Friday, July 3, 2009

Biofuels and Externalities

There was an interesting article in this month's Fortune magazine about the lobbying industry behind ethanol. The article focused on the hiring of retired Gen. Wesley Clark by the upstart ethanol trade group Growth Energy (link to web site with images of small children, American flags, and the color green everywhere).

The article is interesting because it takes you behind the scenes of how the ethanol lobbying effort is working to make up lost ground to the food industry after last year's spike in corn prices. It is also fighting a battle against environmentalists pushing to force the cost of externalities onto the industry. The ethanol industry is back on the offensive and one of their main goals is to get the maximum ethanol component of gasoline raised from 10% to 15%.

Since presidential hopefuls won't be circulating in Iowa until 2010 at the earliest, corn-based ethanol lobby doesn't have as strong a voice as it did a couple of years ago, so the DC lobbying effort will have to be fierce.

One of the industry's biggest hurdles is a new concept called "indirect land use." Some economists and environmentalists are pushing the idea that taking U.S. corn out of the food supply reduces corn exports to the world and forces agricultural burdens on developing countries. This issue is particularly acute in places like Brazil where developing new land for agriculture usually means deforestation, especially in rain forests. Economists call this an externality. If you add the indirect cost of this deforestation to ethanol it becomes much more expensive.

In my opinion, corn-based ethanol is already too expensive. It is supported by government subsidies (not factored into the economic price) and grown in a fuel-intensive manner (not factored into its environmental impact). Plus, it screws up the supply dynamic for food. Corn isn't just for eating off the cob. It's a big ingredient in animal feed, for instance. Sudden increases in the cost of corn ripple quickly and violently through the entire food market. That doesn't even factor in the lost of virgin forests halfway around the world, which I believe is a real impact.

The ethanol industry argues that the externalities of oil are not considered, so why force it on ethanol. Very true. If we had to factor in the grotesque costs required to support our foreign oil addition, most notably a recent six year long desert war, we couldn't begin to afford oil.

Ethanol is a crutch for our oil addiction. It's not a solution. Externalities, though difficult to quantify, are real. We are not in a position yet to have solar cars or plug-in hybrids on a large scale. We need to take real steps towards implementing a bridge fuel, like compressed natural gas, to reduce our dependence on oil while other solutions are developed. We are wasting time fooling around with ethanol when we could be moving forward with CNG.

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