On the face of it, biofuel policy is a success story. Many countries around the world are looking to boost the biofuel share of their energy mix. Their reasons for doing so seem compelling. They include, inter alia, cutting oil consumption, diversifying fuel supplies, improving energy security, cutting greenhouse gas emissions, protecting air quality, and supporting agriculture. And global biofuel production is growing. In the United States alone, the ethanol market nearly quintupled from roughly 110,000 barrels per day (bpd) (1.7 billion gallons per year) in 2000, to an estimated 540,000 barrels (8.2 billion gallons per year) by the end of 2007, (1) replacing more than 5% of gasoline demand. (2) Building on their success, governments in both mature and emerging economies are setting ambitious mandates and consumption targets. In the United States, the Energy Independence and Security Act of 2007, signed into law on December 19, 2007, calls for ethanol usage of 36 billion gallons (2.35 million bpd) by 2022, (3) replacing roughly 20% of forecasted gasoline demand and 10% of total projected oil consumption. In the United States, as in other economies, support for biofuel policies is broad-based, spanning a remarkably diverse constituency of stakeholders across national boundaries and party lines.
Yet after a rapid take-off, the biofuel industry is entering a zone of turbulence. Despite the protection of subsidies and import tariffs, the industry finds itself on increasingly shaky economic grounds. Production costs, far from declining with time as had been expected, have surged in part because of soaring demand for feedstock crops. Plant construction costs have ballooned. In contrast, biofuel prices have failed to keep up with costs, raising questions about the economic viability of new projects and causing a flurry of construction delays and project cutbacks at U.S. ethanol companies from mid-2007 onwards. After an early surge in the spring of 2006, when pollution concerns caused the phasing out of gasoline additive methyl tertiary butyl ether (MTBE), U.S. ethanol demand growth quickly fizzled. Relatively low ethanol prices compared to those of gasoline revived buyer interest somewhat in late 2007, but whether demand growth can keep up with production capacity is unclear. At the same time, doubts are mounting about the comparative advantages of biofuels, notably U.S. corn-based ethanol, as an energy source. The broader economy is being hurt as surging fuel demand for corn, wheat, sugar, and other crops has lit a fuse under food prices. One prominent example has been the rise of Mexican tortilla prices. Concerns have also been mounting about the social, political, and economic implications of food/fuel competition for finite land and crop resources. Even the environmental benefits of biofuels are being challenged amid questions about the energy costs of producing biofuels and other environmental concerns such as water and air pollution. Early biofuel critics are finding a growing mainstream audience. A backlash is brewing. (4)
The unintended consequences of biofuel expansion are causing a groundswell of criticism. But however real the problems may be, blanket rejection of biofuel policies does not offer a practical option--nor is it wholly justified. Lost in the debate is the fact that the perverse effects of biofuel production are greatly compounded, if not provoked, by the nationalist bias of western energy policies. Many adverse effects of biofuels could be averted, or at least mitigated, by denationalizing production, as some countries have done. In the United States and Europe, though, renewable energy policies have a needlessly strong, if understandable, national component: domestic production is seen as essential. Supporters embrace biofuels not just as a sustainable alternative to hydrocarbons, but as a homegrown substitute for foreign oil--a tool of energy independence. …