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A Clear Look at Biofuels a strategy+business exclusive by Bill…
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Created: Mon Apr 21 18:16:49 2008
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A Clear Look at Biofuels
a strategy+business exclusive
by Bill Jackson, Eric Spiegel, and Leslie Moeller
04/22/2008
© 2008 Booz Allen Hamilton Inc. All rights reserved.
A Clear Look at Biofuels
Myths abound regarding the pros and cons of biofuels.
Here is a scorecard to separate truth from fiction.
by Bill Jackson, Eric Spiegel, and Leslie Moeller
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strategy+business
Reality: At least in the short term, biofuels offer mini-
leadingIDEAS
I n the flood of media attention that biofuels have
received, it is difficult to distinguish the facts from
the fanfare. Generally made from corn, sugarcane,
substantially reduce greenhouse gas (GHG) emissions.
mal GHG benefits.
Perception: Substituting biofuels for petroleum will
soy, and other crops, biofuels for powering automobile
engines have been hailed as a panacea that will arrest At first glance, biofuels appear to leave a much smaller
global climate change, reduce dependence on fossil fuels, carbon footprint than oil because energy crops (like all
ensure energy security, and turbocharge agricultural crops) extract carbon from the atmosphere. Indeed,
economies. Yet biofuels have also been denounced by studies such as the International Energy Agency's 2004
critics who claim they will do more harm than good to "Biofuels for Transport" report indicate that "well-to-
the environment and they are not economically sustain- wheel" GHG savings from biofuels range from 20 per-
able absent government protection. To determine who is cent with corn ethanol to 80 percent or higher with
right, we spoke to dozens of experts in government, cor- sugarcane ethanol or cellulosic ethanol (produced from
porate, academic, and nonprofit organizations -- people grass, plant residues, and woody crops). Corn ethanol
such as Prabhu Pingali, director of the agricultural and generates more GHG emissions than cellulosic ethanol
development economics division of the Food and because the corn must be cultivated and distilled,
Agricultural Organization (FAO) of the United Nations; processes that require extensive use of fertilizer, diesel,
Miguel Pestana, vice president of global external affairs coal, and natural gas.
for Unilever PLC; venture capitalist Vinod Khosla, However, the well-to-wheel savings fail to take into
founder of Khosla Ventures; and Greg Stephanopoulos, account the impact of farming land that was, or would
Bayer Professor of Chemical Engineering at MIT -- and otherwise revert to, grassland or forest. Clearing land to
reviewed studies on the growth and viability of the bio- convert forest or grassland into energy crops results in a
fuels market. Based on this research, we explored the substantial deposit of carbon dioxide into the atmos-
truth of prevalent assumptions regarding both biofuel's phere. The magnitude of that deposit depends on the
promise and its impact on markets and the environment. type of property. For example, clear-cutting and burn-
ing a forest releases more carbon dioxide than harvesting
grass. And two studies recently published in Science
Bill Jackson Eric Spiegel Leslie Moeller Also contributing to this article
(jackson_bill@bah.com) (spiegel_eric@bah.com) is a (moeller_leslie@bah.com) is a were Booz Allen Senior
is a senior vice president with senior vice president with vice president with Booz Allen Associate Praneet Gupta, Booz
Booz Allen Hamilton in Booz Allen in McLean, Va. He in Cleveland. He leads the Allen Principal Martha Turner,
Chicago. He works on major leads the firm's work in global firm's North American work in and Frank Bogaert.
organizational change pro- energy and utilities. the consumer, media, and
grams, including restructur- retail industries, and previous-
ings, postmerger integrations, ly led the firm's global efforts
and growth, for a variety of in marketing and sales.
industrial clients, especially in
the global automotive industry.
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strategy+business
Perception: Biofuels are not economically viable as a
leadingIDEAS
Reality: Biofuels offer a competitive alternative to
found that when this initial carbon dioxide deposit is economic merit. Thanks to the large number of flex-fuel
Perception: Global energy markets are so vast that bio-
taken into account, depending on the type of land used vehicles, consumers can opt for whichever fuel is cheap-
for agriculture and the type of crop grown, ethanol's er, which ultimately varies based on the relative prices of
contribution to GHG emissions could break even with crude oil and sugar.
Reality: If agricultural supply expands at historical rates,
that of petroleum in anywhere from a couple of decades Globally, corn ethanol is still much more expensive
to a few centuries. than petroleum and will be until oil prices rise another 20
That said, some emerging biofuel technologies, percent or so. Cellulosic ethanol, although still in the
such as cellulosic and algaeic, require less-active cultiva- early stage of development, will likely break even with
tion of land. Consequently, peering further into the petroleum when the former is around US$55 per barrel
future, the environmental hope for biofuels is not a without government incentives -- about half the price of
complete chimera. oil now and a little below the International Energy
Agency's 2007 forecasted oil price of $62 a barrel in 2030.
