August 13, 2007
Biofuels: All You Need to Know for a Bar Discussion
Over the last few years, there has been a tremendous increase in global interest in biofuels, a term that refers, broadly, to transportation fuels derived from biomass. Bill Gates, Richard Branson, British Petroleum, General Motors, most giant food companies, and countless other people and institutions haves dabbled in these fuels lately.
There is an enormous amount of news reports, analysis, discussion and media attention given to biofuels. One is first struck by the incredible variety of opinions expressed on the matter; from over the top excitement hailing biofuels as the answer to all of the world’s environmental, economic, social and political problems, to severe criticism that views biofuels as an ultimate evil that will have a profoundly negative impact on forestation, food supply, poor-country economics and just about everything else.
I have been researching this topic for a while, and will attempt to use this column to lay out the (very rough) outlines of the current state of thinking on biofuels—this is, more or less, the local-bar-discussion version of my knowledge of biofuels. I will attempt to provide a short (vastly over-generalized) assessment of the scientific literature on the issue, highlight future possibilities, and discuss how government policy is probably playing a negative role in this process—at least in two specific cases.
The biggest question in biofuels circles for the last few years has been concerning whether they are efficient or not (meaning: do they reduce our use of fossil fuels or use up more energy in their production than they give out when they are burned) and about what their environmental impacts might be. Dozens—if not hundreds—of studies have been done to assess these two questions and have arrived at conclusions so contradictory they may as well have been totally random guesses by children. I will not list those studies and attempt to critique them all, but will outline what I view as the conclusions drawn from assessing the most widely accepted and scrutinized results, dividing them by the type of biofuel assessed:
Corn ethanol seems to be a bad unsustainable idea which is only alive thanks to very generous government subsidies in America, which are estimated to be around a mind-boggling $1/gallon, as well as import tariffs that prevent ethanol from other countries from competing with American ethanol. Environmentally, corn ethanol doesn’t seem to offer many benefits, but producing, manufacturing and distributing it may be more harmful to the environment than just using regular oil. Note that these results will probably not change if the price of oil goes up: oil itself, and many other fossil fuels, are used extensively to produce corn ethanol and a rise in their price will also increase the cost of producing corn ethanol, raising its price as well. The survival of this brand of ethanol is almost exclusively due to the power of the farming lobby, and other special interest groups in America who ensure all the generous subsidies, as well as the fact that Iowa, the country’s main producer of corn is the first US state to hold Presidential primaries, making politicians eager to please its corn farmers for votes.
Sugarcane ethanol, which is mainly produced in Brazil, does seem to be a good idea that everyone is happy to endorse: it is efficient and it reduces CO2 emissions. However, most of the studies done on sugarcane are based on Brazilian production, and it is unlikely that conditions would be as favorable in other countries. Secondly, most of the analysis of Brazilian sugarcane ignores fundamentally important issues: whether sugar cane replaces forests, indirectly replaces forests by displacing other crops which then displace forests, and whether its impact through land use change poses significant environmental damage. This will become a more important question with time as sugarcane production increases and encroaches on more and more land.
Cellulosic ethanol is to biofuels what Barack Obama is often portrayed as being to Democrats: the new shining hope that will fix everything and solve everyone’s problems. Needless to say, there is cause for caution in both cases. Cellulosic (often referred to as Second Generation) biofuels will mark a revolutionary way in producing biofuels, with whose technical details I will not bother for this piece. Everyone seems to agree it will be more efficient, cleaner, and able to produce much larger quantities of fuel; yet no one has perfected the industrial process that will be able to produce it en masse, and therefore, any estimates on its efficiency and environmental impact remain, until now, tenuous. With enormous difficulties in measuring the environmental impacts of biofuels that have been produced for decades, it might be a tad over-optimistic to take at face value any estimates of the efficiency and impact of something that hasn’t been produced yet; similar, perhaps, to measuring the fuel-efficiency of the Flying Ferrari from your childhood dreams. I remain pretty skeptical about it until I see some more concrete evidence.
Biodiesel (usually produced from palm oil, soybean, jatropha or rapeseed) seems like a good idea initially, if one were to look at reduction in Carbon emissions and a basic energy balance. However, on closer inspection, one finds that it is usually a terrible environmental disaster in the making. Nitrogen-based emissions, which also have a large impact on global warming, are produced at very high rates in biodiesel production. Further, in many locations where biodiesel is produced, it has caused massive deforestation, soil damage, environmental degradation, and species extinction. This remains the least researched of the biofuels, and new techniques and plant feedstocks are proposed every day, meaning that there might be possibilities for better applications of it.
