Can biofuels be sustainable? Can we displace oil and carbon dioxide, but not food? During today's E&ETV Event Coverage of the National Summit on Energy Security, sponsored by 2020 Vision, biofuels experts debate the recent EPA waiver request for the rollback of the renewable fuels standard. They also discuss the possibility of reducing the ethanol import tariff. Panelists include Scott Faber, vice president of federal affairs, Grocery Manufacturers Association; Joel Velasco, U.S. representative, Brazilian Sugar Cane Industry Association; Brent Erickson, executive vice president, Biotechnology Industry Organization; and Bob Dinneen, president and chief executive, Renewable Fuels Association. The panel is moderated by E&ETV host Monica Trauzzi.
Moderator: And I'm going to try as hard as I can to meet that promise and as soon as everyone gets miked up, we'll start the panel. Our next topic is a completely noncontroversial one, biofuels. I'm sure we'll have nothing to debate about or have any disagreements.
And I'm very excited to see if we can get some clarity on some of the key issues on biofuels. For example, can biofuels displace oil and carbon, but not food?
Can they be produced close to home and be renewable as they are now, but can they be low carbon and low food? It seems these are some of the key questions and we're going to get to them right now.
To lead the discussion I'm very happy to have Monica Trauzzi here from E&E TV. If you're like me, you're probably used to seeing Monica about this big on your computer screen and I'm happy to say she's life-sized, so that's great.
So it's great to see Monica here at life-sized. And I watch your show religiously, I urge you all to as well. She covers the hottest topics at the right time.
I never thought I would watch TV on my computer at work, but I actually do, and it's all thanks to Monica. So thanks a lot and, Monica, the floor is yours.
Monica Trauzzi: Well, I have to say, as a journalist who covers these issues this has been one of the most fascinating issues to cover since I started covering energy and environment because it's taken so many fascinating twists and turns.
And the biofuels issue has been on the front page of every newspaper. It has led every newscast at some point in the last couple of months, but there's a lot of different information out there.
So I think what we're going to try to do today is sort of get some clear points out, truth and fiction, on biofuels and I know we have some varying opinions from our panelists. So it should be interesting. Let me go ahead and introduce.
Starting on my right, we have Scott Faber. He's the vice president of federal affairs for the Grocery Manufacturers Association. And next we have Joel Velasco, U.S. representative for the Brazilian Sugar Cane Industry Association.
Next to him we have Brent Erickson, executive vice president for Biotechnology Industry Organization. And finally Bob Dinneen, and he's president and CEO of the Renewable Fuels Association.
And I've had the opportunity to either interview or have their organization's views represented on my show. It's nice to have them all here at once. And I'm sure you guys won't disappoint. So, with that, I will turn the floor over to Scott for his comments.
Scott Faber: Great, thank you. And I've got what, three minutes? Is that ...
Monica Trauzzi: You have three minutes and I'm watching the clock.
Scott Faber: And you're watching the clock. Well, then first of all, let me apologize. Cal Dooley would love to be here and I'll do my best to replace him.
I don't think there's any question that the sudden and significant increase in the production of corn ethanol in the last few years has contributed to the rising price of commodities, especially the rising price of corn.
Clearly, there are many factors contributing to the price of commodities, including poor weather, energy prices, speculation, export restrictions, global demand certainly is a significant factor.
But the most significant new factor, and the only factor that the Congress and the administration have the power to change, are the mandate, subsidies, and tariffs that are driving food to fuel production here in the United States.
And these increases in the commodity prices are having significant environmental impacts as well. I think many of you know I spent many years working with my good friend and colleague, Tim Searchinger, at the Environmental Defense Fund.
And there's no question that the increase in commodity prices, driven largely by the increase in food to fuel production, is driving farmers all over the globe to change their planting decisions.
And particularly here in the United States, many of the lands that are coming into production in response to these price signals are the lands that are most likely to harbor rare species, are the lands that are going to lose the most nitrogen, and are the lands that are sequestering the most carbon.
The marginal lands that we've invested a significant amount of resources to protect through programs like the conservation reserve and wetland reserve programs. So I don't think there's any question that our current policies are contributing significant new environmental challenges.
