Distilled Spirit

Once known as bootlegger’s moonshine, ethanol is now the rising star of
alternative energy. What does that mean to the price of food and fuel?

Made from corn and mixed with gasoline, ethanol has been touted as the fuel
of choice to drive Americans toward energy independence, lower greenhouse
gas emissions, and rural prosperity. But when grain prices began to rise
last year and a food shortage hit the poorest regions of the world, that
drive toward a cleaner, greener future took an unexpected turn. Ethanol is
now at the center of a high-octane debate about the future of alternative
fuels and how to get there from here.

The debate focuses on state and national policies designed to jumpstart
the development of renewable forms of energy. These government policies invest
millions of taxpayer dollars in the commercialization of biofuel industries
through subsidies and mandates for mixing ethanol into gasoline.

A lot of new research explores home-grown alternatives to petroleum, alternatives
such as canola-based biodiesel and forest thinnings spun into cellulosic
ethanol. But today, only corn-based ethanol has an established technology
that can deliver the volume that is required to meet the federal Renewable
Fuel Standard. That standard, part of the Energy Independence and Security
Act, mandates the use of 36 billion gallons of renewable fuel by 2022 and
offers direct subsidies of 51 cents for each gallon. This “blender’s credit,”
which goes directly to oil companies, was reduced to 45 cents per gallon
on January 1.

A few states support federal policies with subsidies of their own and Oregon
is among them, requiring that all gasoline pumped in the state contain 10
percent ethanol. At the moment, most of Oregon’s ethanol fuel is made from
corn imported from the Midwest. As food costs soared along with record-breaking
gasoline prices, some people were quick to blame government support for the
ethanol industry.

A recent conference at Oregon State University brought together economists
from around the nation to discuss the price of food and energy and the economic
effect of policies that subsidize development and use of biofuels.

The picture is more complicated than corn feeding cars instead of people.
It combines the falling value of the dollar, the rising price of petroleum,
droughts in many grain-growing parts of the world, and an increased demand
for both food and fuel in many developing nations. Using various sources
of information, the economists at the conference blamed the rise in biofuel
production for anywhere between one and 30 percent rise in food costs worldwide.
And a recent World Bank report linked biofuels to as much as 75 percent of
the rise in world food prices. So, debates are wide ranging about the impact
of biofuels and what the best policies should be for Oregon, the nation,
and the world.

Harry deGorter, a Cornell University economist at the conference, argued
that biofuel support policies are unintentionally subsidizing gasoline consumption.
Existing federal and state tax credits for biofuels may total over $20 billion
per year by 2022, he said, effectively canceling the goal of reducing consumption
of imported oil. “That makes about as much sense as bailing out a sinking
boat while simultaneously drilling holes in the hull.”

To be sustainable, biofuels must compete with fossil fuels in cost effectiveness,
according to Mark Partridge from The Ohio State University. For example,
in the fossil fuel industry, supplies of raw materials can be stored indefinitely
underground and the existing network of production and delivery depends on
relatively few jobs. Costs are low. According to Partridge, biofuel production
cannot be a jobs-creation program if it is to compete sustainably with the
current efficiency of fossil fuels. Ethanol plants hire relatively few workers
and therefore may not be effective in creating jobs and boosting rural economic
development.

The biofuel boom and rising food prices have boosted the price of agricultural
land, according to John Penson, a Texas A&M University economist. In
little over a year, land values have doubled in parts of the U.S., including
Oregon. Such steep and rapid rises in land values can force an unsustainable
debt burden for farmers, Penson said, if they borrow money against high-priced
land and crop values suddenly fall. A similar situation in the 1970s led
to many farm bankruptcies across the U.S.

Increasing corn prices will result in more acres planted in corn, which
may have significant impact on the environment, according to JunJie Wu, an
Oregon State University economist. “Biofuels are touted as sustainable and
clean,” Wu said. “And yet corn is one of the most water- and chemical-intensive
crops.” He suggested that increased reliance on corn-based ethanol could
lead to increases in nitrate water pollution, soil erosion, and loss of soil
carbon.

OSU economist Bill Jaeger questioned the effectiveness of energy policies
that focus on corn-based ethanol, which he says requires large amounts of
energy to produce. “It is as if policy-makers have chosen a winning technology
before evaluating its consequences,” he said. There may be other, more effective
ways to reach the goals of energy independence, reduction of greenhouse gas
emissions, and rural prosperity, Jaeger said. “We don’t want to find out
years from now that we spent billions of dollars but achieved very little
toward our goals.”

Brent Searle, an economist at Oregon’s Department of Agriculture, argued
that current policies are an important first step. He compared the ethanol
industry to early stages of the computer industry, when the products were
big, clunky, and slow. But you have to start somewhere, he said. He pointed
to new studies that show that ethanol now has a lower carbon footprint than
gasoline and that biofuels helped hold the cost of fuel below what it would
have otherwise been. Most important, Searle says, support for corn-based
ethanol is paving the way for cellulosic ethanol, the next generation of
biofuel in Oregon.

Instead of kernels of corn, cellulosic ethanol uses waste materials left
over from cutting timber, pruning vineyards, or harvesting corn. The mechanism
needed to break down these tough fibers and extract ethanol-making sugars
is being explored by researchers, including OSU food chemist Michael Penner,
whose pioneering work uses grass-seed straw as a feedstock ethanol.

And on the horizon, beyond cellulosic ethanol, is a third generation of
biofuel that does not require farmland at all. OSU bioengineer Ganti Murthy
is exploring the capacity of algae to produce both ethanol and oil, with
the idea that energy could someday be generated from pond scum on wastewater.

As science and technology evolve, so do industries and policies and possibilities.
“Food and fuel are part of a complex shifting international landscape in
which Oregon is one part,” said OSU economist Munisamy Gopinath, who helped
bring together the conference. “Our role as economists is to provide information
about this complex landscape so others can make informed policies to guide
Oregon’s future.”