Controversies Continue to Swirl over Corn Ethanol

Rising corn prices and slack demand have hurt producers. And biofuel makers face a limit on how much ethanol can be blended with gas

Progress is being made on next-generation biofuels, but for the traditional corn ethanol industry, times are tough. Industry's facilities are 20% idle, taking 2 billion gallons a year worth of capacity off line. Bankruptcies are up. The biggest bankrupt producer, VeraSun Energy (VSUQ), was forced to sell seven of its plants, which were bought by oil refining giant Valero Energy (VLO)at bargain prices. "It's frustrating," says Rodney M. Weinzierl, executive director of the Illinois Corn Growers Assn. "The impact on the rural economy is tremendous."

Why the stumble? After all, corn ethanol was once heralded as a savior—a way to reduce dependence on foreign oil while slowing global warming and helping farmers. And until the troubles kicked in last year, new facilities were being built at a rapid pace.

Part of the reason is the recession, which has driven down the demand for gasoline, and thus, for the ethanol blended into gasoline. "Demand has not kept pace with supply," says Bob Dineen, president of the Renewable Fuels Assn. To make matters worse, the cost of making ethanol soared in the first half of 2008 because of dramatic climbs in the prices of both corn and energy. While those prices have since dropped, some producers continue to be hurt by long-term contracts they signed, which locked in high corn prices as a hedge against even higher possible prices.

Not Much Help Fighting Climate Change

It hasn't helped that corn ethanol's image has taken a beating as well. Critics blamed it for driving up world food prices and for costing taxpayers billions in subsidies. Plus, some analyses showed that replacing gasoline with ethanol doesn't even help much in combating climate change for two reasons: It takes a lot of energy to make the stuff. And the diversion of corn to fuel means that more acres elsewhere may have to be converted to crop land, causing emissions from deforestation.

The industry has been working hard to combat what it sees as misperceptions. The fact that corn prices plunged, even as ethanol production rose to 9 billion gallons in 2008, shows that ethanol wasn't to blame for high food prices, Dineen argues. Companies have also gotten more efficient at making ethanol. "Corn ethanol factories have come a long way," says economist Steffen Mueller, assistant professor at the University of Illinois at Chicago.

In fact, newer analyses show that modern corn ethanol plants use 25% less energy than the industry average of just five years ago. As a result of this and other improvements, such as higher farm productivity, corn ethanol does reduce greenhouse gas emissions, compared to gasoline, by 50%-60%, according to a study by Kenneth G. Cassman, professor of agronomy and horticulture at the University of Nebraska-Lincoln.

But even as it improves its image and struggles to survive the recession, the ethanol industry finds itself facing another huge problem. It's called the blend wall. Right now, much of the gasoline in the U.S. contains 10% ethanol, a gasoline blend called E10. In 2008, the U.S. used 137 billion gallons of gasoline. Meanwhile the ethanol industry made 9 billion gallons of ethanol in 2008 to blend into gasoline. So, doing the simple math, about 2/3 of the gasoline sold in the U.S. is the E10 blend.

No Room to Grow

That means ethanol is about to hit a wall. It's unlikely that every drop of gasoline in the U.S. will contain even 10% ethanol. So assume that the portion of E10 in the total supply rises to 90%.

That means the maximum amount of ethanol in gasoline will be just over 12 billion gallons. Yet, the ethanol industry already has the capacity to make 11 billion gallons, and more plants are planned. Plus, ethanol from cellulosic sources is expected to hit the market in a few years.

Where will all that ethanol beyond the 12 billion gallons a year go? Nowhere, as long as gasoline is limited to E10. This blend-wall problem is already making it even harder to get financing for new ethanol facilities than it would otherwise be because of the credit crisis.

That's why corn growers and ethanol producers are lobbying fiercely for an increase in the percentage of ethanol allowed in gasoline. Even a small boost to E12 (12% ethanol) would give the industry relief and breathing room. "If we could expand the gallons going into the marketplace, lenders would notice, and credit would flow," says Weinzierl.

But it's a tough sell. The push for higher ethanol blends prompted a quick and powerful counterattack. Allowing a higher percentage of ethanol in gasoline is "an ill-considered approach…[that is] contrary to scientific integrity and potentially harmful to our environment, public health, and consumers," argued a coalition of dozens of oil and gas producers, food companies, environmental groups, and other organizations in late March.

Changes in Land Use

The outcome of this battle? Still uncertain.

And if that's not enough, the industry faces yet another challenge. In an effort to combat global warming, both California and the federal Environmental Protection Agency are developing so-called low-carbon fuel standards. The idea is to put limits in overall carbon emissions from fuels. Under these new standards, the fuel that's allowed to be sold will have to have lower carbon emissions than pure gasoline does.

The new studies of the industry's energy use show that corn ethanol does indeed cut carbon emissions compared with gasoline. But these analyses neglect one crucial detail. There's a huge controversy over whether the use of corn (or other crops) for fuel causes the conversion of land elsewhere in the world to cropland. The assumption is that new cropland is needed to make up for the loss to the food supply from the corn diverted to ethanol. And if tropical rainforest is cut down to grow soybeans, for instance, the extra emissions from deforestation swamp the reductions in emissions from using more ethanol.

The industry argues that estimates of such indirect changes in land use should not be included in calculations of the carbon contents under the low carbon fuel standards—and that the current estimates are way too high anyway.

But so far, both California and the EPA are planning to include these land use changes. If the industry loses this battle, then the long-term prospects for corn ethanol will grow even dimmer.

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