Ricardo Haussman is bullish on biofuels

He writes in the FT:

…technology is bound to deliver a biofuel that will be competitive
with fossil energy at something like current prices. It probably
already has. Brazil has been exporting ethanol to the US at an average
delivery price of $1.45 for an amount with the energy equivalence of a
gallon of petrol. It is doing so profitably and in increasing amounts,
in spite of a 54 cents a gallon tariff to protect American maize-based
ethanol producers. Many countries are following suit.

But
ethanol is an inconvenient chemical compound that is corrosive and
soluble in water, thus limiting its immediate market to that of a
gasoline additive. However, this is just the Betamax phase of the
industry. There is plenty of private venture capital money being poured
into finding more efficient ways of extracting energy from biomass and
delivering it to transport and power systems. Over time, the technology
will also become more flexible, allowing more crops to be used as
feedstock, not just the current choice of sugarcane, maize and palm
oil…the world is full of under-utilised land that can grow the biomass that the new technology will require.

It shocked me to read this, though not for any good cognitive reason.  Perhaps I too quickly assume that the trendy will not pan out.  My not well informed mental model has been that our energy future lies with (relatively) clean coal, not so clean coal, nuclear, oil shale, and tar sands, all of which can in fact produce lots of power. 

Comments

Assuming that it is possible to create compatible fuels *locally, and at reasonably competitive prices (not hard given the peek prices of oil recently) Which, as an investor, would you put money into developing?

A) Fossil fuels, typically from politically unstable regions. Your investment may be blown up, nationalized, or held hostage to bribes by local gangs.

B) Reasonably diversified biofules, such as alagal, TDP, cellulosic ethanol, or non-arable field non-edible oil crops. In most cases the investment can be bought anywhere in an equatorial or sub-tropical zone. Area selection can be optimized to place the supply close to demand, or at least shipping lanes, minimal taxes, friendlier locals, lower cost of labor.

C) Retrofit the entire economy to work off of the electric grid and go nuclear.

Among the alternative liquid fuels, ethanol has potential, but not the way we do it here in the U.S. with corn. Brazil has developed their production capability using sugar, which yields far more energy per input than what can be achieved by using corn.

If the U.S. government was really serious about developing ethanol, rather than redistributing tax dollars to support Big Corn farm interests ahead of a presidential election year, it would have reduced the tariffs on importing sugar to the U.S. instead.

This way, instead of making everything made with corn more expensive (tortillas, beef, etc.) by sucking so much of it off to produce ethanol, it could have used the ethanol production demand to keep the price of sugar up in the U.S. while not impacting the cost of so many other foods.

Even those foods (like beer) that are on their way to becoming more expensive because land previously used to produce their ingredient crops (like hops) is being used to grow corn instead.

It's not like the U.S. doesn't have the room to maneuver here - thanks to its sugar tariffs, U.S. consumers pay twice the world price for it. Why not develop a broader supply of useful fuels *and* promote freer trade?

The answer is not to subsidize ethanol OR ANY OTHER SPECIFIC ENERGY TECHNOLOGY.

Instead, put in place energy taxes that reflect the true externalities of fossil fuels (CO2 & climate change, other pollution, national security risks and costs, congestion, etc). Economists have estimated that these externalities amount to about $2/gallon of gasoline (See past issue of J. Econ. Perspectives). The revenues from these taxes could be used to reduce payroll taxes by an equivalent amount. As Pigou pointed out, we should tax bad things like pollution, not good things like work.

As a result, myriad alternative energy technologies, perhaps including ethanol, solar, etc., as well as conservation technologies, as well as individual small and large actions like buying more efficient cars, living closer to work, telecommuting, bicycling, etc, would become cost effective and flourish.

Let the market figure out which combination of techniques works best. All the gov't needs to do is make sure that the costs of fossil fuels is not artificially low (as it is now). Instead, it should reflect the full costs it imposes on others.

It's basic economics.

Behind my favorite villians, the teacher unions, Big Agriculture is one of the most pernicious forces in the American economy today. They're in the perfect position for huge federal money, consisting of a big, influential voting block and very little if any voters with real opposition to them.

