Trickle Down Effects of Bad Ethanol Policy

Colin Carter, well-known professor of Agricultural and Resource Economics at UC Davis, has an interesting commentary in the May 21 Christian Science Monitor on the unintended effects of ethanol policy:

Policymakers and legislators often fail to consider the law of unintended consequences. The latest example is their attempt to reduce the United States' dependence on imported oil by shifting a big share of the nation's largest crop – corn – to the production of ethanol for fueling automobiles.

Good goal, bad policy. In fact, ethanol will do little to reduce the large percentage of our fuel that is imported (more than 60 percent), and the ethanol policy will have ripple effects on other markets. Corn farmers and ethanol refiners are ecstatic about the ethanol boom and are enjoying the windfall of artificially enhanced demand. But it will be an expensive and dangerous experiment for the rest of us.

President Bush has set a target of replacing 15 percent of domestic gasoline use with biofuels (ethanol and biodiesel) during the next 10 years, which would require almost a fivefold increase in mandatory biofuel use, to about 35 billion gallons. With current technology, almost all of this biofuel would have to come from corn because there is no feasible alternative. However, achieving the 15 percent goal would require the entire current US corn crop, which represents a whopping 40 percent of the world's corn supply. This would do more than create mere market distortions; the irresistible pressure to divert corn from food to fuel would create unprecedented turmoil.

Thus, it is no surprise that the price of corn has doubled in the past year – from $2 to $4 a bushel. We are already seeing upward pressure on food prices as the demand for ethanol boosts the demand for corn. Until the recent ethanol boom, more than 60 percent of the annual US corn harvest was fed domestically to cattle, hogs, and chickens or used in food or beverages. Thousands of food items contain corn or corn byproducts. In Mexico, where corn is a staple food, the price of tortillas has skyrocketed because US corn has been diverted to ethanol production.

Any sort of shock to corn yields, such as drought, unseasonably hot weather, pests, or disease could send food prices into the stratosphere. Such concerns are more than theoretical. In 1970, an outbreak of a fungus destroyed 15 percent of the US corn crop.

Politicians like to say that ethanol is environmentally friendly, but these claims must be put into perspective. Although corn is a renewable resource, it has a far lower yield relative to the energy used to produce it than either biodiesel or ethanol from other plants. Moreover, ethanol yields about 30 percent less energy per gallon than gasoline, so mileage drops off significantly. Finally, adding ethanol raises the price of blended fuel because it is more expensive to transport and handle.

Lower-cost biomass ethanol – for example, from rice straw (a byproduct of harvesting rice) or switch grass – would make far more economic sense, but large volumes of ethanol from biomass will not be commercially viable for many years. (And production will be delayed by government policies that subsidize corn-based ethanol.)

American legislators and policy­makers seem oblivious to the scientific and economic realities of ethanol production. Brazil and other major sugar cane-producing nations enjoy significant advantages over the US in producing ethanol, including ample agricultural land, warm climates amenable to vast plantations, and on-site distilleries that can process cane immediately after harvest.

Thus, in the absence of cost-effective, domestically available sources for producing ethanol, rather than using corn, it would make far more sense to import ethanol from Brazil and other countries that can produce it efficiently.

American politicians may be thrilled with the prospect of corn-derived ethanol, but if they don't adopt policies based on science and sound economics, consumers around the world may suffer.

I agree.

Comments

[odograph]

The sad thing is that a free market in ethanol (globalized ethanol) should be a no-brainer, and ideologically appropriate to this administration.

This just proves that the farm lobby is not just stronger than reason ... it is stronger than ideology!

So ... MPG and "drive less" is all we've got.

[Mark C R UK]

This is as much a fact that the US government isn't saying:

"we're hedging our bets on cellulosic ethanol" and "corn is only a temporary measure on the road to cellulosic ethanol and second generation biofuels".

This is a point where joined up government could help take the sting out of the market, and market commentary like this somewhat!

I recall reading a stock broker (venture captalist), responding to "corn or cellulosic ethanol?" (at AltEnergyStocks.com)

- his response "I'm a venture capitalist - I go for the science project every time".

My point - what will ethanol look like in 3 years time?!?

Will John or Tim still be writing the same posts on Ethanol then?

[Mark C R UK]

"But it will be an expensive and dangerous experiment for the rest of us."

- no they are two SEPARATE experiments -

Corn is a market experiment

Cellulosic is a science experiment as its not fully commericalised yet. But when it does will massively (*30 times current energy balance) - make the market more efficient........

[odograph]

A venture capitalist plans on some minority of his projects winning, at a big pay-off. He doesn't put all of his eggs in one basket.

The interesting thing about US energy politics is that it is too often an argument of which basket we should put all our eggs in.

(Sure Mr. Politician, do small "venture style" bets all over the place, but don't think your predictive powers are 100%.)

