Truth About Cellulosic Ethanol Undaunted, promoters of ethanol contended that the mistake

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2 stephen kroninger (all) RRemember when almost everybody was convinced that corn-based ethanol was the elixir that would save us from dependence on the oil sheiks and help save the climate, too? Its benefits, alas, proved elusive. Emissions reductions were largely offset by the copious amounts of oil and natural gas used to grow the corn and distill the ethanol. Arguably worse, the crash project diverted corn from the foodsupply chain, raising its price for tens of millions of poor people An Inconvenient in Latin America. Truth About Cellulosic Ethanol Undaunted, promoters of ethanol contended that the mistake By Roger A. Sedjo and Brent Sohngen was in the choice of the feedstock for fermenting the fuel; far better, they said, to use cellulose from plants that aren t a valued part of the diet of man or beast. Congress agreed, laying on a big subsidy for cellulosic biofuels. But that step, alas, is not the end of the story. For once again, unintended consequences seem about to swamp the virtues of plans to wean Americans from fossil fuels. It s time past time to rethink what we can hope to achieve with biofuels, and how to get from here to there. Fourth Quarter

3 wood-based ethanol when one high-profile failure deserves another Roger Sedjo is a senior fellow at Resources for the Future in Washington. Brent Sohngen is a professor of economics at Ohio State University. Corn-based ethanol proved to be a spectacular embarrassment to policymakers in large part because it diverted a lot of digestible carbohydrates from the global food supply. Farmers eventually responded by planting more corn, suggesting that the long-term price impact of making fuel from corn is likely to be more modest than it appeared in But few analysts now believe that corn ethanol is viable as a major long-term energy source. Among other drawbacks, converting enough land to corn to have a real impact on the mix of available fuels could be self-defeating since the greenhouse gas emissions produced in the process would offset much of the positive effect of the shift from fossil fuels. Corn-based ethanol will likely be with us for the indefinite future corn growers, investors in ethanol distilleries and the members of Congress who look after them will see to that. But the Energy Independence and Security Act of 2007 did aim to recalibrate the nation s ethanol policy. It set a production goal of 9 billion gallons of renewable fuel in 2008, slated to rise to 36 billion gallons a year by Most relevant here, it called for changing the mix of feedstocks, mandating production of 16 billion gallons of cellulosic biofuel by To further that end, it provided a $1.04-a-gallon subsidy for cellulosic biofuel, even as it eased back the corn ethanol subsidy from 51 cents to 45 cents. But producing 16 billion gallons of ethanol annually from cellulose still a modest portion of America s liquid fuel needs would be no small feat. Although grasses may someday prove to be a viable feedstock, the only practical way now to make large quantities of cellulosic ethanol is to ferment it from wood. And by our calculations, the wood required to meet the 2022 mandate would total 348 million cubic meters an astonishing 71 percent of the bountiful United States wood harvest in Policymakers, post corn-ethanol debacle, aren t entirely oblivious to this drawback. To minimize the impact on the market for wood, Congress severely restricted the sources that could be used to meet the renewable-fuel mandate. No biomass from forests on federal lands is allowed. Moreover, only planted trees are permitted as feedstock, thus eliminating the use of wood from naturally regenerated private forests, even in areas of active land management. But since wood is fungible softwoods are more or less substitutable no matter where they are grown the futility of this strategy is apparent. The new demand on forests that do remain a legal source of feedstock will likely be intense, driving up wood prices as much as a policy that didn t restrict the sources would. Note, moreover, that the restrictions will create incentives to harvest timber from lessaccessible places, driving up prices even more as well as increasing the demand for fuel to transport the wood greater distance to ethanol production facilities. If the cellulosic mandates of the 2007 Energy Act are met solely by wood, we estimate that wood prices will be about 15 percent higher in 2015 and 20 percent higher in the early 2020s than they would otherwise be. Worse yet, higher priced wood will drive U.S. forest product processing offshore, increasing imports of wood-based goods, perhaps dramatically. This would increase the United States trade deficit. More important, it might well sabotage the effort to reduce climate 52 The Milken Institute Review

