Study says U.S. biofuel policy is flawed

Jan. 6, 2010, Houston, TX – According to a new policy paper by Rice University’s
Baker Institute for Public Policy, the United States needs to fundamentally
rethink its policy of promoting ethanol to diversify its energy sources and
increase energy security. The paper, Fundamentals of a Sustainable U.S.
Biofuels Policy, questions the economic, environmental, and logistical basis for the
billions of dollars in federal subsidies and protectionist tariffs that go to
U.S. domestic ethanol producers every year. "We need to set realistic
targets for ethanol in the United States instead of just throwing taxpayer
money out the window," says Amy Myers Jaffe, one of the report's authors.
Jaffe is a fellow in energy studies at the Baker Institute and associate
director of the Rice Energy Program.

As an example of the unintended economic consequences of U.S. biofuels policy, the
report notes that in 2008, "the U.S. government spent $4 billion in
biofuels subsidies to replace roughly 2% of the U.S. gasoline supply. The
average cost to the taxpayer of those 'substituted' barrels of gasoline was
roughly $82 a barrel, or $1.95 per gallon on top of the retail gasoline price
(i.e., what consumers pay at the pump)." The report questions whether
mandated volumes for biofuels can be met and whether biofuels are improving the
environment or energy security.

The report, which includes analysis by environmental scientists, highlights the
environmental threats posed by current biofuels policy. "Increases in
corn-based ethanol production in the Midwest could cause an increase in
detrimental regional environmental impacts," the study states,
"including exacerbating damage to ecosystems and fisheries along the
Mississippi River and in the Gulf of Mexico and creating water shortages in
some areas experiencing significant increases in fuel crop irrigation."
Moreover, the report challenges claims that ethanol use lowers greenhouse gas
(GHG) emissions and argues that "there is no scientific consensus on the
climate-friendly nature of U.S.-produced corn-based ethanol, and it should not
be credited with reducing GHGs when compared to the burning of traditional
gasoline."

In 2007, Congress passed the Energy Independence and Security Act (EISA) that
mandated production targets for renewable fuels, mainly biodiesel and ethanol.
The bill mandated ambitious production targets of 9 billion gallons/year of
biofuels in 2008, rising to 36 billion gallons/year by 2022. Corn ethanol is
capped at 15 billion gallons/year in the EISA, but even that level will be
difficult to reach given logistical and commercial barriers, according to the
study. The Baker Institute report finds that the use of flex-fuel vehicles is
not likely to be extensive enough to overcome the barriers to achieving the EISA
mandates for U.S. ethanol market saturation.

The EISA also called for 21 billion gallons of advanced biofuels, produced from
sources like switchgrass, corn stover, and algae, to be used in the nation’s
fuel supply by 2022. But the report determines that "existing mandated
targets for advanced biofuels are not currently achievable, scientifically or
commercially, and should be revisited."

As a result, the report's authors write, "we encourage Congress to revisit
these mandates and revise them to be in line with realizable targets and time
frames to create an improved policy that will reduce uncertainty for refiners
and allow a more orderly implementation of achievable goals and mandates by the
EPA."

Finally, the report questions the tariff imposed on ethanol imported from Latin America
and the Caribbean. Because sustainable production of U.S. domestic corn-based
ethanol faces limitations, the report finds that "tariff policies that
block cheaper imports are probably misguided." 

The study was supported by a research grant in environmental engineering from
Chevron Technology Ventures.