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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.
Posted by Tyler Cowen on November 8, 2007 at 06:13 AM in Economics | Permalink
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.
Posted by: thelonecabbage at Nov 8, 2007 6:26:01 AM
Or
D) Use the cheapest energy available to meet my personal power needs and use the savings to invest in a few broad-based ETFs.
Posted by: Jeff H. at Nov 8, 2007 6:44:49 AM
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?
Posted by: Ironman at Nov 8, 2007 8:05:10 AM
Do you know that we are coming up on 30 years of continuous (corn) ethanol fuel subsidies?
If you sent a kid off to college, to learn to make his way, and discovered that you were still paying for his research and education 30 years later, what would you do? Maybe ask him some hard questions?
Unfortunately, 'the kid' (or kids) get to decide the American presidential primaries. So instead of hard questions, we have a retreat from hard questions, and ridiculous pandering.
I've been following oil and energy closely for the last few years, and share your intuition that biofuels are currently long-shots. Unfortunately they have also demonstrated awesome political power (in very country with a farm constituency).
I'd dearly love to see production subsidies zeroed out, and genuine research and development funded at a moderate pace. I suspect that the ratio is currently 100:1 on production subsidies to research.
On the rest, coal, etc. I fear for the environment. Clean coal is easy to say and too hard to actually do. If we do a lot of coal (on a global, inc. asia) basis, we will go to 20 feet sea level rise, and species loss, in a hand basket.
Posted by: odograph at Nov 8, 2007 8:19:40 AM
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.
Posted by: A student of economics at Nov 8, 2007 8:42:16 AM
"student" ... it is obvious that you will never be President of the United States.
Posted by: odograph at Nov 8, 2007 8:44:50 AM
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.
Posted by: Matthew at Nov 8, 2007 8:51:19 AM
If the aim of biofuels is transport without contributing to global warming, coal and sugarcane based fuels aren't much use. Once you take into account the full life cycle of fuel production and use, corn ethanol is probably worse than gasoline and sugarcane ethanol is only marginally better.
If we are to stabilize emissions, we are going to have to do much better.
Posted by: Milan at Nov 8, 2007 9:49:09 AM
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.
Posted by: michael vassar at Nov 8, 2007 9:54:05 AM
It is a kind of bias to think that the future is based in what we know.So oil and coal will go , soon or later.As Yamani said " The rock era didnt come to a end for lack of rocks".
Perhaps ,genetically engineered bacterias will make oil , that the 10 years bet.
After the China crash , circa 2008( Marginal Revoution says so)the oil pricess will falll.By 2010 the price will be below 20$ for sure.
Cafe would mean 15% less comsumption in 10 years.
Nuclear energy in Russsia and India will alleviate India demand and free russian oil for sale.
Posted by: jrd at Nov 8, 2007 10:02:58 AM
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.).
Posted by: dj superflat at Nov 8, 2007 11:25:41 AM
A truly sloppy, dreadflul piece. Haussman claims there are millions and millions of acres of under-utilized out there. That sounds like he's claiming a free lunch. Very unseemly. And the man actually believes that higher food prices will lead to lower subsidies and freer agricultural trade? That is beyond naive. Look at the 2007 Farm Bill, happily raising handouts at a time of high food prices.
Posted by: AndresV at Nov 8, 2007 12:20:41 PM
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.
Posted by: A student of economics at Nov 8, 2007 12:43:39 PM
Biofuels themselves are carbon neutral. While they use plenty today, they do not have to tomorrow and will become increasingly attractive while fossil fuels will become increasingly unattractive. The only reason fossil fuels are competitive today is externalities.
Posted by: Lord at Nov 8, 2007 1:47:13 PM
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.
Posted by: Andrew at Nov 8, 2007 2:00:20 PM
" Depending on assumptions about productivity per hectare, today’s oil production represents the equivalent of some 500m to 1bn hectares of biofuels"
This line is complete rubbish and all evidence points to this being false. Even environmentalists who supposedly love biofuels know that it's a boondoggle:
http://gristmill.grist.org/story/2006/2/7/12145/81957
That's not even ten barrels of ethanol per acre, and like five per acre for diesel. A hectare is 2.5 (rounding up!) acres, which means 1 billion hectares of ethanol producing crops is only 25 billion barrels of fuel. Which is a little more than a single day's consumption for the United States.
Utter bullocks that should be completely disregarded.
Posted by: Andrew at Nov 8, 2007 2:08:12 PM
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.
Posted by: spencer at Nov 8, 2007 2:24:38 PM
A student,
Given that externalities may be positive as well as negative, there is no a priori reason to believe that $1/gallon tax on gasoline is actually brings the cost of gasoline closer to it's true cost.
Posted by: Yancey Ward at Nov 8, 2007 2:43:48 PM
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?
Posted by: odograph at Nov 8, 2007 3:43:07 PM
The only examples of working bio diesel I've seen are in small scale self contained uses.
The farmer who grows sunflowers on some of his land to crush for oil to run the tractor that maintains the rest of the farm and feeds the pulp to his cows.
The university that turns cafeteria waste into bio diesel on site to run the landscaping equipment.
Self sufficiency systems.
Posted by: TW at Nov 8, 2007 3:52:07 PM
What makes you think shale will ever prove a source of energy? It looks pretty hopeless if you ask me.
Posted by: General Specific at Nov 8, 2007 4:04:01 PM
Yancey Ward:
Fortunately, there has been some research on the sign and magnitued of the externalities. For instance, the recent paper in the J. of Econ. Literature by Parry et al "Automobile Externalities and Policies" estimates the size of these negative externalities to be $2.28/gal, mainly due to congestion costs, but also pollution, accidents, global warming and national security considerations. Of course, their estimate may be too high or too low, but it's probably a good place to start. Certainly better than zero.
This suggests that a $1/gallon tax would, in fact, move us closer to the true cost. Furthermore, the revenues could be used to cut payroll taxes by about $100 billion, further improving the efficiency benefits of this policy, just at Pigou would have argued. Better yet, to the extent the policy lowered overall oil demand, some of the costs would be borne by foreign oil producers.
The existence of these large negative externalities is presumably why most economists, whether liberal, moderate or conservative, support gas and/or carbon taxes.
Posted by: A student of economics at Nov 8, 2007 5:15:38 PM
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.
Posted by: srp at Nov 8, 2007 5:26:24 PM
Congestion fees would be a great alternative to a gas tax, but Parry et al. note that they are to a great extent interchangeable (e.g. assuming 21 mpg on average they provide a conversion rate). I'd be all for system that implemented congestion fees. However, they are hard to implement compared to a gas tax, so in the absecne of congestion fees, a gas tax would be an improvement over the status quo.
Posted by: A student of economics at Nov 8, 2007 5:59:43 PM
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.
Posted by: dj superflat at Nov 8, 2007 6:16:44 PM
