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The U.S. Biofuel Scam: A View from Abroad

The U.S. Department of Agriculture (USDA) has estimated that one quarter of America’s corn cereal production in 2009 went to biofuels, which in effect turned cheap food into expensive fuel.

Despite pushing up food prices and having unintended consequences for the environment, the U.S. Environmental Protection Agency (US EPA) recently reiterated its support for ethanol. President Obama also promised continued investment in advanced biofuels in his recent State of the Union address.

Bad Economics

A leaked paper on the 2007/2008 food crisis by the World Bank Development Prospect Group estimated that U.S. and European Union biofuel production was responsible for 75% of the price rises–a far cry from the 3% estimate by USDA.

Biofuels from crops like corn, sugar, and palm oil have more than tripled since 2000. In accordance with its 2007 energy bill, America is targeted to increase biofuels production to 15 billion gallons by 2012 and 36 billion by 2022, up from the current 10.6 billion. Of that 36 billion, ethanol is capped at 15 billion gallons.

Just last month, US EPA announced that despite doubts as to its energy and environmental record, they would still support further ethanol production. The new guidelines will allow for the production of an additional 2 billion gallons of corn ethanol and potentially much more.

These subsidies are about political pandering, not cutting greenhouse gases.

The EPA admitted that a considerable amount of current ethanol production would, as a result, fail to meet the 20% reduction criteria. It is difficult to see on what grounds these subsidies to biofuels can be justified–if not outright agricultural protectionism.

We should also bear in mind the other renewable or carbon-mitigating technologies that are being sidelined as massive hand-outs are given to biofuels. There is a real risk that resources, skill, and time are being diverted from potentially promising technologies to subsidize biofuels.

A recent report by Rice University (Texas) found that the U.S. spent US$4 billion on biofuel subsidies in 2008 to replace a mere 2% of the US gasoline supply. It estimates that this costs taxpayers about US$82 per barrel, or US$1.95 a gallon more than the retail price of petroleum fuel. By 2022, US biofuel subsidies will have totaled US$400 billion, according to environmental pressure group Friends of the Earth.

The EU is no better, however, giving around €3.7 billion (US$5.2 billion) in biofuel subsidies in 2007, aiming to replace 5.75% of transport fuel by the end of 2010.

The condition underlying the increase is that future ethanol production must have emissions 20% lower than gasoline. The US EPA says that this could increase farm incomes by $13 billion by 2002 and reduce oil consumption as well as greenhouse gas emissions.

However there are good reasons to remain skeptical of the US EPA’s projections. The new rules requiring 20% lower emissions compared to gasoline only apply to future ethanol production – 13 billion gallons already or soon-to-be produced are exempted.

The US EPA admitted that a considerable amount of current ethanol production would, as a result, fail to meet the 20% reduction criteria. It is difficult to see on what grounds these subsidies to biofuels can be justified – if not outright agricultural protectionism.

Environmental Waste

On top of wasted taxes and higher food prices, biofuels make little environmental sense. Specifically, production in the U.S. and the EU can release more emissions than it avoids. Nobel-Prize-winning chemist Paul J. Crutzen estimates

For rapeseed biodiesel, which accounts for about 80% of the biofuel production in Europe, the relative warming due to N2O [nitrous oxide] emissions is estimated at 1 to 1.7 times larger than the quasi-cooling effect due to saved fossil CO2 [carbon dioxide] emissions. For corn bioethanol, dominant in the US, the figure is 0.9 to 1.5.

Although the United Nations Food and Agriculture Organization sees little chance in the near future of another “concurrence of so many factors” that caused the food crisis, there is no room for complacency. Food prices are taking a long time to fall (corn is still 50% above its 2003-2006 average), while the number of hungry people recently topped one billion. This is a worrying trend as there has been an increase in both the absolute number and the percentage of hungry people, reversing decades of progress.

Ethanol already takes up 27 million acres out of the 90 million acres of corn in the USA:  from 2006 to 2008, the World Bank’s Food Price Index doubled.

If biofuel was about the environment, the U.S. would not impose tariffs on environmentally-friendly ethanol from Latin America and the Caribbean. Likewise, new EU tariffs are clearly aimed at American producers who send 95% of their biofuel exports to Europe.

Another environmental problem is the fear that natural habitats will be converted to farmland to take advantage of biofuel subsidies. The diversion of existing U.S. cropland to biofuels has shifted soybean production to South America and Indonesia, encouraging deforestation. On several occasions, ethanol supporters in Congress and the Senate have tried – and failed – to stop it from taking into account international land-use changes when assessing ethanol.

Nor do biofuels save energy. Some varieties require as much to grow, transport and process as they release when you burn it.

Bad Prospects

And according to United Nations Conference on Trade and Development, at oil prices below $70 per barrel (the recent range is US$70-85), corn-based ethanol struggles to compete without subsidies.

The U.S. and the EU claim “second-generation” biofuels from plant cellulose or waste will help achieve their stringent self-imposed “renewables” targets but this is a nascent industry that has yet to deliver value for money. Yet the USDA has already issued new guidelines to encourage farmers to grow crops for “next-generation” biofuels. The EU said it would reconsider biofuels following the food crisis. But there is powerful pressure from farm lobbies in both places.

Conclusion

Agriculture faces many difficulties, from how to establish land rights to how to disseminate technology or adapt to climate change. But the biofuel problem is a no-brainer.

Creating an artificial market with subsidies is no way to reduce emissions, save rainforests or feed the poor. Biofuel subsidies are just a Green handout to farm lobbies in rich countries:  it is time to end them.

Caroline Boin is a Project Director at the International Policy Network, London, a London-based independent think-tank working to promote economic development via free markets and free trade.

4 comments

1 Marlo Lewis { 03.09.10 at 10:54 am }

Good overview of a bad situation, Caroline. A key issue to keep an eye on is what happens if/when the ethanol industry fails to produce and sell “advanced” (low-carbon) biofuels in the quantities specified by the mandate. Let’s see, will the ethanol lobby advocate lowering the total mandate (36 billion gallons/yr by 2022), or will they advocate raising the ceiling on old-fashioned corn liquor (15 billion gallons/yr)? To state this question is to answer it.

2 Caroline Boin { 03.09.10 at 11:06 am }

Thanks Marlo. The rhetoric surrounding biofuel subsidies is completently cynical and protectionist. As with all bad policies, they’ll wait until people no longer remember – and question – the subsidies.
News from today – Imagine the perverse incentives if they decided to subsidise this technological breakthrough! http://www.timesonline.co.uk/tol/news/science/earth-environment/article7054684.ece

3 Tom Tanton { 03.09.10 at 1:52 pm }

my goodness, subsidies for marine termites; of course the formic acid these little guys make is not such a good environmental release. btw, don’t let EPA get away with comments that the negatives were “just unintended consequences.” There’s a HUGE difference between ‘unintended’ and ‘unanticipated’. They were duly notified well ahead of time that ethanol subsidies/mandates would cause numerous and significant negatives. They not only ignored the warnings, they did not plan for the contingencies. If only we could find a technology to convert hubris into fuel we’d be fine…

4 Jon Boone { 03.11.10 at 7:33 pm }

Not likely to matter, Tom, in the United States of Amnesia…. And, Caroline, people will no longer remember in six months, which is a long shelf life for even institutional memory these days.

Does anyone remember this Great Energy Scam, which Time featured in 2003:
http://www.time.com/time/magazine/article/0,9171,1005864,00.html

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