Investigation: Inside the ethanol subsidies controversy
Debate over merits of corn-based ethanol heats up as campaigners remain divided on whether Obama should scrap generous subsidies
Hardly a week goes by in the US without another round of jousting in the debate over whether government subsidies for ethanol are the harbinger of a brave new low carbon world or simply to blame for the still-record food prices facing consumers.
Both sides in the debate are aggressively agitating at the moment; no doubt intent on trying to influence the incoming Obama Administration with the merits of their respective points of view.
In a nutshell, the pro-subsidies camp argues ethanol is being used as a smokescreen by food producers to keep prices up and their profits high; and it needs the subsidies to create a major job-producing industry.
The naysayers want the subsidies phased out not only because they say they are driving up food prices, but also because ethanol research is now showing that corn-based biofuels could be bad for the environment as well.
Through several different programmes ethanol is subsidised in the US to the tune of $5bn and, surprisingly to many observers, this is not a new phenomenon - hand-outs for the industry have been around for 30 years.
It was however the Bush Administration's Energy Policy Act of 2005 that really kick-started the ethanol industry as we know it today. That act launched the Renewable Fuels Mandate, forcing state governments to blend billions of gallons of renewable fuel with gasoline by 2012 and giving ethanol producers a market for their product.
The mandate incentivised farmers to grow corn for ethanol, which no doubt was a factor in the run-up to record corn prices, which led to a knock-on effect on wider food prices as the cost of corn-based animal feed also rose.
According to economic forecaster IHS Global Insight, the bottom line for consumers was four per cent food price inflation in 2007 and another 5.3 per cent this year. Yet in a new report distributed earlier this month Global Insight stressed that biofuel subsidies were just one of several factors that led the food price inflation.
In the report John Kruse, managing director of Global Insight's Agriculture Service described as "fiction" the premise that biofuels was the only reason for the inflation.
He said the causes included higher energy costs, which in turn led to higher transportation costs, higher processing costs and high fertilizer prices.
Poor weather also disrupted global wheat production in 2006 and 2007 and there was income growth in Asia, particularly China, which led to long-term tightening of supply and demand. Biofuel was a factor, but just one of several.
Despite the release of this independent analysis the drumbeat from the blame-ethanol lobby keeps on. Food prices, with one or two exceptions such as milk and produce, have remained stubbornly high despite the fact that the price of a bushel of corn has halved since the summer – although it is still historically high – and the cost of fuel has more than halved.
In fact, while the price of everything else fell in the US in October, grocery prices in the government's Consumer Price Index actually rose by 0.1 per cent. Moreover, government economists are still predicting food prices will increase by as much as 4.5 per cent next year although Global Insight says the worst is over and prices will rise only about one per cent.
Meanwhile, the Grocery Manufacturers Association, the packaged food industry's lobbying organisation, continues to blame ethanol for high prices. Just a couple of weeks ago, as part of the Food before Fuel coalition, the GMA called for the new Administration and Congress to repeal the subsidies.
However, profit and loss statistics from the GMA's member companies tell an interesting story about who is really being harmed by rising crop and transport prices. One thing is clear, it certainly isn't the food producers.
While corporate profits are nose-diving in almost every sector, they are rising healthily at the likes of Kraft, Kellogg and Heinz. In an apples-to-apples comparison at Kraft, the company's sales rose nearly 10 per cent in its latest financial quarter and profits rose 14 per cent. Over at Kellogg, sales grew nine per cent and profits 12 per cent. At Heinz, sales rose four per cent and profits 22 per cent last quarter.
While the food producers are doing nicely the same cannot be said for grocery chains, which face the brunt of consumer anger on a daily basis. Most of the big chains showed negligible percentage increases in profit and one, Publix, centered in the south east of the US, saw its profits fall nearly 19 per cent in the most recent quarter.
Perhaps not surprisingly, the abnormally healthy financials from the food producers has attracted the attention of politicians. Chuck Grassley, a Republican senator from the farm belt state of Iowa, is leading the attacks: " Now, my question is, will lower input costs be passed on consumers with lower food prices?"
