Energy & Environment

Pumping Corn

It looks like farmers can turn almost any crop into fuel. But can they make money at it without government help?
by | September 2006

All over the Midwest these days, there's talk of a boom in biofuels-- the fuels that come from agricultural products. The boom may be closest to reality in Minnesota, which has been seriously promoting it for the past two decades. In that state, every farmer knows that ethanol and biodiesel can be big business. They already are. What's not so certain is whether the boom can be sustained--or created in other parts of the country--without big public subsidies.

Last year, Minnesota became the first state to require that nearly all diesel fuel sold within its borders contain at least 2 percent biodiesel. That's on top of an earlier law requiring that virtually all gasoline sold be at least 10 percent ethanol, and substantial incentives to help biofuel producers get off the ground.

Other states are eagerly following this approach, so much so that the phrase "gold rush" is starting to be used. At least a dozen states have created incentive programs to encourage retailers to sell ethanol blends, while another 15 offer incentives to ethanol producers. Many have aided ethanol indirectly by banning MTBE, a competing fuel additive that has fallen out of favor because of links to groundwater pollution. Even New York--not anyone's model of a Corn Belt state--got in the act last year by joining a group called the Governors' Ethanol Coalition.

All these states see a move toward biofuels as a way of helping the environment, conserving energy and reducing dependence on foreign oil sources. Some of them also dream of a biofuels windfall that could bail out troubled farm economies.

But as they move toward biofuels in a serious way, states have to confront tough political disagreements about how to promote them and generate the infrastructure to support them--and how many taxpayer dollars should be spent in the process.

85 PERCENT SOLUTION

The big advantage that ethanol and biodiesel have over other alternative fuels--such as electricity--is that, when blended in the right proportions with more traditional fuel, they can power conventional vehicles. E-10, a blend of one part ethanol to nine parts gasoline, is now common in many states. But that's still only 10 percent. The bigger breakthrough would be widespread use of E-85--a mixture containing 85 percent ethanol. E-85 has not been used in many places so far because it can effectively power vehicles only if they have been specifically engineered for it. But even E-85 is showing some impressive growth. Overall, production of ethanol and biodiesel has increased dramatically over the past five years, with many more of the specialized production facilities for the fuels now in the works.

As the biofuel momentum grows, states would do well to study the experience Minnesota has had. It was back in the late 1980s that the state first took an interest in the promotion of ethanol as a way to boost corn prices, which were low, and to ease a bad-air problem: The state was at risk for non-attainment of federal air pollution standards, specifically for carbon monoxide. (Ethanol can come from a wide variety of crops, but almost all of it currently comes from corn in the United States. Biodiesel typically comes from soybeans.)

To get ethanol production up and running, Minnesota started offering payments of 20 cents per gallon of ethanol for up to 10 years to any facility producing the fuel. A few years later, the state began shifting its government fleet to flex-fuel vehicles--ones that could run on anything from E-85 to regular gasoline. Minnesota now possesses nearly twice as many E-85 stations as any other state and is expected to produce 550 million gallons of ethanol this year from its 16 ethanol plants.

At this point, though, little evidence exists that E-85 can gain much footing in the market without this type of state intervention. That's because the fuel presents a chicken-and-egg problem: There's little incentive to purchase a flex-fuel vehicle without E-85 stations but little incentive for retailers to offer the fuel if there aren't drivers looking for it.

This difficulty helps explain why, despite ethanol's renaissance, there are still only 700 or so E-85 stations nationwide. "Most of the people who have flexible-fuel vehicles don't have any kind of realistic, practical access," says Don MacKenzie, a vehicles engineer with the Union of Concerned Scientists. The number of flex-fuel vehicles nationwide has been increasing--there are now around 5 million of them--but many of the owners don't even realize their cars are compatible with E-85.

HOW EXPENSIVE?