Perhaps the biggest endorsement of biofuels as an
substitute for petroleum. economically viable alternative to petroleum has come
from the Organization of the Petroleum Exporting
petroleum. Countries (OPEC) itself. Abdalla El-Badri, secretary-
general of OPEC, noted in June 2007 that the consor-
Although break-even costs for different biofuel tech- tium was considering cutting its investment in new oil
nologies vary significantly, in Brazil sugarcane ethanol is production in response to moves by the developed
already commercially viable. Introduced there in the world to create and use more biofuels. "If we are unable
1970s, cane ethanol was nurtured as an infant industry to see a security of demand...we may revisit investment
and backed by public subsidies for many years. Brazil's in the long term," El-Badri said.
government financed new ethanol plants, directed the
state-owned oil company Petrobras to install ethanol
tanks and pumps throughout the country, and mandat- fuels cannot hope to alter the balance of petroleum sup-
ed that carmakers design and manufacture vehicles that ply and demand.
could run on pure ethanol.
About a decade ago, Brazil phased out the subsidies, biofuels can make a significant contribution to the
but with a thriving, efficient cane ethanol industry in transportation fuel pool, resulting in an oversupply of
place, car manufacturers had to find an inexpensive way petroleum.
to make vehicles that could burn both ethanol and gaso-
line. Today, 85 percent of autos sold in Brazil feature It's important to note that although biofuels are the best
flex-fuel power trains, and cane ethanol supplies a sig- and most cost-efficient hope for an alternative to petro-
nificant portion of the automotive fuel pool based on its leum, biofuel production still represents less than 1 per-
3
Perception: Biofuel development robs water-stressed
Reality: Although biofuel development does place addi-
strategy+business
cent of total global fuel demand. However, if agricultur- ernment policies, lack of infrastructure, political insta-
al improvements continue apace, biofuels can eventual- bility, and cheaper imports from the U.S. and Europe
ly equal or surpass current OPEC exports without further depress crop yields in these areas, causing global
jeopardizing the world's food supply. consumers to lose up to 30 percent of their potential
Perception: Biofuel crops will crowd out food crops,
With rare exceptions, for the last half century, agricultural production today.
advances in plant breeding, soil study and fertilizer use, Replacing the appetite for petroleum with a taste
leadingIDEAS
water management, weed and pest control, and infra- for biofuels would no doubt result in the consumption
Reality: If crop yields and agricultural productivity
structure development have increased crop yields and of substantial agricultural resources. However, there is
agricultural productivity. Farming also produces more significant additional rain-fed land in the world avail-
food using less labor, capital, chemicals, and land. able for agricultural production, according to the FAO
New techniques, such as more sophisticated genet- and other global authorities.
ic approaches to breeding, may well accelerate the rate In short, food prices in a world with biofuels will be
of improvement in agricultural productivity. By 2030, higher than in a world without biofuels, but they will
we anticipate that crop yields will increase by some 55 not necessarily be higher than they are today.
percent and that food crop prices will have fallen to
roughly half of 2005 levels. At that time, if the
International Energy Agency's crude oil price predic- countries of their most precious natural resource.
tions are accurate, we expect biofuel production would
cost-effectively offset between 40 and 50 million barrels tional strain on water resources, there are major agricultur-
of oil per day, or about 40 percent of the total global al zones in the world that suffer water scarcity regardless.
need. If agricultural supply increases at half that rate,
Perception: Government mandates and subsidies pro-
biofuel volumes would drop to roughly half that level. The vast majority of the globe's agricultural regions can
This supposes, of course, that the agricultural supply rely on the natural rain cycle for water. Two rather urgent
base develops as we've assumed and the biofuel infra- exceptions are India and northern China. In these coun-
Reality: Government intervention can trigger unin-
structure continues to expand. tries, not only is water quantity a problem, but so is
water quality. China and India's brisk economic growth
will only exacerbate this crisis, as their growth is fed by
driving food prices up and food consumption down in ever-increasing amounts of food and fuel. Petroleum
the developing world. supply cannot keep up with demand even now; both
countries are already dependent on imported oil.
improve at historical rates, future food prices need not Meanwhile, water availability limits their domestic pro-
be higher than they are today. duction of food. Imports will increasingly be a require-
ment, forcing a choice between food and fuel security.