Democratic congressman Collin Petersen, of Minnesota who is the chairman of the House Agriculture Committee, also called on GMA members to reduce prices and apologise to farmers for its anti-ethanol smear campaign.
As BusinessGreen.com reported recently, the ethanol industry has toughened its stance against its detractors by forming a new lobby group, Growth Energy, to make sure Washington and the American public understand their case. With ethanol companies struggling at present – with the fuel being more expensive than gasoline – it is important to the industry has a message that resonates.
Growth Energy points out that the US Department of Energy estimates that for every one billion gallons of ethanol produced, 10,000 to 20,000 additional, non-outsource-able, jobs will be created.
Another recently released study also proves the economic value of ethanol. That research in Texas showed ethanol raised feed prices costing Texas livestock producers $1.8bn, but to offset that it saved the state's motorists $4bn.
It is statistics like those that has Stewart Ramsey, senior economist within Global Insight's Agriculture Service, believing the subsidies are safe. At a time when the employment environment is dire, the Obama Administration is not going to cut funding to a new industry that can prove it is creating jobs, he says.
There are signs that the GMA and Food Before Fuel lobby are changing tack a little in attacking ethanol. There also seems to be a slight de-emphasising of the price-rise issue to instead concentrate on ethanol's supposedly detrimental affect on the environment.
The World Wildlife Fund is a member of Food Before Fuel and it says its has witnessed "the negative impacts of the biofuel policy not only on the environment, but on vulnerable populations throughout the world".
But ethanol firms like Green Energy and other producers counter that corn-based ethanol is simply a precursor to so-called second generation cellulosic ethanol, which they are investing heavily in developing and can be generated from non-food based crops.
In short, it appears certain that the to-and-fro on the merits of ethanol will not end anytime soon.
Neil Winton: European Perspective
Bentley plan to cut CO2 with ethanol comes under fire
Bentley, the British-based luxury carmaker owned by Germany's Volkswagen, reckons biofuels are the key to cutting its carbon dioxide (CO2) emissions on the way to a greener future.
In the short to medium term, this means embracing ethanol as the main so-called renewable fuel. But, unfortunately for Bentley and the likes of GM, the science points increasingly to this being a dead-end street. Some experts reckon this push for ethanol shows Bentley needs a quick and cheap way to at least appear to be improving fuel economy.
Jerry Taylor, senior fellow at the Cato Institute in Washington, D.C., said it is clear that ethanol, if you add up the energy inputs all the way along the production process until it reaches the fuel tank -- the so-called "well-to wheel" measurement -- doesn't cut greenhouse gas emissions.
"The weight of the evidence against ethanol as a net reducer of greenhouse gas emissions vis-À-vis gasoline is by now quite overwhelming. Exactly how negative the balance is, however, remains to be discovered," Taylor said in a report.
Many scientists say that increasing CO2 emissions by humans is warming the climate. A sizeable minority don't agree with this, but most governments around the world agree with the former.
At the Geneva Car Show in early 2008, Bentley made some startling claims. Bentley CEO Franz-Josef Paefgen said the company's fleet of massive, pricey, gas-guzzling, royalty ferrying limousines and slightly smaller high-performance coupes and sedans beloved by celebrities would achieve the equivalent of an average fuel consumption of about 46 miles per U.S. gallon.
Negligible"Bentley's contribution to overall CO2 emissions is negligible," Paefgen said. "But we still need to act. Taken together, the measures we are announcing will make the entire Bentley fleet capable of delivering less than 120g/km (grams of CO2 per kilometer) by 2012 (the equivalent of about 46 mpg)."
"On a well-to-wheel basis, the entire Bentley model range will become capable of delivering less than 120 g/km of CO2 by 2012. The well-to-wheel measurement is the only accurate way to measure the total energy expended from every stop of the life cycle: from producing and distributing a fuel to its use in a vehicle".
Seventy percentWell to wheel is the key concept. This means that because ethanol is derived from crops, the growing process sucks in CO2. By the time it reaches the car and is burned off to drive the wheels, the theory was that this provided a huge CO2 advantage -- up to 70 percent said General Motors' Swedish subsidiary Saab, and Ford of Europe.