The uncertainty over biofuels goes far beyond logistical questions. Scientists have been arguing for a long time about whether biofuels are worth pursuing in the first place. Cornell University's David Pimentel notes with some pride that he has been a thorn in the side of the ethanol industry for 25 years. Pimentel's central argument, which is vigorously disputed by other researchers, is that it takes more energy to produce biofuels than the fuels themselves generate. "Economics, dollars, money is what it's all about," Pimentel declares. "The whole thing is going to go bust, I'm sure."

Lately, critics have been focusing more on the policies they see as most pernicious: the mandate bills that have been popping up in state legislatures, modeled after the ones in Minnesota. Just this year, Missouri approved a similar ethanol requirement, joining Hawaii and Montana. Louisiana and Washington State approved mandates for both ethanol and biodiesel. Similar efforts with regard to ethanol stalled in Wisconsin and Idaho, as well as in Colorado, where Governor Bill Owens vetoed the bill.

Supporters of these bills have argued that they will give a fledgling industry the guaranteed market needed for substantial growth. Without that market, they say, infrastructure advantages--fueling stations, refineries and pipelines--give petroleum an unfair edge.

But ethanol skeptics, including those in the petroleum industry, warn that subsidies will merely disrupt the free market in energy and lead to higher prices for consumers. They suggest that the fuels can't live up to expectations if the government has to order their use. The effect of ethanol on fuel prices is a matter of substantial debate in its own right and some of the mandating states have tried to head off such criticism by making their requirements conditional on ethanol being comparable in cost to regular gasoline.

Back in Minnesota, though, the debate is a bit different. Ironically, supporters of the E-10 mandate say one of its chief advantages was that it gave the fuel's non-mandated cousin, E-85, the foothold it now enjoys. They say that the mandate removed the exotic reputation of plant-based fuels in the eyes of consumers, while creating the political coalition--farmers, environmentalists, transportation experts--to allow E-85 to prosper. They can point to places such as Nebraska, where the fleet of state government vehicles shifted to ethanol a quarter century ago, but where, without mandates, there are only 26 E-85 stations today.

GRASS TO GAS?

Whatever the effect of ethanol subsidies might be, there's one thing that virtually everyone in the field agrees on: Corn-based ethanol will never replace petroleum. There's simply not enough land where corn can be grown for it to become the dominant vehicle fuel in America. Some observers, such as Lester Brown, president of the Earth Policy Institute, are also concerned that there may be a point at which the diversion of corn to fuel will impact global food prices.

But that doesn't necessarily mean a limit to biofuel dreams. One hope for the more distant future is "cellulosic ethanol," which, as the name suggests, is derived from cellulose. Many experts believe that if and when it becomes available, it will eclipse today's ethanol in usage and prove a genuine competitor to petroleum.

Cellulosic ethanol would likely have significant advantages over current biofuels, including better environmental benefits and more favorable net energy gains. A greatly expanded variety of plants would be able to produce the fuel, including switchgrass, a perennial that can grow on marginal land and be cultivated multiple times per year. Cellulosic ethanol also would not worry those concerned about food crops being converted to fuel.

However, cellulosic ethanol has its skeptics, too. Pimentel argues that in the end, it will be no more a net energy producer than ethanol, and that, in any case, the science needed for its production is still a long way off. Others agree. "Cellulosic ethanol was just around the corner 20 years ago, and it's just around the corner today," says Ralph Groschen, a longtime ethanol supporter in the Minnesota Department of Agriculture. "Everyone is standing in line," he says, "to build the second commercially successful cellulosic ethanol plant." Much research still needs to be done not only on the process of converting cellulose to ethanol but also on switchgrass cultivation techniques. Nobody has ever tried to grow this crop commercially before.

Even so, states may be hastening the arrival of cellulosic ethanol by promoting today's corn-based ethanol. Although the production processes for the two fuels will be different, the end product is the same. So, an infrastructure that supports corn-based ethanol will support cellulosic ethanol as well. "You can use the same pumps, you can use the same vehicles," MacKenzie says. "That's why corn ethanol, even though it has limited potential, is very important as a transition fuel."

Josh Goodman
Josh Goodman  |  Former Staff Writer
mailbox@governing.com

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