4 Costs and Greenhouse Gas Emissions of Liquid Fuel Feedstocks $140 PRODUCTION COST, US$ PER BARREL OF OIL EQUIVALENT Cellulosic Ethanol Biodiesel (soybean) Corn Ethanol Tar Sands Oil Shale Coal-t0-Liquids PERCENT OF GREENHOUSE GAS EMISSIONS RELATIVE TO CONVENTIONAL OIL High and low range Costs and emissions range of most crude oil price forecasts over the next 20 years source: Costs: U.S Energy Information, Annual Energy Outlook (2006); other sources. Emissions: A. Brandt and A. Farrell, M. Wang (GREET model 2006). change by creating incentives to cut down trees that serve as natural storage sinks for carbon in places where they aren t likely to be replaced. Wait, it gets even worse; Congress has other new uses in mind for wood. The climate-change bill passed by the House of Representatives this June includes a subsidy for wood used directly as fuel for electric power generation. The impact would be to increase the global market price of wood even more. This embarrassing litany, however, does not necessarily imply that wood has no rational place as an energy source; indeed, wood could play an important role in meeting U.S. energy requirements in a carbon-neutral manner. But it does suggest that we should think a lot harder before plunging. wood as energy Wood s attractions as a fuel are plain. It has been used for heating and cooking for untold millennia. And in recent decades, wood pellets have been widely used as home heating fuel in North America and as a supplement to industrial boiler fuel in Europe. All told, pellet consumption tripled between 2000 and 2007, to about 9 million tons. Wood energy is not, however, without its drawbacks. Raw wood for direct combustion is generally substantially more expensive than coal, and the low energy-to-bulk ratio makes transportation over large distances impractical. The potential advantage, of course, is that growing and burning wood doesn t generate carbon emissions (after emissions from wood transport and processing are netted out). Indeed, to increase the use of renewable fuels, including wood, Europe is offering direct and indirect subsidies. But the primary interest in wood in the United States and Europe is in making liquid fuels for transportation. the price of green Ethanol is the most practical and versatile renewable transportation fuel, either blended Fourth Quarter

5 wood-based ethanol with gasoline or used directly in engines modified for that purpose. For the moment, it is mostly made from corn (United States) and sugar (Brazil). Cellulosic ethanol is much more expensive because cellulose must be converted with expensive enzymes to forms that are digestible by alcohol-making microorganisms. Technology may eventually make cellulose competitive, however, and the eventual goal is to produce cellulosic biofuels from plants grown on land that can t be used to grow grains. In order for biofuels made from cellulose to become competitive, then, their costs must decrease or the costs of alternative fuels, including petroleum, must increase. Recent large fluctuations in the petroleum market demonstrate that relative fuel prices can change on a dime. But once markets believe that the price of petroleum will remain very high for a very long time, biofuels may well come into their own. It s worth remembering that market parity for biofuels could also be achieved by imposing higher taxes on fossil fuels, subsidizing biofuels more heavily or mandating minimum use levels provided investors believed that the preference wouldn t soon change. biofuels and climate change While energy-security issues have played a part in rationalizing preferential treatment for biofuels, the primary reason today for moving to non-fossil liquid fuels is their relatively benign impact on the climate. The big catch here is that greenhouse gases are emitted when fuels are produced as well as when they are burned in our cars and power plants. So what counts is the net reduction. Corn yields at best a 40 percent advantage over oil in life-cycle carbon emissions because so much conventional energy is used in cultivating the crops. Grasses the holy grail of feedstocks for biofuels and wood can do much better because their cultivation footprint is minimal. Cost, of course, is the other side of the ledger; the table on page 53 shows the trade-off between fuel costs and greenhouse-gas emissions. Liquid fuels synthesized from tar sands and coal are competitive with oil at relatively low oil prices, but are even worse carbon emitters than fuels refined from petroleum. Cellulosic fuels are the big winner on the emissions side, but are still wretchedly expensive. Corn-based fuels are in-between, but, as noted above, disrupt food supplies. mowing down the green The federal use mandate (sweetened by subsidies) ensures greater production of cellulosic biofuels for domestic transportation. And, as discussed above, wood will be employed as the primary feedstock for the next decade or more because it is cheaper than grass and available now. One cubic meter of wood can yield approximately 50 gallons of ethanol. So, adding in some waste, we estimate that the 16-billion-gallon mandate would consume 348 million cubic meters of wood. We used a mathematical model to estimate the impact that the extra demand for wood (including the extra demand linked to meeting federal mandates for renewable fuels in electric generation) would have on wood prices. And the results are dismaying: by 2015, wood can be expected to cost about 15 percent more; by the early 2020s about 20 percent more. This price impact would ripple through the economy, affecting to varying degrees the cost of energy and construction and thus pretty much everything else. Biofuel demand is projected to increase wood consumption by about 60 percent by the early 2020s. That s a bit less than the sum 54 The Milken Institute Review

6 of current wood use and the use for mandated biofuel, because the higher price could be expected to choke off some consumption: people will buy fewer houses and less furniture, for example, when prices go up. All that extra demand, incidentally, would almost certainly transform the wood and wood products industries modest (if dwindling) net export surplus of $250 million in 2010 into a deficit of more than $4 billion in lessons yet to be learned One obvious conclusion here is that the bestlaid plans are likely to go awry when we tinker with the moving parts of a system as large, complex and interest-group-driven as the market for energy. That situation shouldn t be used as a rationale for doing nothing: Failure to change the mix of fuels that power the economy could lead to catastrophic changes in climate. And this need not mean that policymakers job is simply to get the prices right with the imposition of emissions taxes or tradable emissions allowances, and then leave the process of reducing greenhouse gas emissions entirely to the market (although this would help a great deal). Markets alone might not deliver the pace of innovation needed to minimize the cost of avoiding or adjusting to climate change. But the potential for unintended consequences does suggest that interventions not funneled through market mechanisms deserve an extra measure of contemplation. As recent history proves, micromanagement of energy and climate change policy can be an invitation to spend a lot of money without much to show for it. m Fourth Quarter