[Mark C R UK]

Agreed on this occasion Odo. Maybe thinking broader would be better here - including expenditure on cellulosic, AND the entire energy mix for comparison? It also asks the question - are the US government thinking long term enough? Like they probably should be for the security of the US (and indeed western civilisation - last week I read ethanol will be bigger than biodiesel in the EU by 2020).

I just went and looked at the original post that I read afew months ago - name of the venture capitalist: Scott MacDonald is an Investment Director with Emerald Technology Ventures, a global leader in cleantech venture capital.
http://www.altenergystocks.com/archives/2007/05/cleantech_venture_capital_still_rising.html

Incidentally - Charles a friend of mine at Altenergystocks.com, he recently wrote about this very subject and the ethanol market in general:
http://www.altenergystocks.com/archives/2007/05/is_the_ethanol_industry_too_competative.html

Makes some interesting reading.

The point is - don't go investing in cowboys. Only go for people in this for the long term - not interested in making a "quick buck". Looking at this - you see who they are from seeing how their operations work from the bottom to the top........

[Mark C R UK]

Apologies - the two links that went off screen were:

here

and here

[Mark C R UK]

"cowboys" - slang here in Britain.... sorry!
Meaning someone who is doing things emm... shoddily... or "on the fly".... usually applied to fraudulent or bad workmen/traders.
I just realised the ineundo that could arrise from that comment. Especially politically given the current US incumbent president oops.
No offence to cowboys honest. Its just a use of phrase here in the UK.

[Am]

Tim, Check out this article.
http://articles.moneycentral.msn.com/News/GasPricesHighButNotHighEnough.aspx

[Matt]

Great post, and all points are well taken. I have a side note to add-

"..in Mexico, where corn is a staple food, the price of tortillas has skyrocketed because US corn has been diverted to ethanol production. "
It is my understanding that another major issue with tortilla prices ( food grade white corn) is the lack of biotech varieties. There have not been enough biotech white corn varieties approved for human consumption, making these crops much more difficult and expensive to grow for our producers, so few are willing to grow it anyway. As a result, white corn accounts for less than 1% of US corn production, and already trades at a premium.

Further, even with NAFTA, there are trade barriers that prevent US corn producers from exporting white corn to Mexico. Even in the case of drought and severe shortage over- quota tarrifs are quite steep.

So, if ethanol has anything to do with the current plight of Mexican food prices, it is only adding to the misery created by previously existing anti-free trade policies.

[Syed Saiful Alam]

Most trips in Dhaka are short in distance, usually one to five kilometres. These trips are perfect for rickshaws. Rickshaws are a cheap and popular mode of transport over short distances. Rickshaws are safe, environmentally friendly and do not rely on fossil fuels. Rickshaws support a significant portion of the population, not only the pullers, but also their families in the villages, the mechanics who fix the rickshaws, as well as street hawkers who sell foods. From the raw materials to the finished product the rickshaw employs people in some 38 different professions. Action needs to be taken to support the rickshaw instead of further banning it in Dhaka. The combined profits of all rickshaws exceed that of all other passenger transport modes.

We think a new ban on rickshaws will be put into force on some roads in Dhaka very soon. During the last Eid many roads were declared rickshaw free without public support or approval. Banning of rickshaws on major roads increases the transportation costs for commuters. Not only due to longer trips to avoid roads with bans in effect, but also due to actually having to take more expensive forms of transport such as CNG scooters or taxi. The environmental impact of banning rickshaws is obvious because it exchanges a non-motorized form of transport for a motorized form of transport, thus increasing the pollution and harming the environment. Ban on rickshaw harms the most vulnerable in society, mainly the sick, poor, women, children and the elderly; generally those who cannot afford or do not feel comfortable on other forms of public transport. Banning rickshaws also hurts small businesses that rely on them as a cheap and reliable form of transporting their goods. Rickshaws are ideal for urban settings because they can transport a relatively large number of passengers while taking up a small portion of the road. In 1998 the data showed that rickshaws took up 38% of road space while transporting 54% of passengers in Dhaka. The private cars, on the other hand, took up 34% of road space while only transporting 9% of the population (1998 DUTP). This data does not include the parking space on roads that cars take up in Dhaka. If included this would further raise the amount of space taken up by private cars. Every year the rickshaws save Tk 100 billion by not causing environmental damage.

The governments made many efforts to reduce traffic congestion in Dhaka but with no success. Blaming rickshaws for traffic congestion and subsequently banning them from major roads has not had the desired effect. Traffic is still as bad now as it was before the rickshaws were banned on major roads. Rickshaws thus cannot be seen as the major cause of traffic congestion. Instead, one should look towards private cars and private car parking on roads as the major cause of traffic congestion. The space gained by banning rickshaws is often used for private car parking. The current trend in transport planning reduces the mobility of the majority for the convenience of the minority. Please take into consideration who is being hurt and who is being helped.

For a better transport system in Dhaka we need to create a city-wide network of rickshaw lanes. If this is done Dhaka can reduce its fuel usage dramatically as well as its pollution.