Having said that, biofuels hold the potential to produce significant environmental benefits and to displace significant amounts of our gasoline supplies if done right.
And, in particular, advance in cellulosic biofuels hold the potential to significantly reduce greenhouse gas emissions, to be produced in ways that don't compound the other environmental challenges I've already mentioned, and, again, to displace a significant amount of our gasoline supplies.
And that's why, not only the Grocery Manufacturers Association, but a broad coalition, the Food before Fuel Coalition. You can check out our web site, FoodbeforeFuel.org.
I think we need to gradually reduce our dependence on food crops as an energy source and to accelerate the commercialization and development of second-generation fuels, advances in cellulosic biofuels that won't pit our energy needs against the needs of the hungry and the environment.
Monica Trauzzi: Thank you. Joel?
Joel Velasco: Thanks. I'm with the other ethanol guys who have been doing ethanol for quite some time and we got news coverage only in Brazil because the rest of the world really didn't care about what we were doing there.
About 30 years ago we decided, in part because of necessity, in part because of some wisdom of policy that we needed to move away, in Brazil, from fossil fuels. And what we found is that there is a great crop called the sugarcane that produces both food and fuel in similar quantities and similar efficiencies.
And it's been quite successful for us. I think to answer, Monica, your question first, I love the challenge of can we be sustainable? And I will explain how I think sugarcane ethanol is sustainable.
But it's interesting; I think for a hundred or so years, that question has never really been posed to oil. And we're not only posting that question to biofuels at a time that it's pretty clear, and the one thing I think everybody in this room will agree, is that fossil fuels oil is not sustainable, in large part because there isn't enough of it to go around anymore.
We're sustainable in the following way in sugarcane in Brazil. We use 1 percent of Brazil's arable land to displace 50 percent of the country's gasoline consumption.
I know you can play with statistics, but that, for those who want to keep track of numbers, is 3.4 million hectares of land, multiply that by 2 1/2, you get the acres.
That's how much crop we're using to produce ethanol in Brazil, which, again, gasoline is the alternative fuel of choice for people in Brazil because we use more ethanol than gasoline. It has been done not by mandates or protection, but strictly by creating a market and an option by customers having flex fuel engines.
And then, in terms of the questions that are also posed to us is can we do this sustainably while displacing oil and displacing CO2? In terms of oil, I think, the case of Brazil is quite clear that it's doable.
And I would say in terms of CO2, it's pretty clear that with sugarcane we have about, even the OECD confirmed it this morning, somewhere between 80 to 90 percent reduction in greenhouse gases on a lifecycle basis, as compared to yesterday's gasoline, not future gasoline.
So that's a big difference. In fact, even if you try to apply some of these carbon debt models, you have to remember that the land that is being currently used for sugarcane in Brazil has been planted with sugarcane for 30 years or so. And then, also, you have to remember the nature of the crop.
The feedstock is important. I can go into details during the Q&A session, but we have significant carbon absorption with the sugarcane crop.
In fact, the OECD made a point that we've been making for many years, is that because of the byproducts of sugarcane production, which are not just food, but also electricity, we supply about 3 percent of Brazil's electricity demand from sugarcane.
We actually may, depending on how you want to calculate it, we actually may have a more than 100 percent reduction in greenhouse gases compared to gasoline because we're producing both electricity and ethanol.
And then finally, on the food, it's really a non-issue in Brazil. I'll just put it that way. We talked about land use in Brazil, sugarcane occupies, in the conservative way of calculating, a third of the land that soybean occupies in Brazil. Mind you, Brazil is the world's largest producer of soybean.
Soybean uses about 6 percent of Brazil's arable land. Corn actually, in Brazil, occupies twice the land that Brazil occupies for sugarcane. In fact, if you look at the data for the state of San Paulo, where we grow sugarcane in Brazil, which, by the way, is a thousand miles from the Amazon at its closest border.
We've actually seen an increase, just in the last year, of corn and wheat while we're increasing sugarcane production. So I have a hard time believing that both can't coexist in Brazil. And I'll leave it at that. I probably ran over my two or three minutes.
