April 9, 2009

Economics of Ethanol

Filed under: Corporatism, Food and Farms — Tags: , — Russ @ 1:22 pm
The bad news keeps rolling in on how bad the environmental fundamentals are for ethanol. A new study confirms existing findings that the nitrous oxide emissions from corn farming by itself have been underestimated by a factor of 3-5, canceling out any alleged greenhouse gas benefit from biofuels. Another study finds that aggrofuel production may use up to 3X as much water as previously believed.
As for the economics of aggrofuel, the CBO estimates that the diversion of corn to ethanol production was responsible for 10-15% of the big US food price runup in the year ending 4/08. The cascade of effect is typical: this diversion of food to fuel drove up the price of livestock feed and therefore of meat and dairy products, which in turn drove up the price of all foodstuffs.
This is just the tip of ethanol’s malevolent food price influence, which last year led directly to mass shortages, hunger, malnutrition, food riots, and state violence all around the Third World. While an American consumer may have the right to decide to pay more for food so he can continue filling the tank of his SUV, he has no such right to make that decision for his neighbor, let alone to starve the world poor. The moral economy of ethanol is even less sustainable than its fiscal, energy, and environmental economies. Yet so far the American government has chosen to subsidize all of these, to convey to a kept industry however much money and unaccountability is necessary to force zero minus one to equal two.
The ethanol industry is currently in a precarious position. It is not a capitalist but a feudal operation, 100% dependent on the rent-seeking opportunities afforded by government handouts, government-generated captive markets, and high oil prices. It needed all of these to turn a profit, and since oil prices plummeted last year, the business, which had bet contango on Peak Oil price effects and had been building new plants at breakneck speed, found itself overextended and unviable even with massive government assistance. One of the top producers, VeraSun, went into bankruptcy and the others are hurting.
So what can a parasitic industry do when one of its hosts is no longer available? It must seek to feed more on the other, in this case the government. Sure enough, what we’ve been seeing is a frenzy of anti-capitalist, anti-market, rent-seeking lobbying.
The main effort is to get EPA to increase the ethanol/gasoline blend wall from the current 10% to 15-20%. There is no economic or practical basis for this whatsoever, just as there no longer is even for the 10%, now that we know that corn ethanol’s energy and environmental promises were lies. Rational policy would dictate that we do away with the existing requirement, and with all ethanol RFS standards. But of course reason has no place in a corporatist system, which is based on distortions, riggings, and rackets. No one in industry or environmental circles wants this blend wall increase. Every kind of machinery maker fears that a 15% blend could damage its products (true to the system, the 2007 energy bill absolved the ethanol racket from any liability for engine damage from ethanol products, so any such damage would be completely externalized onto the consumer and product manufacturer).
What’s odd is how even the ethanol gang doesn’t bother trying to argue that a blend wall increase would benefit anyone but themselves. Clearly they’re simply so confident in their congressional (and presidential) flunkies that they think they can just demand whatever they want, at whatever cost (for everyone else).
So both the “industry” and the DoE are saying, “the free market was wrong before, and it’s wrong now; we must mandate a higher blend wall”. Perhaps by now we must suspect, where it comes to corn ethanol, the free market will always be wrong.
They’re also stepping up demands for more welfare, and for this to be extended into the indefinite future. The argument originally was that “first-generation” biofuels, i.e. corn ethanol, needed temporary government support. This would allegedly lead to a self-reliant first-gen industry and more importantly show the way toward the “second generation” of cellulosic ethanol which would be even more cost-effective and environmentally sound.
Yet today all of this is looking to be a lie. Corn ethanol remains unviable and a ward of the state. There are lots of plans on paper for cellulosic production plants, but no investors. The only money now available is coming in the form of government welfare. For example, one of the few projects still moving forward, Poet’s Emmetsburg plant, is funded so far only by close to $100 million in federal and state grants. They’re still waiting on a federally guaranteed private loan (that should give you an idea of how dubious these economics are: even with a fed guarantee no one wants to loan them money).
According to the 2007 energy bill, 100 million gallons of the biofuel mandate are supposed to come from cellulosic in 2010. It doesn’t look like they’re going to make it. The American Petroleum Institute thinks they’ll dribble out maybe 1-5 million. That’s how much all that government largesse is buying. As API’s cadre said, “We know how to make cellulosic ethanol. We don’t know yet how to make it economically.” (We’re still saying that for corn ethanol as well, and probably always will be.)
Renewable Fuels Association president Bob Dineen sums it all up: “The government needs to step in right now to help these companies.” What this means is, the government needs to continue and step up its complete and absolute welfare support for the entire industry. The government has completely subsidized the first generation of ethanol, and will continue to do so for as long as the people allow it. Industry and government promised that this first generation would soon be profitable in its own right and would pave the way for an even stronger second generation. So now, even as corn ethanol remains on the dole, they’re saying cellulosic needs to become a chronic welfare patient as well. Of course they’re making the same claims now that they did about corn: just a little bit of help to get it on its feet…it’ll be better for the climate as well…it’ll pave the way for the 3rd and 4th generations…and so on.
We must assume that these are lies now just as much as they were in the past. “Lie to me once, shame on you, lie to me twice, shame on me.” We should not subsidize or mandate any further development of biofuels, and we should strip away the existing subsidies and mandates.
(In thinking about all this I was struck by how much of this seemed familiar – massive handouts for well-connected insiders, alleged broad benefits, socializing of costs while only private elites stand to profit – yes. It’s just like the bank bailouts, and so many others. I think Dineen was speaking for a lot more than just the ethanol racket when he said “the government needs to step in right now to help these companies”. That’s all any corporation thinks anymore: the public is a mine and a dump, the government is a conveyor of the extracted loot in one direction, and of the toxic waste in the other. Every corporation and industry either sits feudally in this position, or bribes and lobbies trying to get there. Congress and all recent administrations have been fully complicit in this. This is the key to understanding all business language today such as “talent” and “innovation”. It’s all referring purely to this corporatist insider endeavor.)       


