Why Biofuels Won't Work

Nick Louth - Fri 29 Jun, 2007

Biofuels wont 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. Were 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....

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.

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.

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 oils 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.

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.

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.

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.

Regards

Nick Louth
For The Daily Reckoning 

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