Monica Trauzzi: That's OK. Thanks. Brent?
Brent Erickson: Thank you. Can everybody hear me okay? I dropped my mic earlier. Well, first I'd like to say that we can't afford to biofuels to fail. When we're talking about transportation fuels, we have very limited options. And the United States uses about 150 billion gallons of transportation fuel a year, of gasoline a year.
And we have to make sure that the biofuels industry remains viable and grows. It's an issue of national security. And I'd also like to say that we're really at the beginning of the biofuels journey. A lot of the media coverage we see now is just a small snapshot in time.
We have to think about this as a continuum. The other thing is that a lot of people don't equate biotechnology with biofuels.
But biotechnology, both agriculture biotechnology and industrial biotechnology, are providing the key solutions that are going to enable us to grow this industry beyond what it is today and do it sustainably.
The other thought I'd like to leave you with is it's not just about ethanol. Ethanol is what we're talking about today, but we have a vision of this country developing modern bio refineries that produce not only biofuels, but renewable plastics and renewable chemicals.
And I think, if we look back at the history of the oil refining industry, it's very instructive. It was in 1853 that the first kerosene was distilled from seep oil. And by 1859 kerosene was being distilled and began to replace whale oil to light people's homes.
And then in 1900 we had the advent of the horseless carriage and that old way of making gasoline by just raw distillation. It wasn't very efficient. It was about 20 percent efficiency, so new ways of distilling gasoline were developed with thermal cracking and catalytic cracking.
And over the years we've seen the modern oil refinery develop through advancement of technology and innovation. We have a modern oil refinery today that makes multiple products and is very efficient in turning that crude oil into whatever consumers demand.
And we can stand on the shoulders of the chemical engineering advances that the oil industry made and we can do that with bio refining. So, we are about where we were maybe about with the horseless carriage in 1900 in terms of ethanol. We're just at the beginning. We have great things ahead of us.
In terms of what Ag biotech is doing, we're dramatically increasing corn yields. In 1926, the average corn yield was 27 bushels per acre. Today the average corn yield is 150 bushels per acre. By 2020 we think it may be up to 220 bushels per acre.
And just in the past 25 years, the yield gains we've seen of corn have been so great that we basically created 150 million virtual acres just by the corn yields we've seen over the past 25 years. So, we expect this trend to continue.
McKinsey & Company estimates if these yield trends continue, we can meet the 15 billion gallon renewable fuel standard without planting any additional acres. So, Ag biotech is a very important part of achieving the renewable fuels standard and growing this industry.
And then we have industrial biotechnology and our companies are developing enzymes that are improving conventional ethanol through no-cook methods. No Design Engines Incorp have enzymes that increase the efficiency and lower the energy use for conventional ethanol.
And then we have innovations like improved fractionation, where now we can get 6 percent more ethanol from a bushel of grain. And then we have companies going out into the world and looking at termite guts and mushrooms in the forest and finding these enzymes called cellulases that are going to turn cellulose into sugars that we can turn into biofuels.
That commercialization of that is going to happen much sooner than people think and that's going to revolutionize biofuels production.
And then, beyond that, we have companies that are actually using very advanced techniques like synthetic biology that are developing processes to make bio-butanol, for instance, that can go right into the conventional gasoline infrastructure.
A good example of that is BP and DuPont working on that and Gevo. We have companies working on developing renewable gasoline. So, actually, taking microbes and converting sugars into gasoline molecules, having renewable gasoline.
So, all of these things are coming down the line. So, what's happening today, what's true today, is not going to be true tomorrow and it's changing very quickly in a very good way. All of these things are going to make biofuels even more sustainable than they are today.
So, I will just close with that. And one thing I'd like to point out is for people who say that the Renewable Fuel Standard should be rolled back or waived, it's so important to keep the renewable fuels schedule the way it is.
We have to start with the infrastructure we have and build it. You all remember the old brick phone. Well, now today we all have iPhones and Blackberries. How did we get from this to this? We had to start with the brick phone in order to get to this.