Corn ethanol doesn't make sense and has never made any sense despite 25+ years of federal funding. The best energy blog out there, R-Squared Energy Blog, has made several calculations debunking just about any form of non-sugar ethanol. Due to the relatively low amount of energy per acre farmed, literally entire states would have to switch from food production to ethanol production to meet current energy demands. Even more novel things, such as biodiesel from fast food grease and vegetable oil, would likely never work on a large enough scale.

So what will we do about energy in the future then? For each year since 2002, the peak price of oil has consistently increased about 20 dollars. I don't see this trend stopping any time soon based on the strength of worldwide economy and the ever-decreasing new reserves of oil. The US energy consumption will need to radically shift from oil over the next 10 years to maintain the same standard of living.

However, don't peg me as one of those doomsday "peak oil" types. By and large, the ones most pessimistic about oil will look straight to the government for immediate draconian solutions. Instead, I look at it with optimism that the market will provide the right solutions for the right climate better than the government ever could.

Right now, I'm guessing the market will soon provide very high fuel efficiency cars, such as plug-in hybrids, to start having nuclear and coal power replace the energy from oil. I see as radical of a shift 20 years from now as the shift from 1987 to 2007. My only fear is the increasing intensity of government stupidity with projects such as corn ethanol.

Lots of good comments here.
Tyler, you are right about biofuels never coming close to replacing fossil fuels, but they could still contribute a few percent to total transportation fuel. Even that may make a fairly substantial impact on the price of oil in coming years, especially if heavy investments in shale etc don't begin until the market is convinced of permanently high prices. Biofuels are probably more scalable.

hard to price the externalities when you can't, you know, actually price them in any reliable way. put another way, anyone willing to try to do the cost benefit analysis for impact of (e.g.) added $2 per gallon tax against what benefit we might get from that? aren't you ignoring that we can't tax (e.g.) chinese and indian gas products? so you're not really capturing many of the externalities, just imposing a penalty on certain purchasers (yes, yes, they're paying for past living of the high life, etc.).

Dj says: "Hard to price the externalities "

Yes, that's true. But pricing them at zero is not correct. Better to be approximately correct ($1, $2, $3 per gallon) than precisely wrong.

The point is NOT to punish people for past living of the high life. On the contrary, the point is to give them incentives to make decisions today that reflect the (imperfectly measured) full costs and benefits of their actions.

If the money is returned via payroll reductions, on average no one is worse off.

In fact, its better than that.

Since the current system is at an inefficient equilibrium (artificially high consumption of fossil fuels since their price does not reflect their full cost), the imposition of carbon taxes makes everyone BETTER off, on average. In effect, we are removing a subsidy by forcing oil consumers to pay for the pollution they create. If they still find it beneficial to burn the oil, taking into account the full costs, then that's fine. Go for it.

Just pay all the costs and only burn fuel when the benefits outweigh the costs.

Incidentally, the fact that other people (Chinese and Indian?) don't fully pay the costs is not argument for inefficiently subsidizing our own fossil fuels.

Brazil's sugar is a bad thing to compare, because sugar can only grow in relatively wet and warm locales. Maize or corn based biodiesel first must be turned into sugar or vegetable oil before being turned into fuel, and that process requires a ton of energy to do. For example, the american biofuels industry created the equivalent of 6 billion barrels of oil last year, but used 3.8 billion barrels of oil to do so. Those are garbage results.

Finally, I heard someone from Oxfam on the BBC say that if all the farm land in the US, Canada and the EU were used for biofuels it would create less than 25% of the fuel demand there.

It's inefficient and expensive, and only survives because of VAST government subsidies. We should ignore it completely.

Nuclear presents an interesting alternative.

Currently about half of the fuel for the existing US nuclear power industry comes from decommissioned Soviet nuclear weapons. But they are planning on expanding their nuclear power industry and so notified the US that they would not renew the treaty to decommission weapons when it expires in 2012.

Moreover, largely because of not-in-my-back-year prospects for other sources of uranium is very poor, even at much higher prices.

