2 Jan 2009

Ethanol Debated

In November, Ben Ho posted a defense of ethanol here. In the 32 comments that follow, he, I and readers debated his notions. If you have some time, go and read the original post and replies.

I summarize Ben's POV as:
Carbon taxes are better than ethanol/alternative fuel mandates and subsidies, but taxes are politically toxic. In a second best world (do something!), we need subsidies to spur innovation, which is the only way we will get carbon-neutral innovation and reduce our dependence on [foreign] oil.
I summarize my view as:
Carbon taxes are politically feasible (we already tax gas) and much less dangerous in terms of corruption, distortion (trade and ag production), and directly attacking the problem (too much carbon -- not a lack of corn ethanol).
Although Ben claimed to win (he had the last post), I declared a clearer (and meaningful) test of who "wins" in our debate (Ben as Pro-ethanol and me as Con-ethanol), i.e.,
Con wins if more evidence supports my POV OR congress cancels the program as the economic/ecological disaster that it is. Pro wins if the program expands AND a majority of evidence supports the ethanol program.
Since there's $20 at stake, I figure that I'd better keep track of the evidence on ethanol.

Pro

nothing in support.

Con

Jacobson (Stanford) studied alternative fuels and concludes that
cellulosic- and corn-E85 were ranked lowest overall [Wind is best.] and with respect to climate, air pollution, land use, wildlife damage, and chemical waste. Cellulosic-E85 ranked lower than corn-E85 overall, primarily due to its potentially larger land footprint based on new data and its higher upstream air pollution emissions than corn-E85.
...and worse, ethanol uses crazy amounts of water, which we kinda need now. In this piece, the CEO of Nestle (who has a reason to hold this view) channels this blog (indulge me):
In some of the most fertile regions of the world... overuse of water, mainly for agriculture, is leading to sinking water tables... mainly because water is seen as a free good.

As if this were not enough, politicians have added another drain—biofuels. It takes up to 9,100 litres of water to grow the soy for one litre of biodiesel, and up to 4,000 litres for the corn to be transformed into bioethanol. What is meant to alleviate a serious environmental problem (climate change) is making another, even more serious problem (water shortage) worse... I am convinced that, under present conditions and with the way water is being managed, we will run out of water long before we run out of fuel.

There are solutions. They start in politics—for example, stopping subsidies for biofuels...

If water had a price (such as from locally tradable water rights, though of course not for basic human needs), and if farm products could be traded freely and without subsidies across borders, a water-efficient allocation of production would follow.
Meanwhile, lower oil prices have bankrupted one ethanol producer and put many more at risk of bankruptcy (another bailout! Congress double-ended this one!)

What about the farmers? The WSJ had a nice (but sad) feature on an Iowa farmer facing higher costs and lower (and more volatile) prices. Although the Congress may intervene to raise corn prices higher (bailout!), it's more likely that farmers will try to delink corn prices from oil prices. One way to do that is by killing the ethanol program.

But wait. Is there any political hope that the ethanol program will be killed? Given Obama's choice of Iowa governor Vilsack as Sec Ag, it seems unlikely, but I am hopeful. If anyone's going to kill ethanol, it's going to be a politican from a corn state.

So what's an alternative to the ethanol program? Carbon taxes, obviously. How will they reduce our emissions? First by making carbon-rich fuels more expensive, and second by subsidizing low-carbon alternatives. Luckily, Gar Lipow has done the hard work:
Making the unrealistic assumption of zero technical breakthroughs in efficiency or renewable technology, the total cost of a complete transition to 95 percent (or better) emissions-free energy in the U.S. would be about $1.7 trillion annually, if financed at 5 percent over 30 years....

From a social standpoint, total paybacks would be $600 billion a year more than this, meaning in the 20th year, the economy would grow $600 billion more per year net than without such investments (not counting global warming reductions, but only immediate and short-term social returns.) Energy costs only, not counting possible fossil-fuel price increases or any social costs, would be about 31 percent higher in this scenario than under a business-as usual-scenario.

However the particular subsidies I projected start at around $275 billion annually, average to $365 billion a year for the first 20 years, and peak at $475 billion annually in the 20th year. They drop back to $275 billion a year in the 21st year, as the renewable industries mature and can get by without further subsidy. The other $275 billion continues for another 10 years to pay back the green debt. These not only overcome most of the bottlenecks to phasing out fossil fuels, but they also compensate for what would otherwise be increases in energy costs.
I am making plans for my $20 (single-malt, hmmm...)

Bottom Line: Kill the ethanol program. Do it for the environment, for the water, for the farmers, for all of us.