But others didn't agree and reckoned that the production process's use of water, energy, fertilizer and transport actually used more energy than was being saved.
To be fair to Bentley, it is not alone in this belief. At last year's Detroit car show, GM CEO Rick Wagoner said ethanol was the best way to cut CO2 emissions. He said hybrids and fuel cells would have little impact on overall use of gasoline over the next 15 years, but half of GM's vehicles will be able to run on flex-fuel (ethanol or gasoline) by 2012. Wagoner said that if all the flex-fuel vehicles made by GM, Ford and Chrysler were to run on ethanol through 2020 the U.S. could displace 29 billion gallons of gasoline annually, or 18 percent of the projected annual usage. At last year's show, GM announced a deal with Coskata Inc to make so-called second-generation ethanol, known as cellulosic.
Meanwhile, Bentley has not repeated its Geneva claims of late, but it has published a paper on its intentions, which include cutting CO2 emissions by at least 15 per cent by 2012, introducing a new engine which will improve efficiency by 40 per cent, and making its entire range compatible with renewable fuels, which it says will deliver significant savings in CO2 emissions.
"The renewable fuel solution will be based on the incorporation of flex fuel powertrains -- engines that use either biofuel or petrol -- into Bentley cars, dramatically cutting CO2 emissions on a "well-to-wheel" basis," Bentley said in its paper.
Hybrids, dieselsStuart McCullough, Bentley sales and marketing board member, told a press conference called last week to discuss the paper that the company hadn't gone for hybrid petrol-electric engines because they were incompatible with the company's requirement for high-speed cruising. Diesel engines hadn't been ruled out though.
(Parent company VW also owns Audi, which produces high-tech diesel engines for its upmarket cars. Porsche, which now controls VW, recently announced it was installing a diesel engine in its big, luxury SUV, the Cayenne. This diesel is sourced from VW/Audi).
Bentley sold just over 10,000 cars worldwide in 2007, but this has been sliding in 2008 and is likely to reach about 7,000 this year. Sales in the U.S. will fall to about 3,000 in 2008, compared with 4,290 last year. Production at its Crewe factory in north-west England has been slashed.
In past downturns, luxury carmakers were often immune. Not true this time apparently.
More suffering"It's certainly not true in current circumstances. We suffer more in a downturn than mass car manufacturers," McCullough said.
Al Bedwell, analyst at J.D. Power's European headquarters, believes the outlook for biofuel is bleak until cellulosic ethanol becomes available and that won't be until well into the next decade. Current use of ethanol has been criticized for impinging on food production and raising prices.
Cellulosic ethanol uses agricultural waste like corn storks, waste grass and wood, household and municipal waste, discarded plastic and old tires. Microbes then munch away on the stuff to produce ethanol. This process uses less than one gallon of water per gallon of ethanol, compared with three to four gallons with the current process.
Bedwell said though it's not surprising that Bentley is turning to ethanol now.
"As for Bentley, they need to do something quickly as regards CO2. Low production volumes mean developing new powertrains for Bentley cars may not be feasible, whereas conversion to E85 (ethanol) is pretty cheap. Also, Audi is pulling back from hybrids so there wouldn't be a suitable donor system. Diesel is an option, but again, I think the volumes are too low. V8 diesels are generally being replaced by six cylinder diesels, which aren't suitable for Bentley. V12 diesel is a possibility, but it's not that frugal," Bedwell said.
NowhereCato's Taylor thinks the ethanol route is going nowhere.
He cited a study comparing the cost of ethanol made in the cheapest area, Iowa, with Georgia where costs are much higher.
"Green house gas emissions from ethanol are about 32 per cent greater when the corn is grown in Georgia -- the 26th largest corn producing state -- the sort of place where much of the additional corn needed to meet federal consumption mandates will come from. Hence, ethanol production at the margin generates far more greenhouse gas emissions than does ethanol production produced from infra-marginal corn sources, and almost certainly more than conventional gasoline."
"Unfortunately, most studies on this topic have confused average green house gas emissions with marginal ones. Accordingly, expanding ethanol production will thus increase -- not decrease -- total greenhouse gas emissions," Taylor said.