It is important to note that these studies are inherently marred with enormous problems that might turn a skeptic away from even bothering with their results at all. Many of these studies have a bad methodology and employ some really egregious assumptions about certain parameters. There is a long debate about what parameters are to be included, and how they are measured. Yet, even if one were to somehow overcome these methodological problems and find the “best” papers employing the most impeccable methodology, problems persist. Even the “best” of these studies still employ a large number of assumptions and predictions of factors which are almost impossible to predict. Everything from the future prices of oil, to the price of cattle feed to demand for oil and price of land is factored into these models, and extrapolated into the future with the swaggering certainty of the captain of the Titanic on the eve of its maiden voyage from Southampton.
Here, one could ask a very pertinent question: Why bother attempting to answer such difficult and laborious questions in universities and think-tanks and research centers? The market system on its own can make decisions for us without someone anointing themselves as an all-knowing prescient central planner ready to predict for us everything from the price of oil to demand for cattle feed in 2030, a quest in which they will invariably fail.
Without subsidies, farmers will only produce what is economically efficient, and everyone will be better off, right? Not exactly. The reason this wouldn’t really work in the case of biofuels (and in many cases related to environmental issues) is that the market can not (at least in its current state) factor in the all-important issues of environmental costs and benefits. Biofuels would compete with oil purely on technical and economic grounds, and the issue of the environment will not factor in the market-decisions of rational actors in any way. This will ignore the environmental damage and produce an incentive to over-exploit fuels that would be harmful to the environment.
Here one would hope for public policy to attempt to make things better, or at least not make things worse. A reasonable course of action would consider funding research into biofuels, since if some of their benefits do materialize, a good argument could be made that these benefits are public goods for which subsidy might be appropriate. Another avenue would be to set the regulatory and economic framework for the fuel market to take into account the environmental benefits and damages accruing from biofuels to assure an incentive for producing the cleanest and most economic forms of fuel.
Unfortunately, public policy seems to be doing the exact opposite: aggravating all the bad aspects of biofuels production and providing incentives for everything but good energy and environmental policy. There are two main policies that I refer to here, and they are common in America and Europe: the subsidizing of biofuel production and the issuing of mandates for a certain percentage of biofuels to be used in transportation fuels.
When production of biofuels is subsidized, governments are practically taking a product which the markets says is inefficient and forcing its production, without much knowledge of whether this increase does indeed have any benefits worth subsidizing, and without even a clear knowledge of whether this subsidy will lead to an incentive to innovate better biofuels, or to promote lethargy among producers whose incentive shifts to lobbying for more subsidies rather than innovation.
But perhaps what is more egregious than subsidies are the mandates forcing a certain level of biofuels to be blended in with regular fuel. The most important of these regulations is the EU directive stipulating a 5.75% share of biofuels in transport fuels by 2010. What this effectively does is encourage the production of any type of biodiesel worldwide to meet the needs of the EU market, with total disregard to their environmental impact. As European demand for biodiesel sky-rockets, the production of the dirtiest and most polluting biodiesel in the world is encouraged, along with all that that entails in deforestation, emissions, and environmental destruction. This is most pronounced in Indonesia and Malaysia, where Orangutans are facing a real threat of extinction from encroaching palm oil farming for biodiesel. The EU will be reducing CO2 emissions coming out of its own cars, but in exchange, probably increasing emissions in other places that supply the biofuels as well increasing deforestation and harming ecosystems.
The incentives from such policies are a textbook example of the law of unintended consequences, and of how government can so often make things worse when attempting to make them better. The original goal of these policies, addressing global warming and environmental damage, has been replaced with the tool that was supposed to address them: biofuels. These laws have converted the means into the ends, and while concentrating on producing legislation that convinces voters that the government is “doing something” about global warming, are instead possibly producing more global and far-reaching damage to the environment.
Far better for all involved (except the producers benefiting from subsidies) would be for governments to get out of subsidizing production and placing mandates, but instead make sure that the market for all fuels internalizes the costs of the environmental damage that they produce. This would provide actors in the global fuel marketplace with the incentive to look for the fuels most efficient economically and environmentally, and allow the market and the collective wisdom of millions of decision makers to arrive at the best outcome. The most obvious way of doing this would be to press ahead with plans for a global market for carbon emissions.
When that happens, maybe biofuels will really turn out to be the panacea that will save humanity, or maybe we will find out that they are a completely pointless, expensive and counter-productive invention and that we would all be better off utilizing other forms of energy. It is impossible to be able to answer this question now, no matter how good the data and the methodology employed. We are much better off remaining agnostic and skeptical; and working to ensure that a system exists that allows the market itself to answer this question clearly.
It is important to note, however, that a lot of the environmental damage that comes from biofuels’ (and all other fuels’) production is not restricted to carbon emissions, but also extends to issues of biodiversity, water pollution, habitat destruction, air pollution, and countless other issues, all of which would not be captured in a market for Carbon. Addressing these issues is no mean feat, but would probably be best achieved through mechanisms that internalize the price of positive and negative externalities into production, allowing the market to decide on what is economically, socially and environmentally optimal.
Posted by Saifedean Ammous at 12:07 AM | Permalink