June 22, 2006
On Biomass Ethanol Price Subsidies

David Morris is the vice president of the Institute for Local Self-Reliance says the current US federal 51 cents per gallon subsidy for ethanol should get replaced by a program that protects against price falls. (shorter New York Times version of the article here)

It will be difficult, if not impossible, to politically justify a 51 cent per gallon incentive for ethanol if there is an ethanol mandate for 10 or 20 or 30 billion gallons and oil prices remain high.

Ethanol needs no financial incentives to compete when crude oil prices are over $65 a barrel. However, history demonstrates the volatile nature of oil prices. The price of oil in the last 10 years has dropped below $20 per barrel several times. Moreover, the cost of ethanol production is highly dependent on the cost of its feedstock, and although corn prices have not varied nearly as dramatically as oil prices, they do vary. Corn prices briefly topped $4 per bushel in the late 1990s, although they have held fairly steady at about $2 per bushel for most of the last 20 years.

How might we redesign the federal incentive to honor the nationís commitment to both farmers and taxpayers? The incentive needs to be structured to protect the farmer-producer if the price of oil plunges or the price of the feedstock(corn, soybeans, cellulose) jumps. The taxpayer must be protected from having to underwrite handsome subsidies when the biofuels industry no longer needs them.

Corn could not replace much of the fossil fuels used to make liquid fuels.

Farmers have pushed for years to get more people using gasoline mixed with ethanol made from corn kernels, but so far such ethanol has replaced only about 3 percent of the nation's gasoline, and by most estimates, the country would never be able to grow enough corn to replace more than 10 or 12 percent of its fuel supply.

But high oil prices make plant biomass competitive.

"If you think we're heading towards a future where oil prices are going to stay relatively high, $50-plus a barrel, then the energy cost delivered in plant biomass is much, much less than the energy cost delivered in oil," said Bruce E. Dale, head of the Biomass Conversion Research Laboratory at Michigan State University. "I'm completely convinced that this industry is going to happen on economic grounds alone. The demand for liquid fuels is so high and rising that we're going to convert an awful lot of stuff to liquid fuels."


Scientists have projected that in the long run, ethanol made from biomass could be cheaper than gasoline or corn ethanol, costing as little as 60 cents a gallon to produce and selling for less than $2 a gallon at the pump. But right now it would be more expensive than gasoline, and the low prices are likely to be achieved only after large plants have been built and technical breakthroughs achieved in operating them.

The most promising future for biomass energy comes from developments to break down cellulose (often referred to as "cellulosic technology") so that all of a plant could get converted into ethanol and many more types of plants could serve as inputs to ethanol production..

Cellulose, like starch, is made up of glucose molecules, but packed so tightly they're extremely hard to break apart. Plants use cellulose chiefly as a structural material -- it helps trees and grasses stand upright. If efficient ways were developed to break open the molecules, a wide variety of agricultural wastes or specially planted energy crops could feed the new industry.

Scientific progress has been slow, but now it seems to be accelerating. Enzymes needed for the process used to cost more than $5 per gallon of ethanol, but biotechnology companies, under government research contracts, have reduced that to 30 cents per gallon. A handful of small companies, exploiting the drop, are already making small amounts of ethanol from biomass, and claim that they are close to doing so at competitive prices. Not only are they shopping for locations for bigger plants, they are also signing contracts with farmers to supply raw material.

A lot of environmentalists are thrilled at the prospect of cellulosic technology. But picture countries with 10 or more times the population density of the United States (e.g. India) shifting heavily toward biomass to power a growing economy with eventually hundreds of millions of more cars. What would happen to the already shrinking habitats where animals live? They'd be converted into fields to grow plants for cellulose.

I prefer accelerating research and development of photovoltaics, batteries, and nuclear power. Advances on these fronts will enable a shift toward electric power for cars and reduce the ecological footprint of our methods for generating energy.

Share |      Randall Parker, 2006 June 22 03:00 PM  Energy Policy

simon said at June 24, 2006 9:29 AM:

The use of biomass that requires continuous subsidy is pure stupidity. We must use science to advance our ability not taxes to redistribute current resource allocations.

Randall Parker said at June 24, 2006 1:21 PM:


I've love to switch all the money spent on subsidies to fund energy research instead.

bigelow said at June 25, 2006 3:16 PM:

Is reside left after biomass conversion by cellulosic technology good for anything?
If the stuff is trucked back and spread over the fields can it replenish the soil?

I think electric cars, trains and trucking is the proper course to pursue. Yet there are places where liquid fuels for transportation are necessary, the arctic for instance.

Great blogging Randall.

Minos Gordy said at June 27, 2006 6:42 PM:

It appears to me that 10% ethanol in gasoline may reduce mpg performance of a vehicle. I have only begun to use it here in Mass. Perhaps someone stole gas from the first tank while mechanical work was being done during the period of its consumption. But the second fill-up will be more carefully guarded barring mechanical difficulties. I've asked a friend to check his mpg.

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