Biofuels: The Cup Is Half Empty

[imgbelt img=ethanolplant528.jpg]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.



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Contractors signed the last beam of a demonstration plant for making fuel from cellulosic ethanol in Jennings, LA, 2008. Late in 2012, BP cancelled its plans for larger scale commercial development of cellulosic ethanol throughout the U.S..

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? 

Biofuels History

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.

Not good economics.

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.