If we get rid of the Renewable Fuel Standard or disrupt it, we're going to disrupt getting to this end product. That's what's going to happen with biofuels and that's why it's so important that we stay the course and build on what we have going today. Thank you
Monica Trauzzi: All right, we'll give the other panelists a chance to comment on the RFS. I know, Scott, you're dying to.
Scott Faber: Well, I wanted to pull out my rubber chicken and talk about the price of chicken, but I'll wait for Bob.
Monica Trauzzi: First Bob, go ahead.
Bob Dinneen: Thank you Monica. OK, ethanol absolutely can be produced sustainably. We're doing it today and we're going to be doing it in the future. To sort of play off Brent's comments, he's absolutely right, this is an evolving industry.
The ethanol industry is far different than it was even five years ago with new technologies and looking at new feedstocks for the future. And it will be unrecognizable five years from now. There are issues, no question, but we are addressing those.
And Scott had talked a lot about the food price impact of the biofuels industry today. Look, there are a lot of reasons for increasing food prices. He mentioned a few of them and I appreciate the fact that there was a little bit of balance there.
Sometimes, there always hasn't been, but today you mentioned that there was increased demand. There certainly have been weather related events, speculation in the marketplace. Scott didn't talk about one of the most important ones, however, and that is the skyrocketing price of energy, of gasoline.
You can't produce two dollar corn on $4.50 diesel. And he says that, of these factors, the only one that Congress can do anything about is biofuels. Wrong! Congress can and has and should do something about skyrocketing energy prices.
And the single most important thing that can be done is to create competition, to have fuel diversity, to expand the production and use of domestic renewable fuels like ethanol and allow this industry to continue to evolve for additional biofuels and new feedstocks.
And, as Brent said, if you were to change course right now you'd completely undermine the investments that have been made and you'd derail the efforts to second-generation ethanol production. You can't have a second generation of you don't have a first-generation.
And so it's incredibly important that the path that we are on in terms of ethanol production be maintained. There are limitations to what this country is going to be able to do from grain.
But Congress recognized that, in effect, capping ethanol production from grain at 15 billion gallons, which everybody says can certainly be done without causing disruptions in agricultural markets. Have we had an impact on corn prices? Sure we have.
We were supposed to have an impact on corn prices. That's one of the reasons Congress has been so enthusiastic about encouraging ethanol production from grain, is so that farmers are able to get more of their income from the marketplace than the federal government.
There has been an increase in grain prices, but when the farm value of food commodities is less than $0.20 on a dollar spent for food and the biggest share of the marking bill is impacted by energy prices that's what's having the single most important impact on food price inflation today. It's energy.
Ethanol is having a significant impact in reducing the volatility, reducing the cost of gasoline prices today. The Department of Energy says it's $0.25 to $0.35 a gallon. Merrill Lynch says it's more like $0.50 a gallon, but it is an incredibly important impact for two reasons.
One, ethanol is less expensive than gasoline today and, two, just by the sheer volume of ethanol that's being added to our motor fuel supply is clearly having an impact on keeping prices lower than they otherwise would be.
Now, when a consumer is paying $4.50 for gasoline, it's not a real high point that he could be paying five dollars were it not for ethanol. We need to get gasoline prices down, but if you want to increase gasoline prices, if you want to increase food prices, do away with the ethanol program.
We have to develop more sustainable technologies. We have to continue to evolve this industry. But we have to remember that you will not have food security in this country unless and until you have energy security here and around the world.
The average processed food products travels 1300 miles. Fresh produce travels 1500 miles from farm to grocery store. Gasoline, diesel fuel prices, energy prices are driving food price inflation today.
The only thing that we have that is having any kind of a mitigating factor is, indeed, ethanol, which is blended today in 7 percent of the nation's motor fuel or is 7 percent of the nation's motor fuel. We have to continue what we're doing.
Monica Trauzzi: Thanks Bob. OK, so this issue is getting traction on the Hill in two major ways. There's talk about what to do with the RFS. Do we roll it back? Do we keep it how it is? Do we freeze it? And then there's talk about the ethanol import tariff, looking at that again.
What do we want to do with that? Do we want to take that away? Do we want to make it easier for more ethanol, from Brazil for example, to come in? So let's talk about the RFS first. Scott, is it a responsible request to ask the government to rollback the Renewable Fuel Standard when oil is at $140 a barrel?
