Current U.S. ethanol policy “misguided,” but biofuels still hold promise, says MIT Sloan expert

Future food price hikes due to biofuel production relatively modest, says study

CAMBRIDGE, Mass., June 26, 2008 — Biofuels are being blamed for soaring food costs and other problems, but policy makers should not allow one especially misguided policy — U.S. corn-based ethanol mandates — to forestall development of a new generation of technologies that can deliver on the promise of biofuels without such negative consequences, says an MIT Sloan School of Management professor who two decades ago warned about the dangers of U.S. ethanol plans.

”Interest in biofuels has swung from it being the answer to everything, from energy independence and climate change to farm income, to being the cause of all problems, including deforestation, high food prices, and hunger,“ says MIT Sloan Senior Lecturer John M. Reilly, co-author of a recent research paper that has created a buzz within the scientific and energy communities.

Reilly sees the truth in the middle: biofuel production, the paper finds, can be rapidly expanded to help reduce climate change while triggering only relatively modest price increases in agricultural products.

Much of today's negative view of biofuels, according to Reilly, has been triggered by current U.S. and European policy, which mandate specific levels of production of biofuels. ”No one should really be surprised that the mandates in the United States have created the huge distortions in the corn market,“ he says. ”The impacts of ethanol expansion on the corn market were detailed in research at the U.S. Department of Agriculture in the 1980s, where our studies showed that a two to three billion gallon increase in ethanol production could easily increase corn prices by $1 to $2 a bushel in today's prices.“

The Energy Independence and Security Act requires that corn-based ethanol expand from about 4 billion gallons in 2005 to 9 billion this year and to 15 billion by 2015. According to Reilly, the recent expansion could easily add $3 or more to the price of corn and expansion to 15 billion gallons another $3. ”To suggest that the United States can be energy independent on ethanol without dramatically affecting the nation's food production is naïve,“ he says.

The view that biofuels can be derived inexpensively from waste materials is also unrealistic. ”Converting such cellulosic material has promise,“ says Reilly, ”but the whole idea that there is forest and agricultural waste out there and it's free misses the fact that collecting it is costly and energy-intensive. Cellulosic crops may cost less to produce than corn but their expansion will affect land prices and people underestimate the cost of raising the feed stock and transporting it to processing facilities.

But corn-based ethanol should not bear total blame for the rapid rise of food prices, says Reilly. Other factors, including greater demand and weather, have likely played an even more significant role. ”Ethanol policy has no doubt had some effect and we must be highly sympathetic to people who are struggling because of high food prices, but the link from corn prices to food prices is rather weak,“ he says. ”By the time you get to the price of hamburger in the store, corn costs are relatively small.“

The challenge for policy makers now, Reilly says, is to apply the lessons of the ”misguided“ corn-based ethanol program to longer term cellulosic biofuel technologies. Reilly's paper concludes that biofuels can help offset climate change without causing major food price hikes.

”It appears to be possible to introduce a large cellulosic biofuels industry without dramatically upsetting agricultural markets,“ it says. Expanded use of agriculture and forestry products to produce biofuels will affect price levels, but ”somewhat surprisingly, these price increases are relatively modest“ at about 5 percent to 10 percent. ”This result is quite different than what we have seen in recent years with the expansion of corn-based ethanol in the United States.“

Reilly remains hopeful that biofuels can help reduce climate change, but land use and other costs must be properly considered. ”While biofuels are not the panacea some imagined, food prices and other issues that have arisen with the current generation of the technology are probably exaggerated,“ he says. ”They should not be used as a reason to forego development of new biofuels technologies even while thinking carefully about how to reduce problems that might be associated with their deployment.“

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