So if we are going to expand nuclear, right now we do not even have an assured supply for current operations, let alone an expanded industry.

We have a chance to compare strategies and outcomes in the coming year(s). The Europeans have put a higher tax on fuel, and as a result have a system a little bit pre-adapted for high oil prices. Our strategy has been to largely trust the market, and to trust that we'll adapt as needs be.

It will be interesting to see how many Americans are ready to be nimble market players, switching to Priuses or whatever, and how many will squawk and call for congressional action.

Will we follow through with our market commitment?

What makes you think shale will ever prove a source of energy? It looks pretty hopeless if you ask me.

The Parry et al paper, assuming its methods are accepted, actually proves that there should be congestion fees on the roads. Non-congestion externailities of fuel burning are already covered by existing gas taxes. So the Pigouvian argument for increasing gas taxes is not even second best.

you ignoring my second point -- you're not really dealing with the externalities if you can't impose that price on everyone responsible (e.g., chinese, indians), even if you think your just imposing the cost of externalities created by the people you can tax. put another way, taxing americans to reduce their use of oil just makes oil cheaper for indians and chinese and etc. (thereby creating even more externalities) (coase is fun!). now, if you want to tax americans so that they have incentives to create greentech, that thereafter may be adopted by those not so taxed, that's a different argument.

Student,

As always, people only try to find the negative externalities, they never look for the positive externalities, nor do they even try to calculate the potential negative externalities of a carbon tax itself. I would just caution against taking a too simplistic view on any topic- a failing I find repeatedly in most people.

The cost of removing carbon from the atmosphere puts a cap on how high a carbon tax/credit should go. It's not yet clear how much it will cost to remove carbon from the atmosphere on a large scale, but it has been suggested that it would be less than $100 a ton. This means that makeing gasoline carbon neutral should cost less than 36 cents a gallon, significantly less than $2.28 a gallon.

dj superflat, I see no reason why people in China or India would buy a 10km per liter car if a 40km per liter car is available for a similar price. I don't see any reason to think China and India will follow U.S. patterns in oil consumption per capita, partiularly when current oil prices are considered. Countries such as Japan have demonstrated that they can become as advanced as the United States while using much less oil per capita than the U.S.. I fail to see anything naive in what A Student of Economics has written.

Biofuels have been all the rage recently, but what fails to be discussed is the climate-change alleviating features of biofuels, or the lack thereof. How is the global warming phenomenon going to be ameliorated by burning another carbon-based fuel, thereby still releasing carbon-dioxide into the air? I do recognize that growing the fuel would mean that carbon-dioxide is being circulated, but the efficiency of this cycle is far from 100%. In the long run, carbon-based fuels can only be a supplement to energy demand, not the main source of energy. Furthermore, we ought not to destroy even more habitat and rain-forest for the sake of planting crops to burn. I'm fine with market outcomes, but all these subsidies for biofuels is disgusting.

Andrew,

Sorry, I had forgotten about this thread.

Climate warming itself might be a positive externality for all we know at the moment, but it is always portrayed as a negative.

In the absence of gasoline use, what might people do as the alternatives? It is quite possible that the response will have greater negative externalities than the present regime of energy consumption. Unless you can completely answer that question, then you cannot claim that fossil fuel use can not have a positive externality.

All I am attacking is the simplistic idea that fossil fuel use has only negative externalities. The world, decisions made of governments, and the consequences- both seen and unseen- are more complex than most people portray.

I don't understand why the United States has been so slow to embrace alternative forms of energy. Sure the government isn't helping but the consumer is where the real power lies. Every purchase is like a vote for a particular item telling the manufacturer to make more of that item. Things like solar panels and hybrid cars may be more expensive than their traditional counterparts but not so long ago desktop computers were very very expensive and now you can buy a new computer for a few hundred dollars. These things are cheaper now because people bought them anyway and prices gradually came down and demand rose. I personally would run out and buy a car that used something like biofuels, solar, electrical, or hydrogen but those kinds of cars cost way too much for a poor college student like me so for now I'll resort to car pooling, recycling, and turning off lights when I'm not using them. It's not much but every little bit counts.

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