[Yasmin Chowdhury]

Pricing public transit: learning from Bangkok
Yasmin Chowdhury
When I first visited Bangkok in 1994, I got around the city mostly by bus. The buses were slow, the streets congested, and I soon learned that I could only make one plan for the morning and one for the afternoon, as it might take a couple hours to move about.
Then the city started to build their skytrain. I waited with great anticipation for its completion. It seemed to require a lot more time and a lot more money (OK, just two years of delay and three times over budget) than originally anticipated, and the fares are admittedly quite high, but it was finally built—if never finished. (I saw an article in a Thai newspaper about people very upset that the planned line to their area had never been built; meanwhile, the pilings leading to the now domestic-only airport have been converted into advertising posts.)
To be quite honest, I love the skytrain. Sure, the cement structure looming overhead is ugly. Sure, most of the stations lack escalators, making them inaccessible to those in wheelchairs, and exceedingly difficult for those lugging heavy bags or luggage. Sure, the two lines only cover a very limited portion of Bangkok. Sure, it’s expensive. Sure, despite all the hassles, the trains are often packed. Sure, the stations are congested and I sometimes have to push through people to reach my train. But at least I can see a little of the city while I travel, and I can now get around to the stops on the line quickly, allowing myself to visit far more places in a day.
Though the skytrain certainly makes moving around the city much easier (if you can afford it), it obviously didn’t alleviate the congestion, as the government then opened a very limited subway system. The first time I tried to ride it, about a year after it opened, it was closed for two weeks due to an accident. I finally rode it a couple years after that, and discovered that it cost about US$0.50 to ride what it would take me ten minutes to walk. That seemed outrageous, and I don’t love riding up and down long escalators and traveling in tunnels. Since the Metro doesn’t seem to go much beyond the skytrain, I stick to the skytrain.
But now, after spending billions of dollars on those mass transit systems, and despite having an existing extensive bus system, and more roads than most Asian cities of their level of economic development, the government is now planning bus rapid transit—a bit like a street-level trolley, but with buses instead of trams. Of course, that too is delayed—but the cost is a fraction of that for the skytrain and Metro.
A more careful look at those costs reveals something interesting and of considerable relevance as Dhaka plans its public transit system. According to various Web sites, the skytrain, which opened in 1999, cost about US$1.5 billion for 24 kilometers. That amounts to US$62.5 million per kilometer. Of course, things were cheaper back then.
Construction of the Metro began back in 1996, but it wasn’t finished until 2004. According to Wikipedia, “The project suffered multiple delays not only because of the 1997 economic crisis, but also due to challenging civil engineering works of constructing massive underground structures deep in the water-logged soil upon which the city is built.” Interesting. Fortunately we don’t have those troubles in Dhaka (ahem!).
As for cost, the Metro cost a mere US$ 2.75 billion for 21 km, or US$130.95 million per kilometer—just over twice that of the skytrain. Apparently burrowing underground, dealing with flooding issues, providing ventilation, and so on is much more expensive than building above our heads. Meanwhile, again quoting Wikipedia, “ridership has settled down to around 180,000 riders daily — considerably lower than projections of over 400,000, despite fares being slashed in half from 12-38 baht to 10-15 baht per trip. As of 2006, fares range between 14-36 baht per trip.” With an exchange rate as I write of 32 baht to one US dollar, that’s a mighty high fare. Good thing Bangladeshis are wealthier than Thais (??).
Meanwhile, the anticipated cost for the BRT is 33.4 million for 36 kilometers. Admittedly, anticipated costs are often far less than actual costs, but still, at US$0.93 million per kilometer, that’s a bargain compared to the Metro or the skytrain—even more so when considering it’s being built last, when prices are highest. At 67 times less than the skytrain and 141 times less than the Metro, even with significant cost increases, it will still be far more affordable than its public transit predecessors.
Of course, operational costs are another issue. Buses require fuel, trains electricity. Buses tend to require more maintenance, tires wear down frequently, and buses have to be replaced far more often than trains. While it is cheaper to build a BRT system initially, the higher operational costs might mean that, in the long term, a tram system would be more affordable—tram meaning street-level light rail, not something up in the sky or underground, which greatly multiplies the costs.
Which is all to say, I’m all for public transit. So, apparently, are Thais: last I checked, hotels and housing advertise their proximity to the various public transit options. Apparently people are sick and tired of sitting in cars stuck in traffic jams. In public transit, you can sit back and read a book while you ride, look out the window (preferably not at tunnels), eavesdrop on your neighbor’s conversation, and otherwise amuse yourself without risking crashing into someone once the traffic moves again.
But when considering spending millions or billions on public transit, it would make sense to invest it wisely, in a system that will be the most extensive and least expensive, and thus offer the best value for the money. At 141 times per kilometer less to build BRT than Metro, we could both have a far more extensive system, meeting far more people’s needs, and lower fares. Sounds like a bargain to me!