Al Gore is half right on ethanol

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Now that this year’s federal budget has been worked out, biofuels policy will move its way back up the agenda in the 112th Congress. Late in 2010, biofuels policy briefly became a marquee topic when none other than Al Gore opined that “it is not a good policy to have these massive subsidies for first-generation ethanol,” referring to a whole suite of subsidies and mandates for corn-based ethanol. History will note the first statute to mandate the use of ethanol as an additive to certain reformulated gasoline blends passed the U.S. Senate in 1994 by then-Vice President Gore’s tie-breaking vote.

The 111th Congress renewed the tax credit — but lawmakers and industry officials agreed that a more thorough debate should be had in 2011. Many of the themes Mr. Gore cited will guide that debate. He noted the energy conversion ratios, the cost to the Treasury, and the resulting food price inflation.

The effect of ethanol subsidies on food prices — especially meat prices — is of particular concern. Beef prices increased 1.9 percent in February and are 10.8 percent above last February’s prices, with steak prices up 11.2 percent and ground beef prices up 9.9 percent. Pork prices increased 1 percent in February and are 8.9 percent above last February’s level.

Kudos to Mr. Gore, the Academy Award-winning Nobel Laureate and now reflective politician. It takes a big man to admit his mistakes — and he did, citing political pressure from his home state farm lobby and presidential ambitions as his reasons for supporting ethanol subsidies.

Sadly, in the same set of remarks, the former vice president reiterated his support for “second- and third-generation biofuels,” including “cellulosic ethanol.” That’s where he squandered his minutes-old credibility.

Cellulosic ethanol has never come close to meeting its promises. Indeed, Bill Brady, CEO of Mascoma Corporation, a major player in the development of cellulosic biofuels, admitted candidly in a recent Senate Energy Committee hearing that, “quite frankly, the rate of technological advancement was a bit oversold.”

In fact, for all intents and purposes, cellulosic ethanol does not exist commercially. The Environmental Protection Agency (EPA) had to — for the second year in a row — reduce the amount of cellulosic ethanol mandated under the so-called Renewable Fuel Standard (RFS). The RFS is an annual schedule of the minimum amount of biofuels that must be used in the national fuel supply. It prescribes a minimum of 36 billion gallons of biofuels by 2022 — more than half is second-generation fuels like cellulosic ethanol.

The RFS caps corn-based ethanol at 15 billion gallons in 2015, and it mandates 250 million gallons of cellulosic ethanol for 2011. According to the EPA, which implements the RFS, the total commercial supply of cellulosic ethanol this year will be only 25 million gallons at most. Similarly, last year, cellulosic ethanol use was to be set at 100 million gallons; EPA cut the mandate to 6.5 million gallons to match the commercial supply.

It is worth mentioning that in addition to the legal mandate, cellulosic ethanol receives what the Congressional Budget Office calculates as a $3-per-gallon subsidy — much more than corn ethanol. Yet a commercial supply is still not in the offing. Nor does it appear forthcoming. A report from the USDA’s own internal research advisory committee included this bearish outlook: “After two decades of research without a sustainable technical breakthrough to make cellulosic ethanol competitive, it appears that it is time to reevaluate the research.”

So why is Mr. Gore, once known as a detail-oriented policy wonk, so bullish on cellulosic ethanol despite its obvious failures? Probably because he has switched hats from green policy guru to capitalist. Gore’s current financial interests include cellulosic biofuel technology. Business trumps politics.

Steve Milloy, author of the Green Hell blog, revealed that “if we turn to the investment portfolio of the venture capital firm of Kleiner Perkins Caulfield and Byers (KPCB), where Al Gore is a partner, we find that KPCB has invested in Mascoma Corporation whose business is cellulosic ethanol.”

A cursory overview of KPCB’s investment in Mascoma offers a glimpse into the state of the cellulosic industry — how its timelines lengthen, its deadlines come and go, and its claims are downscaled.

In 2008, Mascoma backed out of an ambitious Tennessee-based project when it couldn’t come to terms with the University of Tennessee under a 2007 state-funded project to build a five-million-gallon cellulosic ethanol plant. The facility opened in January 2010 as a joint venture of the University of Tennessee and DuPontDanisco.

Mascoma has moved on and now plans to open its first commercial facility in Northern Michigan. It made that announcement after making a deal with SunOpta. Mascoma’s “hope is to begin construction on this facility this fall pending achievement of several milestones,” Brady recently testified before the Senate Energy Committee.

Biofuels were supposed to be a way for the U.S. to break its reliance on foreign energy. Yet DuPontDanisco is a venture between DuPont and a Danish corporation, and SunOpta is a Canadian firm. Indeed, the U.S. Department of Energy — under both Bush and Obama — has given grants to several foreign companies, including Abengoa, a Spanish company that received a grant to put a crop waste-based plant in Kansas; BlueFire, a Japanese company chosen because of its “proven technology” for cellulosic fermentation; Iogen, a Canadian company that abandoned its plan to build a plant in Idaho to turn wheat straw into ethanol (it built it in Canada instead); and Novozymes, a Danish company that operates a lab in North Carolina.

So, the actual biotechnology for producing cellulosic ethanol, as it exists today, is mostly non-U.S. intellectual property. Of course, there is nothing wrong with that per se. But it is yet another example of the gap between reality and promise. Cellulosic technology was sold in large part as bringing the U.S. closer to “energy independence.”

Cellulosic ethanol was also supposed to have less of an impact on fuel prices than corn ethanol. However, the Tennessee demonstration plant has almost 6,000 acres of switch grass dedicated to produce feedstock. A corn ethanol plant that produced the same amount of energy would need about 550 acres. Those extra 5,450 acres have to come from somewhere — either from existing farmland or from pasture land that supports livestock. Either way, food production is displaced.

Even the cellulosic technology that relies on farm “waste,” as the cellulosic ethanol advocates like to call it, still has an impact on food prices. Corn stover and other crop residue left in the field plays an important economic — and environmental — role in modern farming. With biotechnology, precision application of pesticides, and modified planting techniques, crop residue can increase the nutrient quality of the soil and eliminate the need for plowing. To the farmer, that means lower overhead; to the environmentalist, it means a smaller carbon footprint.

The greater nutrient quality lowers fertilizer costs — and most nitrogen fertilizers are made from natural gas. That lowers its energy conversion ratio. The emergence of this common farming practice known as conservation tillage not only has increased economic efficiency, but has virtually stopped soil erosion and helped protect and improve water quality. Harvesting crop residue for cellulosic feedstock would reverse these conservation achievements.

Gore’s support of cellulosic ethanol is the classic case of special interest business. He’s hoping that Washington will continue to buy the line that a breakthrough in cellulosic production is around the corner. Ironically, that mirrors the perspective of the Bush administration back around 2006 and 2007. It was President Bush who first believed in cellulosic ethanol and who proposed the recklessly ambitious 36 billion gallon RFS levels for biofuels. Talk about a mistaken policy — Bush’s plan mandated the commercial use of cellulosic ethanol, a fuel that was still in the lab. Today it remains only available at de minimis levels.

Gore’s political half, however, avers that providing “massive subsidies” for corn ethanol was a mistake because of its impact on food and feed. As the USDA noted in its most recent global crop outlook, this year’s world corn stocks are expected to “be the lowest since 2006/07, the first year of the rapid expansion in U.S. ethanol production and use.”

So Al Gore is half right. Subsidizing first-generation ethanol is a mistake. But so is subsiding second- and third-generation ethanol.

Dave Juday is a commodity market analyst in Washington, D.C., and principal of The Juday Group.

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