Nitrous oxideTaylor also cited a study by Nobel Prize winning scientist Paul Crutzen, which found that a potent greenhouse gas nitrous oxide emitted in the course of converting biomass to biofuel is three to five times greater than the total amount of nitrous oxide assumed by life-cycle analyses of biofuel production.
He also referred to studies in Science magazine that led to a story in Time magazine noting that all previous studies of greenhouse emissions from ethanol had assumed growing corn and other biofuels removed CO2 from the atmosphere.
"(This was an) assumption that, once plugged into the models, served to offset the larger energy inputs associated with biofuel production vis-À-vis gasoline production. Yet those studies ignored the carbon emissions that occur as farmers worldwide respond to higher crop prices and convert forest and grassland to new croplands to replace the grains diverted to biofuel production," Taylor said.
The so-called well-to-wheel advantage of ethanol adds up to very little, if anything.
"Virtually all studies show that the greenhouse gas emissions associated with ethanol are about the same as those associated with conventional gasoline once we examine the entire life-cycle of the two fuels," Taylor said.
Maximize potentialPerhaps a bit hopefully, Bentley looked forward to second- generation biofuels, which could be grown on marginal land and at least wouldn't take land away from crops for food.
Contrary to Taylor's views, Bentley still claims that biofuels offer a significant reduction in CO2 emissions.
"Bentley believes that producing cars capable of running on biofuels now will maximize the potential net CO2 saving of our cars in the future. Even in areas where biofuel is not yet on sale, these cars will enable our customers to immediately change from petrol (gasoline) when R85 becomes available in their locale."
Neil Winton, European columnist for Autos Insider, is based in Sussex, England. E-mail him at firstname.lastname@example.org.
Bentley banks on biofuels
The luxury car-maker is putting all its eggs in the second-generation biofuel market to meet forthcoming emissions requirements – and maybe also to transport the Queen.
Bentley has revealed further details of its biofuels strategy that it is hoping will help it to reduce the carbon dioxide (CO2) emissions from its cars by 40 per cent within three years and perhaps win over the British royal family to the benefits of plant-derived motoring.
The Crewe-based luxury car maker says it will unveil a bioethanol-fuelled car at the Geneva motor show in March, which will be on sale by the end of July. The company also says it is talking to the royal family about the environmental impact of its car fleet and has not ruled out a supply of bioethanol engines to the Royal Household. In 2002 and 2003, the Queen was presented with two Bentley state limousines, which have been in regular service since then.
Bentley claims that second-generation biofuels offer far superior well-to-wheels CO2 emissions than electric or hybrid cars, but that the fuel has been overlooked by European regulations, which concentrate mainly on tailpipe emissions.
"The emissions contribution from every Bentley ever made represents a single Coke can in an Olympic-sized swimming pool," says Stuart McCullough, Bentley's sales and marketing board member, "but we are serious about the environment and we are very serious about well-to-wheels figure – or net CO2 emissions,"
McCullough says that Bentley cannot change what it is, but it can help bring about a change in the way biofuel is perceived and increase demand for the fuel. He admits that using the fuel "is fraught with social and ecological issues", but points to Sweden, which has Europe's largest biofuel-compatible fleet of more than 115,000 vehicles, and Brazil, which is the world's second largest producer of bioethanol, as examples of the successful use of the fuel in a ecological and environmental way.
McCullough says that Bentley wants to be seen as innovators and that the use of bioethanol will contribute about 15 per cent to the target of reducing Bentley's current 400g/km fleet corporate average by 2012.
"If we engineer our cars to accept the flex fuels, as the vehicle parc grows the demand will push the supply," he says. He has not ruled out the use of diesel engines in a future Bentley, but says the current push is towards biofuels. The company, which is part of the Volkswagen group, says the recently-passed EU rules on new-car CO2 emissions mean that it has the opportunity to register itself as a small, sub-10,000-unit per year producer and negotiate its own CO2 targets with the EU, although it has not definitely decided to adopt this strategy yet.
"The recession means we are likely to remain a sub-10,000 a year producer for some time," says McCullough, "but this EU compromise has given us some comfort for the future of emissions regulation at least."
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