Monday, September 24, 2007

The Biofuel Backlash

A plethora of possible postings has arrived in CARE’s in box in the last couple of weeks. Regrettably, other projects and deadlines have prevented us from making the blog a priority. Today, faced with a window of time to get to reviewing, editing, writing an opening, and posting these delicious new tidbits, we are presented with a different predicament: “Do we post them all now? Do we post one or two today and a couple more tomorrow or later in the week? Which ones should we select first? Should we arrange the postings thematically, or vary the topics?” What to do, what to do?

Because we have a couple items on biofuels are in our collection of articles awaiting posting—and the last posting was on biofuel, today, we offer you fodder for this ongoing discussion. The first has been edited for brevity—though it is still long. We have cut some of the text that we perceive will be less relevant to our audience. If you have an interest in biofuels in Europe, we encourage you to check out the full article at:

If you have wondered why biofuels have taken such prominent position in the energy security debate—especially when they seem to have such negative baggage, you will find this report looking at the agriculture sector to be insightful.

The Organization for Economic Cooperation and Development (OECD) released a scathing report Sept. 11 calling for a dramatic drawdown in the subsidies and preferential trade laws granted to biofuel producers in OECD countries. Libertarian groups on both sides of the Atlantic applauded its call for a reduction in subsidies.

The report is one of a number of efforts designed to deflate support for biofuels in the United States and Europe. Increasing numbers of groups, especially in Europe, are beginning to question the wisdom of the current move toward biofuels as a replacement, at least in part, for gasoline and diesel in vehicles.

The critics, however, are running head on into the powerful agricultural lobbies in the United States and Europe that so successfully championed the issue in the first place. These advocates say that ethanol, biodiesel and other nonpetroleum-based transportation fuels reduce pollution, help fight climate change and improve national security by reducing dependence on foreign oil. Though many policymakers find these arguments compelling, the biofuels issue would not have achieved the political momentum it has without the intense lobbying by the agricultural sector.

In fact, the fate of the current wave of biofuel mandates and the pace at which industrialized countries offer biofuels at the pumps will largely be determined by agriculture interests. The implications are as strong and lasting for developing countries as for the industrialized countries involved.

Plant-based Fuels
The term "biofuels" refers to any number of combustible liquids derived from plants that can be used to create energy. Most biofuel development is directed at use in transportation, where biofuels are envisioned as a replacement for gasoline or diesel fuel. The most prevalent sources of biofuel now are corn ethanol (predominantly in the United States), sugar ethanol (mostly from Brazil) and rapeseed oil for biodiesel in Europe. Among the other current sources are palm and soy oil and various waste products (such as cooking waste) for diesel. In the future, researchers hope to make ethanol from unused portions of agriculture produce--cellulosic ethanol from corn stalks and waste from wood processing.

The creation of biofuels produces dramatically different levels of pollution, depending on the plant used. Ethanol is the same and burns similarly regardless of its source, but the pollution and emissions associated with the specific plant's production cycle vary widely. Corn ethanol, for instance, produces 0 percent to 3 percent less greenhouse gas emissions than gasoline when the factors of planting, fertilizing and harvesting the corn are taken into consideration along with the processing and transportation of the fuel, which in the best case requires dedicated pipelines and currently requires overland transportation.

In the United States and Europe, corn currently provides the bulk of ethanol. Europe has recently adopted a stringent biofuel mandate that calls for an escalating percentage of biofuel in its transportation fuel mix.

Politics of Ethanol
The energy bill that passed the U.S. House of Representatives in August includes a call for more than 7.5 billion gallons of biofuels to be sold in the United States by 2009 and for the amount to escalate to 36 billion gallons by 2022. The catch is that most of the ethanol in 2022 will have to be from "advanced" sources, which is to say from next-generation cellulosic processes. (Europe's emerging policy has a similar clause.) The U.S. numbers will likely be scaled back in the conference committee, but some requirement to increase the use of biofuels will go forward. Once passed and signed, biofuels will be cemented in the national energy mix.

Environmentalists' support for biofuels is tied directly to their support for action on climate change. For environmentalists, imposing a cap on greenhouse gas emissions on the United States is their primary objective. They see a carbon cap as the prize, and they figure that anything done in the process of achieving that goal can be fixed later.

To achieve a carbon cap, supporters recognized that they needed not just the political backing of lawmakers from the West Coast and Northeast, but that they also needed a certain amount of political support from the middle of the country. Policymakers in Michigan, West Virginia and Colorado seemed unlikely to come on board because of the stake their states have in the automobile and coal industries. States such as Iowa, Nebraska and South Dakota, however, have no clear stake in the climate issue so those battling for a carbon cap offered billions of dollars in subsidies and a guaranteed market for corn ethanol. That was something a farm-state senator could support.

The political support for biofuels already is paying dividends in both Europe and the United States. Corn prices are now more than 40 percent higher than they were a year ago, despite a 15 percent increase in planting. The rising price of corn meant reduced acreage of wheat planting, and this has coincided with a terrible drought in Australia and a falling dollar. As a result, wheat prices have doubled in the past year, to $9 per bushel for the first time ever (more than $10 in France). These are good times for farmers, and ethanol is playing a role in it.

Brazil's Challenge
For Brazil, the existing or proposed barriers to the importation of its biofuels present a severe challenge. It invested heavily in research and development of biofuels and has perfected a system that provides a replacement for gasoline at a competitive price and with a significant reduction in greenhouse gas emissions (corn-based ethanol offers little to no greenhouse gas benefits). Brazil is moving its vehicle fleet to ethanol, which will take most of the country's output, but it has developed capacity to export ethanol as well.

Seeing its ethanol exports blocked by the United States and Europe, Brazil is learning that energy security and climate change were only a part of the reason countries looked to biofuels. Certainly, these arguments were important, but biofuel mandates would not have happened if not for the power of agriculture in both the United States and Europe.

Brazil's problem, then, is that it merely solved the problem politicians talked about--it has developed a fuel that reduces greenhouse gas emissions and comes from a place that is politically stable and friendly to both the European Union and United States. In solving the rhetorical problem without offering a political fix, it has placed U.S. environmental activists and EU politicians in a difficult position, and has not necessarily won markets. The larger problem, a problem that the OECD suggests but does not explicitly state, is that there is little interest in either the United States or Europe in staring down the agricultural interests.

Bart Mongoven is Vice President, Public Policy for Stratfor

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