  1. Why just bitch about corn-ethanol, and dream about Cellulosic-Ethanol, which is still commercially uneconomical? There are simpler commercial solutions that are actually happening and profitable.

    Sweet Sorghum is one such solution, it is non-food, and makes better commercial sense than sugar-cane and corn etc.

    Comment by Paramjit — April 10, 2009 @ 10:50 am

  2. Hello Paramjit – I’m certainly not “dreaming” about cellulosic. Though, as I wrote, I think those who are going through the same faith cycle with it as they did with corn probably are dreaming.

    As for sorghum, although it may be less water- and N2O-intense than corn, it still poses the same problems of either displacing food production or bringing marginal land into production, and is just as likely to drive up food prices. (I also read it’s not transportable from harvest to processing, but rather must be processed within hours of harvest. That doesn’t sound like it makes for a very efficient system.)

    More broadly, all large-scale monocrop ethanol props up the twin evils of industrial agriculture and the personal car, which are the things civilization must evolve beyond. And the evidence is that it can never be cost-effective anyway. It is utterly parasitic on government handouts and/or high oil prices. I doubt any particular crop is going to break the pattern already set.


    Comment by Russ — April 10, 2009 @ 1:05 pm

  3. I am taking a political science class entitled ‘environmental policy’ and my professor is really pushing climate change prevention and touting the benefits of corn ethanol and the cellulosic fuels.. it is refreshing to hear dissent based in reason and fact. Also, advocating for government to stop subsidizing industries and technology, will hopefully lead to the breaking of the notion of government intervention. I probably have a vague idea of it but, what is your view of carbon cap and trade? Thanks -rchem

    Comment by rchem — April 10, 2009 @ 3:45 pm

  4. my apologies, I came to your blog only seeing this post, but hit your main page and saw your article on the cap and trade, will read that. Learning much from your posts sir!

    Comment by rchem — April 10, 2009 @ 3:51 pm

  5. Hi rchem, I’m glad you like the place.

    It’s been a long time since I heard of anyone except out-and-out flacks touting corn ethanol as a climate change panacea. The benefits were dubious to begin with: the most pro-corn studies came up with at best a 20% reduction in ghg compared to gasoline. Then in 2008 new studies punctured even this modest claim, finding that when you really account for the entire fossil-fueled life cycle of planting to tailpipe, corn ethanol is no better than gasoline; maybe even worse.

    And now, as I cited in the post, a new study finds that corn farming’s nitrous oxide emissions are far worse than previously estimated. That should definitely blow corn out of the water once and for all as a ghg mitigator.

    I have a few posts up about cap and trade (they should be in the “climate crisis” category). If it was up to me, I think I’d go with regulatory command-and-control plus a carbon tax. I consider these both philosophically preferable (I very much object to de jure privatizing the atmosphere as a “property right” to pollute) and less readily gamed.

    It’s not that I think a tax can’t be gamed, but it has a far simpler mechanism which does not inherently involve gambling(even a well-designed c&t is still by design casino capitalism).

    Since it looks like c&t is the policy darling and will be tried, we can only hope it’s well-designed. But every example so far, proposed or enacted, has been badly set up – far short of 100% auctions, heavily weighted to offsets, with dubious caps pre-weakened with “off-ramps” and safety valves, poor regulatory set-ups regarding the trade mechanisms, lots of concept-contradicting pork for “clean coal”, and so on…

    So although I can grudgingly accept c&t in theory, as a lesser evil compared to business as usual, the actual proposals so far have been grievously flawed.


    Comment by Russ — April 10, 2009 @ 5:35 pm

  6. […] I would abolish corn ethanol subsidies and mandates, and end all support for biofuels in general. Ethanol is a pure racket which has never capitalistically supported itself and never will. It’s simply taking food from the mouths of the hungry (driving up the price and tying up vast […]

    Pingback by Small Farms Beyond Thunderdome « Volatility — August 11, 2010 @ 6:00 pm

  7. […] is just the latest and most malevolent result of the West’s biofuel mandates, a policy as wicked as it is irrational. Within a country like the US, ethanol mandates are pure corporate welfare, and globally […]

    Pingback by The Revolution of Food « Volatility — February 10, 2011 @ 2:12 am

RSS feed for comments on this post.

Sorry, the comment form is closed at this time.

%d bloggers like this: