A Plan for the Future of Biofuels in America or The Real Economics of Fuels (Bio and Otherwise)

January 19, 2012

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by Robert E. Kozak (Advanced Biofuels USA) In last days of the 2011 session the US Congress, with a job approval rating of 11% , cancelled the VEETC ethanol subsidy and dropped the tariff on Brazilian ethanol imports.

These major events have caused soul-searching on how the renewable fuel industry will survive. Brazilian sugar cane ethanol interests have cheered Congress even though ethanol is flowing from the US to Brazil rather than the reverse. US corn-ethanol producers have kept a stiff upper-lip and stated their belief that a market approach for biofuel will bring success to the US biofuel industry. Others, however, have questioned if the market approach, as currently constructed, is a viable solution.

In a recent op-ed piece in the Washington Times, Gal Luft (Director of the Institute for the Analysis of Global Security and listed as an ex-Israeli military officer in his bio) has weighed in with his take on how a market based system for ethanol would work.

I’m not sure Dr. Luft’s market based solutions for profitable ethanol prices will be universally popular. “(E)thanol should be viewed as an insurance against economically devastating oil shocks that will hit us again sooner or later.” And, “the comparative per-mile economics of ethanol could easily improve if, as a result of a war in the Persian Gulf, the fall of the House of Saud or collapse of Nigeria, oil prices were to soar into uncharted territory.”

Until these catastrophic events that would revive the ethanol business occur, Dr. Luft has another transportation fuel solution. “At current oil prices, ethanol is more costly than gasoline while the alcohol fuel methanol, primarily made from natural gas, is cheaper than gasoline on a per-mile basis.” If you are wondering where the supply of natural gas beyond the mostly spoken for Marcellus Shale gas (US Dept. of Energy/Energy Information Administration (DOE/EIA Annual Energy Outlook 2011 April 26, 2011, DOE/EIA-0383, 2011) would come from in the future to produce 1 million barrels of methanol per day or more, consider the Leviathan gas/oil field in the eastern Mediterranean Sea. Israel, as well as Syria, Turkey, the Palestinians in Gaza, and both the Greek and Turkish factions in Cyprus have laid claims to this field.

Definition of Markets

Before we get on board with this approach, I think it is time to ask supporters of the “market approach,” how they define markets. Probably the most important question to ask is, “What costs do they count when they determine fuel prices?”

Going back to the quotes from Gal Luft’s piece, he states that natural gas is less expensive than ethanol.

However, the social and environmental costs of extracting Marcellus Shale gas; which already include water supply damage, increased GHGs, and earthquake damage, are not included.

And as for future Leviathan gas, he does not include the direct US national security expenses (and US contributions to Israeli and other countries’ defense budgets) needed to keep Middle East energy supplies flowing. If the hundreds of billions of dollars in US defense funds were included, or the cost of remediating short and long term environmental and social damage were included, natural gas would probably not look so good.

Public Costs

Simply stated the greatest problem with the so-called market approach is that current "markets" do not account for public costs associated with the product.

Hence, most people raised on Reaganomics are able to nicely ignore the costs of fracking or protecting the Leviathan oil/gas field when they calculate transportation fuel costs.

Curiously enough though, they can hypocritically demand that renewable fuel people account for public costs through international indirect land use change (ILUC) assessments and related "clean fuel" standards. (Dr. Luft did point out the hypocrisy of the California clean fuel standard when it came to domestic ethanol production versus Brazilian imports in his article.)

This leads to the question that Naomi Klein asked in her 9 November Nation article. Can the current form of "capitalism" really address climate change?

Ms. Klein, the author of The Shock Doctrine, critiques the economic and social failures created by unregulated corporate capitalism and the privatization of social wealth through shock events such as preemptive wars. She argues that the short term demands of private sector investors combined with governmental cultures that do not require payment for environmental or social costs prevent the necessary actions needed to preserve the planet.

“After years of recycling, carbon offsetting and light bulb changing, it is obvious that individual action will never be an adequate response to the climate crisis. Climate change is a collective problem, and it demands collective action. One of the key areas in which this collective action must take place is big-ticket investments designed to reduce our emissions on a mass scale.”

And, “The private sector is ill suited to providing most of these services because they require large up-front investments and, if they are to be genuinely accessible to all, some very well may not be profitable.”

From an historical perspective, would private investors finance the Interstate Highway System, the Manhattan Project or Hoover Dam? All being projects of the magnitude that is needed. The answer to all three was and remains no.

Reviving and Reinventing the Public Sphere

Ms. Klein’s recommendations to meet the challenge of Climate Change are:

Reviving and Reinventing the Public Sphere
Remembering How to Plan
Reining in Corporations
Relocalizing Production
Ending the Cult of Shopping

These recommendations are not all that radical. In fact, from a Roosevelt or even an Eisenhower perspective, having the public involved with real decision making, basing future actions (of the magnitude of D-Day) on honest strategic planning rather than waiting for catastrophic events, making corporations responsible for their actions, keeping as much production as possible local, and practicing moderation when it comes to personal acquisition doesn’t sound all that bad.

So, getting back to the future of the renewable fuels in the United States, I do not think the solution will be found in something called a “market solution” as long as that market does not account for environmental, social and national defense costs. Nor do I think the private investment class, with their focus on short term profits and lack of focus on regional or national economic goals, will provide the capital needed for a renewable fuels industry that will meet consumer needs and properly compensate the growers who will produce the grasses, trees, and other biomass sources, the workers in the plants, and the scientists and engineers that will create the needed breakthroughs.

To supply the people of the United States with affordable sustainable biofuels, and hopefully to serve as a model for other countries, the basic sustainable biofuels plan for the US needs to include the following.

1. Level Playing Field: Establish a "level playing field" on the accounting and payment of environmental (including long term climate change carbon taxes), social, and national security costs required for all transportation fuels.

Shouldn't the $900 million/day for imported oil be considered a tax on US citizens? Shouldn't the cost of the US forces keeping the oil and gas flowing from the Middle East be added to the cost of oil? Shouldn't the environmental costs of fracking be included in the natural gas sale price? If those costs were properly accounted for in a "truly open transportation market," funding of the projects needed to create sustainable home-grown biofuels would become available. And the sustainable biofuels would be revealed as the bargains they truly are.

2. Planning: Eisenhower’s team got 250,000 men ashore on D-Day and broke the German defenses with less than 5% casualties and did it without digital computers. The Apollo team got to the moon in nine years with rudimentary computers. Those stupendous efforts took real planning. We need to do it again for sustainable biofuels. This type of planning requires leadership and unselfishness. The people of the US need to demand it.

3. Public Investment: A sustainable biofuel supply in the United States would return tremendous social value to the country and its people. The country is ours and does not belong to multinational financial corporations. Therefore, we the people, through our government, will have to finance the science, engineering, and building needed since the investment class will not.

Think of what the great hydroelectric projects in the 1930s and the Interstate Highway system of the 1950s did for the entire country, not for just a few corporations.

We need to make the same effort to build a new biofuels production infrastructure in conjunction with a rebuilt freight rail system and regional transit systems. We need to talk billions and not millions. The US spent over $100 Billion dollars per year since 2001 in Iraq and Afghanistan. We can’t spend $50-100 Billion in the next five years to stop non-renewable, imported transportation fuel use?

2012 is a Presidential Election year. The Farm Bill is also up for renewal this year. Decisions will be made this year that will shape the availability of sustainable home-grown biofuels for the next decade. We need to make sure those decisions will benefit the United States and all the people that live here. Think about the three basics of this sustainable biofuels plan when you talk to candidates and incumbents this year.

1 http://politicalticker.blogs.cnn.com/2012/01/16/cnn-poll-congressional-approval-hits-all-time-low/

2 http://www.washingtontimes.com/news/2012/jan/17/market-based-future-for-ethanol/

3 http://www.oilinisrael.net/top-stories/noble-delays-drillin

4 http://www.thenation.com/article/164497/capitalism-vs-climate

Also: http://www.greentechmedia.com/articles/read/Will-the-Plunging-Price-of-Natural-Gas-Ruin-Renewables/

and http://www.americanprogress.org/issues/green/news/2012/10/24/42790/the-institute-for-energy-research-gets-it-all-wrong-on-regional-energy/

and Video: http://www.plattsenergyweektv.com/video/default.aspx?WT.mc_id=ACAM1309SM_EWTV%20Weekly%20Sept%2022&WT.tsrc=Eloqua&bctid=2669674502001&elq=a219fc3136aa44568ebfbf2132c43826&elqCampaignId=2146