Two economists study outcomes of U.S. biofuel production. Sold as key to energy independence and rural development, biofuels thus far have been costly failure.
Biofuels have been hyped by many as “renewable” sources of energy that would “reduce our dependence on foreign oil” while “revitalizing rural areas.” Are these claims true or, in the immortal words of Will Rogers, just a bunch of hooey?
There have been two waves of political support and massive taxpayer subsidy for bioenergy development in the United States. The first lasted only a couple of years in the 1970s. Federal and state subsidies, including tax credits, spurred significant investment in ethanol plants, many located in rural areas; however, economic reality driven in part by lower gas prices soon set in and ethanol plants were shuttered. Many plants ended up in bankruptcy, making the federal and state subsidies a waste of money. Furthermore, many farmers mortgaged their land to finance ethanol operations and lost both the fuel plants and their land.
The second wave began when President George W. Bush declared that the U.S. was addicted to oil. The wave became a tsunami when Congressional legislation established (a) the Renewable Fuel Standards (RFS) mandating increasing use of biofuels, (b) expanded federal funding for research on renewable fuels, and (c) continued tax credits of $0.45/gallon for ethanol producers, $1.00/gallon for biodiesel, $1.01/gallon for cellulosic biofuel, and an ethanol import tax of $0.54/gallon to deter Brazilian imports. Except for the cellulosic subsidy, these tax credits and import taxes ended in 2010. This year’s “fiscal cliff” deal, however, retroactively extended the biodiesel tax credit, though not the credit on ethanol. Meanwhile RFS mandates continue, forcing refiners to purchase biofuels.
President Obama followed Bush in promoting renewable energy, calling in his recent State of the Union address for doubling renewable fuel generation by 2020.
Current Biofuel Production
The biofuel industry has been growing rapidly for the past ten years, now driven primarily by the Renewable Fuels Standards. About 14 billion gallons of ethanol and one billion gallons of biodiesel are now produced in the United States. Corn ethanol is made with nothing more than modern moonshine technology on a grand scale; production of biodiesel from plant and animal oils is a very simple chemical process with a big name, transesterfication. These are known as first generation biofuels.
Ethanol plants are located primarily in rural agricultural areas, overlapping with the location of corn production, while biodiesel plants are more closely tied to regions with extensive animal processing and urban restaurants that produce volumes of waste cooking oil.
Current biofuel production meets the 10% Rewable Fuel Standards blend requirement, but the Environmental Protection Agency (EPA) can increase this requirement to 15% in the near future. The effect of a 15% blend on engines has not been resolved.
Cellulosic biofuels, knows as second generation bioenergy sources, are produced, in theory, from corn stalks, grasses, wood and other fibrous plant material. Much of the biomass that might be used for cellulosic biofuel production is located in rural areas, thus this fuel industry has been touted as revitalizing for rural economies.
The original Renewable Fuel Standards mandate called for 500 million gallons of cellulosic biofuel by 2012 and 16 billion gallons by 2022.
Starting five years ago (2007), the U.S. Department of Energy (DOE) invested about $400 million to aid in development of six cellulosic biorefinery plants expected to produce 130 million gallons of cellulosic ethanol annually. Some of those plants are now shuttered. EPA has projected that only two of the plants will produce any meaningful volume in 2013, a total of only 14 million (not billion) gallons.
What went wrong? Federal and private investment was driven not by sound public policy economics but by wishful thinking, false hope and vested interests.
Early on, many industry representatives and scientists insisted that cellulosic ethanol would be commercial viable in only “five years.” That was 1976. Now, after 37 years and billions invested in cellulosic conversion, proponents of this fuel industry are saying that commercial viability is, yes, only five years in the future, a forecast hard to believe.
Producing biofuels from algae dates back to the oil crises of the 1970s. The U.S. government then invested some $50 million in producing liquid fuels from algae. Other countries also invested heavily in algae research and development. These programs were terminated in the mid-1990s because the research showed that “the grand ideal of using algal systems for the sole purpose of industrial energy production” or food production were “simply unrealistic.” There are currently programs dedicated to demonstration and evaluation of algae as a feedstock for liquid fuel but the economics have not improved appreciably.
Removing biomass like corn stalks from fields reduces organic matter and the return of plant nutrients to the soil. If these are not replenished, crop yields eventually decline, soil structure deteriorates and erosion increases.