Scott Faber: We'll be releasing analysis on this subject in the next few weeks. But the right question is not whether or not the existence of ethanol is having an impact on gasoline prices.
The right question to ask is whether mandating that we blend 9 billion gallons or 10 billion gallons versus 7 or 8 billion gallons will have any impact on gasoline prices?
And, clearly, the answer is no. It's too insignificant a change in the amount of ethanol that ultimately will be produced to have any impact on gas prices whatsoever. But the other question to be asking also is would changing the mandate have any impact on food prices?
And, clearly, there the answer is yes. And the best way to describe this is, and I'm thrilled that Bob who knows so much about our industry, just talk a little bit about the costs of making a chicken, I can imagine him holding a rubber chicken now.
Sixty percent of the cost of producing a chicken is the corn you have to feed to the animal. And that's the reason why, for every farmer who is earning record profits thanks to this ethanol mandate, and let's be clear about why we have an ethanol mandate.
Bob said it, we did it primarily to increase corn prices. For every farmer who is doing well as a result of high corn prices, there are five farmers who produce livestock or poultry, who are facing record losses or even bankruptcy.
And across the country now there are meatpacking plants that are closing up shop and laying off Americans because of the high price of feed. So there's a trade-off here and it's a trade-off that is costing not only ordinary Americans a lot more money in the grocery aisle, but it's costing farmers their livelihood.
It's costing ordinary Americans their jobs. And, unfortunately, this problem is going to get significantly worse. People are culling their herd. Livestock operators are culling their herds today because of high food prices.
We're tightening supplies of meat over the next few years and we're just going to see a steady increase in the price of basic staples. And this isn't a big problem for those of us in the coat-and-tie set, and we all know that.
But it's a huge problem for the 20 percent of Americans to spend 33 percent of their after-tax income on food. And it's a life or death problem for people in the developing worlds who are spending 70 percent of their income on food every day.
So, clearly, there's a trade-off here, but it's a trade-off that's not working in the interest of most Americans. It's not working in the interest of the global poor, but it is working in the interest of a handful of corn farmers and in the interest of the ethanol industry.
Bob Dinneen: Scott, I think it's great that you've recognized that there are some offsetting benefits here, but I suggest maybe you ought to learn a little bit more about your industry. Because, the fact of the matter is, last year there was more corn fed to livestock than the year before, in fact, a record amount.
And you can't just take these little snapshots. You've got to look at the bigger picture. Last year we fed more, we exported more, and, yes, there was more demand for grain for ethanol production, but we had a record corn crop last year. Of that, more went to feed than for ethanol.
Scott Faber: Yeah, but, you know ...
Bob Dinneen: So, there were all kinds of reasons for increased demand.
Scott Faber: But the amount of feed has nothing to do with the cost of that feed to livestock operators. And, as you know Bob, almost all of the increase in global corn production, between 2004 and 2007, was used to make ethanol in the United States.
At the same time, that global demand continued to grow as people in Asia, especially in China and India continue to consume more meat protein.
So, while all of the global increase in corn went to make ethanol, global demand kept eating away at the stalks of corn that we had globally, contributing, this is classic supply and demand.
Some of you took economics in freshman year of college, driving up the price of corn, increasing volatility in the commodities markets and that's why today it costs seven dollars to buy a bushel of corn and not three dollars. So the big picture ...
Bob Dinneen: You are wrong on the facts Scott.
Scott Faber: ... is not the question of how many bushels we fed to the animals, but the cost of that corn.
Bob Dinneen: We grew 2.7 billion bushels of corn ...
Scott Faber: I'm sorry, go ahead.
Bob Dinneen: It's actually wrong. We grew 2.7 billion more bushels last year than we had the previous year. Of that 2.7 billion, our industry consumed only 600 million bushels more.
That means there were 2.1 billion bushels additional corn that went for increased exports and increased feed use. So, ethanol is not the single, largest driving factor here.
And, indeed, I would suggest were it not for the signal that the ethanol industry had sent to farmers that there was going to be increased demand, you wouldn't have seen 13 billion bushels last year.
