Europe Looks Beyond Ethanol

Continental carmakers are testing a variety of biofuel alternatives as well as engine technologies that reduce carbon-dioxide emissions

Spurred by American automakers and the farm lobby, U.S. President George W. Bush is betting big on ethanol as a green additive to gasoline that can help make America more energy-independent. But most European automakers and politicians are far less convinced that ethanol made from corn is the best green fuel choice. "Cars that run on ethanol are more of a marketing gimmick," says Ferdinand Dudenhoeffer, director of the Center for Automotive Research in Gelsenkirchen, Germany.

No doubt, green autos are hot in Europe. And not everybody is turning up their noses at ethanol: Sweden, for instance, heavily subsidizes ethanol fuel and cars, and some 80% of Saab's sales in Sweden are models that run on a mix of 85% ethanol and 15% gasoline, known as E85.

But to develop cleaner-burning cars, most of Europe is going beyond ethanol, experimenting with a variety of biofuels, including biodiesel (diesel made from plants, oils, or fats), biomass, and hydrogen—as well as compressed natural gas and engine technologies that reduce harmful carbon-dioxide emissions. That varied approach, analysts say, could hand Europeans a competitive edge in developing greener cars and fuels.

Investors Backing Startups

Indeed, the European Union has shied away from promoting existing biofuels as a major breakthrough. "With technologies currently available, biodiesel breaks even at oil prices around €60 ($82) per barrel, while bioethanol becomes competitive with oil prices of about €90 ($123) per barrel," a recent EU report noted. The report instead highlights next-generation green fuels—made from wood, straw, or the entire stalks of plants, instead of just seeds and oils—as more promising and a preferred target of EU support.

For now, the EU requires blending conventional fuels with 5% biofuels at the pump, in an initial bid to help reduce carbon-dioxide emissions. That mix is set to rise to 10% by 2020. Since 50% of cars sold in Europe already are more fuel-efficient diesels, investors are pouring billions into biodiesel startups that produce fuel from a variety of plants and oils, including rapeseed and waste oil from restaurants that normally would be discarded.

Roughly 80% of the green fuel produced in Europe is biodiesel. "Biodiesel makes more sense [than ethanol]," says Al Bedwell, senior analyst at J.D. Power Automotive Forecasting in Oxford, England, who points out that ethanol requires higher subsidies to entice consumers.

Onto the Second Generation

Some environmental groups have criticized the switch to ethanol, saying the process of making the fuel from corn requires at least as much energy and produces as much pollution as it saves. Groups like the Union of Concerned Scientists in the U.S. have advocated ethanol, but only from higher-yield sources like switchgrass and by using more advanced production methods than the industry currently uses for corn-based ethanol.

Now, European automakers such as Volkswagen and DaimlerChrysler (DCX) are collaborating with companies such as Choren Industries in Freiberg, Germany, to explore second-generation biofuels that are made from wood, straw, or the entire stalks of plants. Second-generation biofuels should require less energy to produce and hence return 80% to 90% less CO2 to the atmosphere when burned. Choren, which is backed by oil giant Shell (RDS.B), will start producing 20,000 tons a year of "Sunfuel," or second-generation biodiesel, in 2008.

"Corn is catastrophically bad for the whole energy equation," says one Volkswagen official. "We hope that second-generation biofuels are available in market quantities by 2012 to 2015."

R&D: Hard at Work

European automakers aren't waiting for a biofuel panacea, though. BMW is spending millions on research and development to develop innovations that make auto engines more efficient. A new BMW 530i with 270-horsepower boasts a fuel use of 7.7 liters per 100 kilometers (30.5 miles per gallon) and lower carbon-dioxide emissions than a comparable Lexus hybrid, thanks to a new fuel-injection system that improves the engine's efficiency.

"It's one of the most innovative cars on the market," says Dudenhoeffer. The same technology gives the new BMW Mini Cooper S a fuel use of 7.2 liters per 100 km (32 miles per gallon).

PSA Peugeot-Citroen is developing a hybrid-diesel engine that will come to market around 2010 and should dramatically reduce CO2 emissions. The company is betting it can develop a hybrid-diesel that will cost only €1,500 ($2,050) more than a regular diesel model but will be dramatically more fuel-efficient and produce only half the CO2 emissions today's cars churn out on average—or 80 grams per kilometer.

Consumer Focused on Cost

But where government subsidies create a market, automakers have been quick to make the simple $300 conversion to components needed for ethanol models. General Motors' Saab (GM) unit and Ford of Europe (F) both offer several models in Europe that burn a mix of 85% ethanol and 15% gasoline, mainly for the Swedish market, where ethanol has been subsidized since 2001.

Ford's "flex-fuel" lineup includes the Focus compact and the C-Max minivan, and next year the company will add the new Mondeo sedan and Galaxy. And at the Geneva Auto Show in March, Saab introduced a concept car based on the 9-5 Sport Combi with a working 300-horsepower turbocharged prototype that runs on 100% ethanol, called BioPower 100.

Still, European analysts say ethanol is unlikely to become a widespread solution outside Sweden, in part because oil companies would be required to invest heavily in new tanks, pumps, and trucks to carry the fuel, which is more corrosive than gasoline. Ethanol cars are also less fuel-efficient and thus more expensive to drive. Green fuel "all sounds fantastic, but if it costs consumers more, they won't buy it," says J.D. Power's Bedwell.

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