Some in the media have blamed biofuels for the recent Agriculture consumes more water, by far, than any
run-up in food prices -- for corn in the U.S., tortillas in other sector. Biofuel production requires water, but grow-
Mexico, pasta in Italy. Although biofuels are a contribu- ing feedstock consumes much more. In other words, it is
tor, current volumes are too small to account for these agricultural activity -- not biofuel development per se --
recent regional commodity price spikes. Other factors that diminishes the quantity and quality of available water
such as droughts and inventory levels have had a signif- in India and northern China. The solution to the water
icant impact. crisis in these regions will be found in sound policy and
Despite this evidence, critics maintain that over the development of a reliable and diversified portfolio of
time biofuel production will almost certainly outpace import sources for both food and fuel.
that of food crops, resulting in greater malnutrition,
particularly in poorer parts of the world. These argu-
ments are persuasive, but the developing world's food vide the necessary foundation for the development of
woes cannot be laid entirely at biofuels' door. Farmers in the biofuel industry.
these markets are already at a disadvantage when it
comes to accessing the latest agricultural practices and tended consequences, negating the intended benefits of
information on yield improvements. In addition, gov- biofuels.
biofuel's economic and environmental advantages.+
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strategy+business
Governments around the world have offered favorable necessary prerequisites to developing functioning
tax treatment, low-cost loans and research funds for the agricultural markets in developing countries.
development of biofuels, and a biofuels infrastructure · Availability of capital and know-how is essential for
chiefly to promote energy security, reduce GHG emis- developing countries to establish a biofuels industry.
Resources
sions, and protect domestic agriculture. Over time, · Reliable and diversified import sources can
however, greater government emphasis on biofuels puts address food and fuel security issues in water-
leadingIDEAS
upward pressure on food commodity prices, and tariffs stressed countries.
and quotas have shut out economically viable options in
favor of local alternatives. For example, protectionist With careful attention to these issues, business and
policies in the U.S. have effectively eliminated imports government leaders around the world can develop a sus-
of Brazilian cane ethanol. tainable approach to biofuels that makes the most of
In certain instances, regulatory support of biofuels
has had obvious deleterious effects. European mandates
supporting biofuel production prompted certain
Southeast Asian countries to burn forests and peat lands
to produce palm oil for ethanol. The resulting GHG
emissions were dangerously high.
Policies can furnish the necessary impetus to devel-
op valuable new technologies and establish new infra-
structure; the Brazilian government's promotion of cane
ethanol is the perfect example. However, policymakers
must walk a fine line in promoting long-term beneficial
behaviors to avoid short-term detrimental conse-
quences. They need to pave the way to an orderly tran-
sition by introducing incentives that are broad enough
to encompass long-term optimal technologies and spe-
cific enough to focus on those with the most potential.
After separating truth from fiction, our conclusion
is that with sound policies in place and healthy innova- Fengxia Dong, "Food Security and Biofuels Development: The Case of
tion, we can expect biofuels to become a viable alterna- China", Iowa State University Center for Agricultural and Rural
tive to fossil fuels in the long term. And as we look Development, Briefing Paper No. 07-BP 52, October 2007: The back-
ground, history, and current state of biofuels development in China, and
toward the world's biofueled future, government leaders implications for other developing countries. (PDF)
and economists should be mindful of the consequences www.card.iastate.edu/publications/DBS/PDFFiles/07bp52.pdf
and implications of various policy solutions: Richard Doornbosch and Ronald Steenblik, "Biofuels: Is the Cure Worse
than the Disease?" Organisation for Economic Co-operation and
· Current agricultural rules in Organisation for Development Roundtable on Sustainable Development, September 2007:
A report on the facts and myths surrounding biofuels. (PDF)
Economic Co-operation and Development http://media.ft.com/cms/fb8b5078-5fdb-11dc-b0fe-0000779fd2ac.pdf
(OECD) countries, including farmer subsidies and
restrictions on imports, lower world food prices and "Biofuels for Transport: An International Perspective", International
Energy Agency, April 2004: The costs and benefits of biofuels as a replace-
reduce the incentive for developing countries to ment for petroleum around the world. (PDF) www.iea.org/textbase/nppdf/
develop their own agricultural supply. free/2004/biofuels2004.pdf
· Biofuel subsidies, tax exemptions, and blending "Potential Contribution of Bioenergy to the World's Future Energy
mandates exacerbate biofuels' upward pressure on Demand", International Energy Agency Bioenergy, 2007: A summary of
food prices. biomass resources and associated issues of market development, internation-
al bioenergy trade, and how these resources stack up against other energy
· Infant-industry support may provide the required options. (PDF) www.idahoforests.org/img/pdf/PotentialContribution.pdf
incentive to establish the infrastructure necessary
for biofuels, such as flex-fuel power trains, fueling World Resources Institute's EarthTrends Web site: A collection of facts,
articles, and documents relating to environmental trends and concomitant
stations, and transportation infrastructure. social and economic issues. http://earthtrends.wri.org/
· Political stability, land rights, and infrastructure are
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