You wouldn't have seen 93 million acres planted last year. So I mean we assured that there would be more supply out there for more feed.
Brent Erickson: Could I just say one quick thing?
Monica Trauzzi: Please.
Brent Erickson: Because I've been quiet listening to this. If you look at rice prices and wheat prices and corn prices, they all track upward on the same trend. And you don't make biofuels out of wheat and rice. So, biofuels is not the culprit here.
Scott Faber: But I don't think anybody has attributed, obviously, wheat prices are going up primarily because of weather. Rice prices are going up because of what's going on in the export markets.
At the same time, we are seeing the Corn Belt shift westward in response to these rising corn prices. So is ethanol a big factor in the rising price of wheat? No. But is it a factor? Clearly.
And is a creating a competition for land that is driving up the cost of all commodities? Well, at least according to the World Bank, IMF, IFPRI, FAPRI, former chief economist Keith Collins, the answer is yes.
Monica Trauzzi: Joel?
Joel Velasco: I guess I'm the younger one here, so I'm still focusing on the question that you posed to us ...
Monica Trauzzi: Thank you!
Joel Velasco: ... on the RFS. You know, I think in reality, I mean let's just do the math. The RFS, I think you talked about it, the demand for gasoline in the U.S. today will probably go down in the future, depending how you think projections are.
But today it's about 150 billion gallons of gasoline is what we consume and we can stipulate that, roughly. And that means 10 percent, E10, would be about 15 billion gallons of ethanol would be needed to make an E10 out of that entire pot. If you took, Bob, how much ethanol capacity do you have this year?
Bob Dinneen: Eight and a half billion gallons.
Joel Velasco: OK, and let's just say ...
Bob Dinneen: Right now, it will be more by the end of the year.
Joel Velasco: Well, let's just say, just for argument, 10 billion gallons. OK, just making up numbers, just back-of-the-envelope numbers. Brazil produces about 5 to 6 billion gallons of ethanol this year.
Put both those together and you provide no ethanol for Brazil's market, which it needs at least 5 billion gallons there. There's not enough to fill the E10 market today.
My point is this RFS issue is really not going to have any impact, in my view, on the demand for ethanol in the United States. Why?
Because if you pulled the two biggest guys, who control pretty much all of the ethanol that's available in the world, they still can barely get to the 15 billion gallons.
Here's the issue, what I think the RFS does in the long run is beneficial because it sends the signal to the advanced biofuel guys, who we can debate whether one of us is going to be advanced or not, but, you know, there are other players who need that signal, that mandate. And I think this is the point you are making.
And I'm not sure I quite understand changing the RFS, the impact on food in the short term, but we do know that changing the RFS this year, and I think the guest you had yesterday on your show Monica said this, you'd have to change it next year as well, because there's a demand.
There's a guaranteed demand I would say of close to 15 billion gallons of ethanol for the next few years in the U.S., because it's cheaper than gasoline.
Guys buy ethanol, mix it 10 percent with gasoline, and they sell it to you and I at the price of gasoline. It's a boondoggle if you're a gas guy, because you're making more money out of selling only 90 percent ...
Scott Faber: But the right question is not whether we should have a 10 percent blend rate and whether we should have we should have 15 billion gallons of ethanol, but whether that cup should be should be filled with primarily corned ethanol or primarily sugar ethanol or with some advance in cellulosic biofuels.
Joel Velasco: Well, we're getting to that question.
Monica Trauzzi: We're going to get there.
Scott Faber: And I think ...
Joel Velasco: I'm getting through the question at hand.
Scott Faber: But the issue is, if you change the mandate and if you send the market the signal that we should not be using so much corn and driving up the price of meat and basic staples in the process to produce ethanol, then we have the opportunity to fill the cup with other fuels that don't pit our energy needs against the needs of the hungry and the needs of the environment.
Monica Trauzzi: All right ...
Bob Dinneen: Let me, just real quick ...
Monica Trauzzi: Quick.
Bob Dinneen: You waive BRFS in the fashion that Governor Perry from Texas has requested and Scott's group have supported. Texas' own University, Texas A&M, looked at what the impacts would be and they said it's not going to be much of an impact on commodity and prices because of all these other factors driving grain prices today.
