Sheila McNulty Time to revisit corn ethanol policies

A new study by Rice University raises an old point about ethanol – but backs it up with new research, so there is cause for hope that it just might be taken up by the Obama Administration. The report, which includes analysis by environmental scientists and was led by Amy Myers Jaffe, energy expert at Rice University, concludes that the US’ biofuels policies are flawed, raising questions about the economic, environmental and logistical basis for the billions of dollars in federal subsidies and protectionist tariffs that go to domestic ethanol producers every year.

Indeed the numbers detailed in the report are staggering:

In 2008, the US government spent $4bn in biofuels subsidies to replace roughly 2 per cent of the US gasoline supply. The average cost to the taxpayer of those `substituted’ barrels of gasoline was roughly $82 a barrel, or $1.95 per gallon on top of the retail gasoline price (i.e., what consumers pay at the pump.)

These subsidies are aimed at providing a more environmentally friendly alternative source to fossil fuels that has a lower carbon footpint. Yet the report notes ethanol production comes with its own environmental risks, including exacerbating damage to ecosystmes and fisheries along the Mississippi River and in the Gulf of Mexico and creating water shortages in some areas experiencing significant increases in fuel crop irrigation. And the report challenges claims that ethanol use lowers greenhouse gas emissions:

There is no scientific consensus on the climate-friendly nature of US-produced corn-based ethanol, and it should not be credited with reducing greenhouse gasses when compared to the burning of traditional gasoline.

Beyond that, the study notes that the mandates in the Energy Independence and Security Act passed by Congress in 2007 are unrealistic. The bill mandated production targets of 9bn gallons of biofuels a year in 2008, rising to 36bn gallons a year by 2022. Corn ethanol is capped at 15bn gallons a year in the law, but the study says even that level will be difficult to reach given logistical and commercial barriers. And it notes that the law called for 21bn gallons of advanced biofuels, produced from sources like switchgrass, corn stover and algae, to be used in the US fuel supply by 2022. But existing mandated targets for advanced biofuels are not currently achieveable from domestic supplies – scientifically or commercially. Therefore, the report says lawmakers should question the tariff imposed on ethanol imported from Latin America and the Caribbean:

We encourage Congress to revisit these mandates and revise them to be in line with realizable targets and time frames to create an improved policy that will reduce uncertainty for refiners and allow a more orderly implementation ofa achieveable goals and mandates by the Environmental Protection Agency. Tariff policies that block cheaper imports are probably misguided. We believe on balance that the economic and geopolitical benefits to this trade with select regional suppliers would outweigh any energy security costs to having some larger per centage of US ethanol supplies arriving from foreign sources.

Certainly seems to make sense. And that is something Obama’s energy team is striving to do. Take the decision by the Environmental Protection Agency in December that it will wait until the middle of this year before deciding whether to increase the allowable ethanol content in fuel. Growth Energy, a biofuels industry association, had asked the EPA to allow for the use of up to 15 per cent of ethanol in gasoline, up from 10 per cent. But the EPA said it wants more testing data on whether engines in newer cars can handle an ethanol blend higher than the current 10 per cent limit before making a decision.

That is a sign someone in Washington might not just read this report, but act on it.

Related links:

US moving in the right direction on biofuels (FT ES, 07/12/09)
Reviving next-generation biofuels investment (FT ES, 10/11/09)