With industrial biofuel farming, nutrients would be replaced from outside sources. Nitrogen fertilizer is manufactured from natural gas, and phosphorus and potash fertilizer is mined. Mined sources of phosphorus and potashfertilizer will be further depleted. So, production of biomass for energy is not renewable to the extent that expanded production requires more mined phosphorus and potash, much of which comes from foreign sources.
In addition, the price increases for feed grains (corn) have encouraged conversion of pasture and grasslands to cropland, affecting water quality, soil productivity and biodiversity.
So, are first- and second-generation biofuels actually renewable? Not really.
To a very limited extent, biofuels may reduce our dependence on foreign oil, but they will increase our dependence on foreign sources of fertilizer from Morocco, Canada, China and the former Soviet Union.
Moreover, biofuel production numbers bandied about in Washington and by industry representatives are gross production figures, not net. It takes fossil fuel to grow corn, to manufacture nitrogen fertilizer used by corn, to harvest and transport the crop, and finally to generate heat necessary for distillation of ethanol. The consensus is that dryland corn results in a net energy gain of 30-70% depending on soil productivity, production practices, and distillation technology. This means that it takes about a half gallon of ethanol-equivalent fossil fuel to make a gallon of ethanol. This also means that producing 14 billion gallons of ethanol only adds 7 billion net gallons to the nations fuel supply.
But the energy balance for irrigated corn used to produce ethanol is generally negative. Producing irrigated corn for ethanol in the Texas High Plains wastes energy and also wastes water from the exhaustible Ogallala Aquifer. Not good economics.
Manufacture of biodiesel is much more energy efficient, on the order of a 340% net fossil-fuel-equivalent gain. Much of current production of biodiesel is from rendered animal fat, waste cooking oil and non-edible vegetable oils. Some is produced from virgin vegetable oils such as soybean oil. But because vegetable oil production per acre is low, the national potential of biodiesel production is presently limited.
In total, current production of biofuels is replacing not 10% of our fuel, but a net of only about half that: 5%. Beyond the measure of gallons is an issue of energy per gallon of ethanol versus petroleum based gasoline. Ethanol contains 76,100 Btu’s per gallon compared to 114,100 for gasoline. This energy component affects fuel mileage.
Revitalize Rural Areas?
Expanded biomass production will pump more dollars into rural economies through higher crop prices and expanded economic activity. However, many of these dollars will flow to urban areas and to international financial centers for two reasons. First, one of the dismal lessons from economics is that higher crop prices will be capitalized into land values. Long-term, there are no windfall profits to farming, as such, but to owning land. At present about 30% of U.S. farmland (and as much as 80% of productive cropland) is owned by absentee landowners. Enhanced land values may accrue to people in urban areas.
Second, the cost of transporting cellulosic biomass is high. This means that much of this biomass feedstock will need to be used in local conversion facilities or burned in nearby power plants. The buyers of the biomass may have considerable market power over biomass sellers, meaning that farmers may get squeezed and not realize large benefits.
Tax credits and Renewable Fuel Standards mandates increase the demand for corn and, to a lesser extent, the demand for oil-producing crops like soybeans and for biomass in general. We estimate that current levels of biofuel production increased the price of corn and soybeans by about 80 cents per bushell. Other crops were also affected to a lesser extent.
Crop farmers are big supporters of biofuels because their income is increased. Livestock and poultry producers, however, dislike biofuels because their income falls due to higher feed costs. Higher crop prices do translate into higher food costs, but the effect in grocery store prices may not be discernible to the average U.S. food consumer. Similarly, the net impact of ethanol production on gasoline prices is very small.
For very low income people, particularly in parts of the world where most of personal income goes for food, the food-price effect of expanded biofuel production could take people from barely adequate nutrition to hunger.
For the U.S. economy as a whole, negative effects on food consumers are almost offset by farm income gains. The big impact is the cost of the subsidies to taxpayers, amounting to over $6 billion in 2010, and totaling over $20 billion since 2007.
Will first- and second-generation biofuels solve America’s energy problems? With current technology, absolutely not. Expanded biofuel production with current technology will result in large benefits for some, but large costs for others, netting only a small impact on energy. This outcome could change if technological developments were to create commercially viable processes of production and if—this is a big if–we develop cost-effective processes for recycling plant nutrients to avoid dependence of foreign sources of fertilizer.
Until these technologies and new processes for retaining plant nutrients become realities, biofuels can’t offer energy independence, sustainability, or promise for rural development. They aren’t what they’ve been cracked up to be.
C. Robert Taylor and Ronald D. Lacewell are professors of Agricultural Economics, Dr. Taylor at Auburn University, Dr. Lacewell at Texas A&M.