But it will certainly drive up the price of gasoline. And our analysis of data would suggest that if you take 4 1/2 billion gallons of liquid fuel supply off the marketplace, as Scott wants to happen by supporting this waiver, you're going to drive up the price of gasoline more than a dollar a gallon in the near term.
That's a real impact. Heck, a refinery hiccups in this country and gasoline price spikes. Take out 4 percent of the U.S. motor fuel market and see what happens. And that's what is the real question here.
What's the impact to consumers if you are to do this? Is it going to impact food prices? No. Is it going to impact gasoline prices? Absolutely.
Monica Trauzzi: Our time is limited. I want to talk about the ethanol import tariff, because that's getting a lot of play on the Hill with Senator Lugar sort of changing positions on that recently and supporting us re-looking at the tariff, maybe scaling it back. How seriously should Congress be considering this? I'm asking all of you, but go ahead.
Joel Velasco: You know, I came to work this morning. I was listening to MPR like some of you guys might have heard, and it was music to my ears to hear some MIT economist saying that listening to the Obama campaign promises on energy and the McCain proposal.
And he said there's only one that's going to have, and offshore drilling and this and that, there's only one that's going to have an immediate impact on prices and that was to reduce the ethanol tariff.
You know, we've been pretty clear on this, and we've been saying this for years, it just wasn't popular. I was screaming bloody murder during the time of the farm bill and nobody wanted to hear us.
That the way the system is structured, it penalizes, and we can debate over how much the differential is in the secondary tariff and the primary tariff and so forth. But there is a premium being paid by the guys bringing the lower cost biofuel into the United States today.
And the differential is nine cents and if you add a secondary, the primary tariff, it's $0.14, whatever we want to debate that is, it's a price. It's a tax that's being paid on consumers. Oil from Hugo Chavez, the Saudis, whoever it is, doesn't pay a lick. And so we've been saying that Congress should look at that.
And you know, I like the analogy of the phone. I was thinking here, you know, mind you I was in the boondocks of Brazil and we barely had a landline, but we certainly didn't have cell phones, but I remember pictures of that kind of phone. I was a little young then. But if you told ...
Bob Dinneen: It depends on how hard it was to find them.
Joel Velasco: I could imagine, they were using still some of the ...
Brent Erickson: Yeah, the Smithsonian.
Joel Velasco: Well, I won't tell them you took it. If you told Research in Motion, the maker of Blackberry, and said, listen, you can come in the U.S. market anytime you want with your cool technology, but if you bring here anything from outside, you're going to have to pay a tax on it to bring it in.
I guarantee you, yeah, we would have had a few Blackberries in, but all of us wouldn't have a Blackberry because you're pushing the price of that Blackberry up and you're pushing people out of the market. And that's the issue I have with it.
You know, I would say after 30 years of a differential policy on the imports of ethanol, maybe it's time to say to this industry that, hey, it's time for competition. I mean, Bob, your words and you know, you and I squabble over this.
You know, I think you have today a $0.45 a gallon tax credit according to the new farm bill. And you have a $0.54 a gallon import duty plus 2 1/2 percent as valorem. If you do the math, I can show you, it's somewhere between $0.09 to $0.14 a gallon today premium. Why should consumers be paying that?
Scott Faber: And, at a minimum, we should at least lower the tariff to be equal to the tax credit. I can't imagine there's an argument against that.
I mean I think nobody could sit here and make the argument that an industry that's going to produce probably 9 1/2 to 10 billion gallons of ethanol this year and has more than 150 facilities, is that still the number, is an infant industry in need of protection from the international market.
Monica Trauzzi: Bob, what would scaling back the tariff mean for U.S. producers?
Bob Dinneen: A moment of agreement, because I actually do agree with the fact that the tariff should be lined up with the tax incentive. The only point of the secondary tariff is not to protect the U.S. industry, it's to protect taxpayers from having to subsidize an already subsidized product.
I mean Joel and Brazil has done a tremendous job, over 35 years, building a terrific industry with tax incentives and production mandates ...
Brent Erickson: Show them the dates.
