The Future Of Biofuels - The Twisted Economics Of The Carbon Economy
A Fleet Street Letter Special Report
By Nick Louth
The Future of Biofuels: Tough Competition
Biofuels won’t work. Whether the question is offsetting climate change, cutting reliance on Middle East oil or simply finding a profitable new investment, those who put their faith in biofuels are likely to be disappointed.
There are all sorts of reasons for this, but the underlying one, as so often, is economics. We’re not talking PhD economics either, most of this stuff is GCSE-level supply and demand, plus substitution effects. Here are the facts. Most biofuels compete with food supplies. That is either in terms of the land they use, or because they are actually made of food crops. Most absorb more fossil fuels in their cultivation than they save in their end use, so they obviously cannot begin to compete with oil without subsidies. Where the basic economics are attractive, in tropical countries, that is because the land resource is ‘free’. The failure to price the carbon value of tropical forest is leading to the loss of an irreplaceable store many times more effective than the cash crop which will replace it. Finally, a few promising biofuel techniques, using agricultural waste products or seawater, are under development but have attracted only a fraction of the capital of the current crop of useless schemes.
The Future of Biofuels: The best and the worst
Here’s the best kind of scheme, as used in Brazil for several decades. Take a bus, get it to run on ethanol from sugar cane waste instead of on diesel, and you get cheaper fuel and one in which the carbon emitted from the burning of the fuel is balanced by that absorbed when the sugar cane was growing. This cuts the amount of carbon released per mile travelled by 90%. For third world countries, this can boost rural incomes, build a local technology base, and provide a useful export product too.
Here’s the worst kind of scheme, which also happens to be the biggest. Spend $10bn a year subsidising American mid-West grain farmers to grow more maize (corn) which can then be turned into bio-ethanol for mixing with petrol. Ignore the fact that scientists have proved that growing enough corn in a temperate climate to make a gallon of ethanol actually requires more than a gallon of oil in fertilisers , insecticide, agricultural machinery use, processing and transport. Ignore the fact that the energy efficiency of ethanol, gallon-for-gallon is lower than that of the fuel it replaces, so more is needed to drive a mile. Ignore the fact that the rush to grow corn is causing U.S. farmers, those whose surpluses normally feed the developed world, to switch away from every other kind of grain. Combine with a year in which Australian drought and a wet American harvest season are already restricting supply, and then express surprise when prices of all soft commodities shoot to record highs. Oh yes, and one final lunatic twist. Make sure you impose high import tariffs on the only really environmentally effective biofuel, Brazilian ethanol, to protect the market you have so expensively created.
We are already a long way up this blind alley. The U.S. is currently considering extending existing subsidies on biofuel production, which including the 51-cent-per-gallon ethanol tax credit, would cost American taxpayers $140bn over the next 15 years. Congressional lawmakers are considering adding extra subsidies which would raise this total to $205bn. The EU, not to be outdone, has mandated that by 2010 5.75% of transport fuel within its borders should be derived from biofuels, and by 2020 10%. The International Energy Agency has predicted crops grown for biofuels will soar from 41.5m tonnes of oil equivalent in 2010 to 92.4m by 2030 without subsidies, or up to 146.7m tonnes by 2030 with them.
The Future of Biofuels: The carbon economy
and global warming
Let’s get back to first principles. The carbon in the atmosphere, which causes climate change, isn’t made or destroyed but liberated or captured by physical processes. It is absorbed by plants during their growth and released when they die and rot. During their lifetime it is stored within them. We humans, like all animals, take in carbon with our food and exhale it as we breathe. The carbon in our cells grows as we do and is released when we die. Carbon in fossil fuel is also stored, but for millennia rather than years, from the ancient algae and bacteria from which it is made. When we use our cars we liberate this ancient carbon, and do so in a microscopic fraction of the hundreds of millions of years that it took to accumulate.
Now the economic underpinning behind biofuels can be expressed like a household budget. The idea is to avoid drawing on our inherited carbon savings (from fossil fuel reserves ) but use our carbon ‘income’ from growing crops to fund our carbon ‘spending’, e.g. motoring, aviation and industry. Clearly that only works when there is a new source of income, i.e. new crops grown, to fund the new carbon expenditure incurred since the industrial revolution. If you merely divert existing crops into biofuels, you do not add anything to the carbon income side of the account. We have merely been raiding the kitchen kitty.
Leaving the world short of grain is merely causing food stocks (a different form of carbon store) to be run down and prices to rise. The US Department of Agriculture says that world grain stocks have already dropped 5% this year.
The amount of U.S. corn being turned into bio-ethanol for vehicles has tripled in five years to 50m tonnes in 2006. Corn prices earlier this year reached ten year highs, and at $4 a bushel are 70% above year-ago levels. Wheat prices have now followed suit, reaching an 11-year high in recent days, fanned by bad weather. Because agricultural land can be switched from one crop to another, the demand for corn bio-ethanol has fed inflation right the way through the grains complex. Soaring animal feed prices are already feeding through to higher prices for meat and milk. The same is beginning to happen in Europe, where edible oil such as rape seed for bio-diesel are the crop of choice. Brewer Heineken has already warned that acreage switched away from barley to oils is causing prices to rise.
The Future of Biofuels: All this, to save a drop in a bucket
But surely, for all the expense, we are lowering our reliance on Middle Eastern oils? Not really, because there isn’t enough land to allow us to do so. The OECD has calculated that it would take 70% of Europe’s farmland to supply enough biofuels to save 10% of the oil currently used in transport. The 146.7m tonnes of oil equivalent the IEA expects to be drawn from biofuels by 2030 (on the big subsidy assumption) is just 3.8% of annual global oil consumption of 3,809m tonnes, barely enough to satisfy a single year’s incremental growth in oil demand.
The Future of Biofuels: Rainforest destruction
So what about in the tropics? The United Nations has already warned that the clearing of rain forest has accelerated in Asia because of the soaring price of palm oil, which can be used as biofuel. According to Greenpeace, each acre of cleared lost rain forest liberates 20 times the carbon that can be saved by growing palm oil on it for biofuels.
In the shadow of all this, there are some promising technologies. Using food waste that is not either eaten by humans or livestock could add to the net carbon gain, though what pigs and goats are already capable of eating is much underestimated. Electricity generation through burning short-rotation coppice of elephant grass and willow is already a well-established niche in Britain, though it adds to carbon saving only because, unlike food crops, it is allowed to be grown on EU set-aside land. The Seawater Foundation in Mexico has used a combination of shrimp farm waste and seawater to grow carbon-absorbing and salt tolerant plants. This is promising, but small scale so far. Perhaps the simplest biofuel of all is closest to home. We can burn household vegetable waste that otherwise often rots in landfill and releases methane, which is an even more damaging greenhouse gas than carbon dioxide. However, these possibilities so far lack the scale and development needed to push them to the forefront of official thinking.
For FSL readers, there are two conclusions to draw. One is that you are better off riding what looks likely to be an enduring price rise in soft commodities than trying to pick winners among the crop of biofuel minnows on AIM. The subsidy regime, which underpins the economics of too many biofuel ideas, could easily change once the penny begins to drop at the EU on how few are really cost effective.
As for the U.S., if they really wanted to help save the planet (as opposed to enriching some well-placed agricultural interests) they could have used the tools of Adam Smith. A decent-sized tax on gasoline (whose average price per litre even now translates as just 35p) would be a great start. It really is just GCSE stuff.
Nick Louth, Guest writer for The Fleet Street Letter (Sign up today!)
First published on June 23rd 2007
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