil prices and partly because of energy laws passed by Congress – the first since those formed in the wake of the energy crisis of the 1970s – to push carmakers to turn their attention to building more efficient vehicles.

But proponents of the corn-based fuel can point to at least one area where ethanol has helped taxpayers save: at the petrol pump.

The International Energy Agency, the western countries’ oil watchdog, says: “Given the poor performance of non-Opec production and relatively low spare capacity, clearly much higher petroleum prices would be in place now if those biofuels had not been available.”

Francisco Blanch, an analyst at Merrill Lynch, has suggested fuel prices would be up to 15 per cent higher if it were not for increased production of biofuels.

Additional reporting by Kevin Allison.

3. Has it cut greenhouse gas emissions

Environmentalists used to support biofuels, such as corn ethanol, as a way of cutting the carbon emissions from road transport – until the fuels were implicated in the soaring cost of food prices, writes Fiona Harvey.

But does the use of ethanol lead to a cut in greenhouse gas emissions?

Not always, is the answer.

In theory, using plants as fuel should produce a lower quantity of carbon dioxide than fossil fuels. Plants absorb CO2 as they grow, which is then released when the fuel is burned, making the fuels carbon-neutral over their lifetime.

In practice, however, whether ethanol produces more or less CO2 than fossil fuel is a function of how it is produced. Some methods of production are so inefficient that burning the ethanol in cars might be a net contributor to greenhouse gas emissions, and thus to climate change.

The US department of energy estimates that using ethanol produces, on average, about 20 per cent less CO2 than fossil fuels. If the production methods were made more efficient, that figure could rise to about 52 per cent, the department says.

Part of the problem is that US production methods are relatively inefficient. Brazil, for instance, has been working on biofuels from sugar cane for decades, and its production processes are the most efficient in the world, with a saving in greenhouse gases of more than two-thirds compared with petrol.

Some US corn-to-ethanol plants are powered by electricity from coal-fired power plants. Emissions from such power plants are much higher than other sources of energy.

The amount of fertiliser needed is also a factor. If land is converted from other purposes to grow ethanol, that cuts the greenhouse gas saving. A study in the journal Science showed ethanol from corn grown on fertile cropland incurs no “carbon debt” – it results in carbon savings compared with fossil fuels – but ethanol from land converted from grassland would take 93 years to repay its carbon debt.