While early cars often ran on ethanol, the drastic rise in the use of cars has been associated with a reliance on fossil fuels. Concerns about climate change, the rising cost of oil, and the desire to enhance rural development were among the motives to the establishment and subsidization of a modern biofuel sector.
About 10 years have gone by since rapid oil price increases led to the takeoff of the modern biofuel sectors in the US and Europe (in Brazil, modern bioethanol was introduced in the 1970s). Ethanol is being produced from different crops: corn ethanol is the main transportation biofuel in the United States, while sugarcane ethanol is the main biofuel in Brazil. For its part, Europe produces substantial amounts of biodiesel from rapeseed. But what have we learned over these past 10 years?
Modern biofuels enjoyed a short honeymoon period in their initial use, when environmentalist, farmers, and consumers were excited about the prospect of clean, domestically produced fuel that would enhance fuel security. But the enthusiasm subsided as some researchers argued that biofuel production and processing emits more greenhouse gases (GHG) than it sequesters (Pimentel and Patzek 2005). Others (including myself) were concerned about the implications for food prices, which led to the genesis of the food vs. fuel debate (Rajagopal, Sexton, Roland-Holst, and Zilberman 2007). There were also growing concerns about the economic viability of biofuels and the subsidies they require (de Gorter and Just 2010). The most recent development in the argument against first generation biofuel is that they induce an “indirect land use effect” (ILUE), which suggests that biofuel appropriates some of the grains that were once used to produce food to produce fuel instead, and that biofuel production will lead to expansion of the agricultural land base, causing deforestation and other GHG emitting land use changes (Searchinger et al. 2008).
In hindsight, it is likely that the U.S. introduction of major biofuel mandates, which were introduced during a period of low grain inventories, was a major contributor to the food commodity price crisis of 2008 (Wright 2014), and in the longer run diversion of biofuel was responsible for a modest increase in corn prices (10-15%) (Shiva, Bessler, and McCarl 2014). The debate surrounding biofuel also led to a powerful lobby effort from US farmer interest groups who sought (and partially achieved) subsidies (formally known as crop insurance schemes). This suggests that they expected a significant period of lower commodity prices with biofuels in the fold (Schnitkey 2014). But biofuel production kept food commodity prices high, yet they would have been significantly lower had the unreasonable barriers to adoption of genetically modified crops, which were in place mostly in Africa and Europe, been removed (Zilberman et al. 2012)
What about the competitiveness of first generation biofuels? Biofuel in Brazil has been profitable for much of the first decade of the new millennium. Over the last few years its competitiveness has eroded, but much of this can be attributed to the subsidization of energy by the Brazilian government (Moraes, Zilberman, and Kaplan 2014). Fundamentally, Brazil has the resources and land capacity to produce much more ethanol in a competitive and environmentally sustainable manner, but doing so requires significant reform – a topic that deserves its own blog post. The relative profitability of corn ethanol in the US has fluctuated since its introduction, but has on average increased during the new millennium.
The increased profitability of first generation corn ethanol over time is a result of learning by doing that has reduced the ethanol processing cost by 50% over the last 20 years (Chen and Khanna 2012), increases in corn productivity, the use of residue corn grain for animal feed (GDGs), and the higher octane content ethanol provides. The direct subsidy for ethanol has been eliminated and its production would not decrease much if the mandate were eliminated (Babcock 2010). While corn and sugarcane ethanol are becoming economically competitive, other first generation biofuels have yet to reach such levels. For example, biodiesel from soybeans and rapeseeds are heavily subsidized and for most part cannot be competitive without support.
Economically viable biofuels are more likely to have smaller ILU effects. Searchinger’s initial estimation of these effects for corn ethanol was found to be unreasonably high by later studies, which corrected flaws in the modeling of the ILU effects, accounted for increased productivity in the production of corn, and factored in the use of residue corn grain for animal feed. These studies suggest that altogether corn ethanol will emit fewer GHGs than gasoline (20-40% less), and the GHG emissions of sugarcane ethanol are significantly lower than those of gasoline, even taking into account the ILUE (Khanna and Crago 2012). Furthermore, most of the Brazilian sugarcane used for ethanol production is grown far from the Amazon rainforest, and the last decade has seen a decline in deforestation in Brazil despite the drastic increase in sugarcane production (The Economist 2014). At the same time, the GHG emissions of biodiesel produced from soybean and rapeseed, taking into account the ILUE, are substantially higher than those of the diesel fuel they replace (Laborde 2011).
Our research and analysis suggests that not all biofuels are alike, and heterogeneity among feedstocks and locations will affect performance, profitability, and environmental side effects. But we have at least two major first generation biofuels (sugarcane and corn) that are economically viable and contribute to a reduction in GHG emissions compared to the fossil fuels they replace. Their effectiveness can be attributed to continuous improvements in productivity because of investment in research, learning by doing and learning by using, and a policy environment that has encouraged investment in these technologies (Moraes and Zilberman 2014). The subsidies (which were eliminated in the US) and mandates that protected and supported the technologies were far from socially optimal (Lapan and Moschini 2012), but provided investors with the confidence to engage with corn and sugarcane biofuels.
Our experience with the development and production of first generation biofuels suggests that continued research and temporary mandates and subsidization may lead to the establishment of an economically viable second generation biofuel sector. There are many feedstocks and refining processes currently being considered that may not come to fruition, but a few large successes could have a tremendous impact in achieving energy independence and combating climate change.