contributor perspectives

Sep 13, 2007 | 18:25 GMT

The Biofuel Backlash

Contributor Perspectives offer insight, analysis and commentary from Stratfor’s Board of Contributors and guest contributors who are distinguished leaders in their fields of expertise.
By Bart Mongoven 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. In Europe, Friends of the Earth hailed the report, saying it has focused attention on the negative issues surrounding biofuels, while 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. They argue that these fuels offer little benefit and have serious drawbacks. Specifically, they question the wisdom of burning food crops for fuel. They point to a "tortilla crisis" in Mexico caused by rising corn prices and a "bread crisis" in France caused by rising wheat prices. Inflation in China is now running above 6 percent, largely due to increases in the price of foodstuffs. In other words, the backlash against biofuels is in full swing. 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. Moreover, advancements in biofuel technology over the next decade or so could convert some of the current critics to supporters.

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. Sugar ethanol from Brazil, over its lifecycle, produces 50 percent to 70 percent less greenhouse gas emissions than gasoline. Early indications are that the next generation of cellulosic ethanol will produce more than 90 percent less emissions than gasoline over its lifecycle, though there are significant infrastructural and technical obstacles to the realization of such breakthrough technology. According to the U.N. Food and Agriculture Organization, the countries of Southeast Asia, Central Africa and South America, especially Brazil, have the highest potential for producing the fast-growing woody crops that will be used in the next generation of biofuels. Over the long term, biofuels could emerge as a way for the economies of many poor countries to gain a solid footing by increasing the agriculture sector generally and diversifying national economies. That is, of course, if major consumers will import their biofuels. 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. With this, it is looking beyond corn to other sources, such as Brazil's sugar-based ethanol — though a solution that benefits Brazilian farmers but offers little to EU farmers is highly controversial. Meanwhile, in the United States, where imported ethanol is saddled with a 53-cent-per-gallon tax, biofuel produced outside of the United States is uncompetitive.

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. Among the most intriguing aspects of the political wrangling over the biofuel mandate in the United States has been the disappearance of the environmental lobby. When pressed, it says it generally supports a mandate and emphasizes the importance of next-generation sources. This is an important turn because for the past 20 years environmentalists have battled appeals by farm states to mandate the use of corn ethanol. Major environmental groups are among those that have commissioned and brought attention to studies showing negligible or negative environmental benefits from ethanol. 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 issues were similar in the European Union, though the politics were slightly different. While the EU environmental lobby is much stronger than its U.S. counterpart, it pales in Brussels compared to the farm lobby. In Europe, the important energy issues are energy security and climate change. Environmentalists were helpless when the farm lobby flexed its muscles in the most recent energy policy discussion and won a dramatic increase in biofuel use, having used both energy security and climate change as justification. Though environmentalists were livid, for EU politicians it was an easy decision: the policy supports farmers while dovetailing with the urgent call for a diversification of energy sources. As in the United States, support for biofuels addressed a problem rhetorically and allowed politicians and interest groups to score important political points. 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. In Europe, environmentalists are more outspoken in their frustration — as Friends of the Earth's clear support for the OECD report suggests — though many rest with the knowledge that they have at least reduced oil's share of the transportation fuels' market, which for many is better than a Pyrrhic victory.

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.
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