Bob Dinneen: ... and export enhancement and infrastructure development and debt forgiveness. And I say that with pride. I think you've done a great job building that industry. U.S. taxpayers shouldn't have to subsidize their product as well.
So, all the secondary tariff is intended to do is to offset the tax benefit that refiners get when they purchase ethanol, whether that product is imported or domestic. And they should match up and we have supported that. But it has not been a barrier to entry in any case.
We imported 450 million gallons from Brazil last year, some of it having come through the Caribbean basin where it does come through duty-free and some of it directly because it can compete in certain markets. And it will.
And we welcome the competition and we do think that there should be parity between the secondary tariff and the incentive. But unless there is a reason why we should be subsidizing Brazil, Brazil and sugar and ethanol producers, I think the secondary tariff should stay in place.
Monica Trauzzi: Joel, talk about that two-way street, because a lot of people say that Brazil needs the U.S. as much as the U.S. may need Brazil for more imports.
Joel Velasco: Yeah, I mean, first, nobody will dispute history shows that there was government support in the initial phase of the Brazilian ethanol program and that's true. It ended about 15, 20 years ago.
And the level of support really would pale in comparison to, you know, I was reading, I think, the GO report from 2000 I think, when Senator Harkin had asked GO to say how much subsidy had gone to the ethanol industry and the oil industry.
And the ethanol industry, at that point, if I remember my math correctly, was somewhere already at 15 or so billion dollars. And this is before the boom had started. In fact, I think the GSI, which is the Global Subsidies Institute, puts that at somewhere about $48 billion.
So we're talking different scales here, so the dollar figures are going to be far, the other thing I just want to comment briefly. The CBI, I've heard people say it's a backdoor. So, like the RFS and like all these other things, it was congressionally created.
You know, we're not trying to sneak something in. In fact, what I find interesting is that it's not like a Monopoly game, where you go past Go and you collect 200, going through CBI.
It actually requires, it costs about $0.20 roughly is our estimate, based on talking to the traders, to dehydrate in the Caribbean. And for those focused on $0.20 a gallon to do that.
So yes, you'll save on the tariff a little bet, but you have to leave some money in Jamaica and some of these other countries.
Second thing, that dehydration, instead of taking place in Brazil or in the U.S. with a renewable fuel or with a domestically produced fuel it's done with fossil fuels.
So I mean it actually makes the carbon footprint of ethanol a little worse, marginally, but it's kind of alarming, interesting to me.
But the two-way street thing is we need a global market for ethanol. We think that there should be one. We think that it should be a level playing field.
In a market that is trading on cents and sometimes parts of cents, a $0.14 differential between one product and another makes a difference. It makes a difference also because here is the issue for us in Brazil.
We will probably export more ethanol into the U.S. paying the tariff. We've already paid up to May $20 million in tariff already to export ethanol into the U.S. We will export probably more through the end of the year.
But we are only going to produce our ethanol for what we really think there is a reasonable chance for us to sell at home and abroad.
The tariff works in a way that we'd have to guess that the price of ethanol in the U.S. would go up to a point where it would make it worthwhile for us to pay the extra duty. And that's the issue. There is no predictability for us.
Our guys in Brazil were there two weeks ago and they are like, well, I wish I had known that they were going to have this flood in Iowa. And, therefore, the price of ethanol was going to shoot past $2.50 to $2.90, that then I could be shipping to the U.S.
You need predictability. I mean the Saudis have it. Hugo Chavez has it, because they know it's a common market in the world for fossil fuels. And my issue is that on the ethanol market we, and this is unique actually across almost all the OECD countries. Canada does it. Europe does it.
And I understand that we want to encourage domestic industry and energy independence. I just think that the road to energy independence is not through isolation, but really through diversification. That everybody should have a chance, everybody that meets a certain criteria even, should have a chance at the table.
Monica Trauzzi: Brent, maybe you can answer this next question. Are we seeing an acceleration in investment for second-generation biofuels as a result of all this negative press that corn ethanol has been getting?
Brent Erickson: We've seen a definite increase in investment in next-generation biofuels, but it hasn't been a result of the negative press. I think it's a result of people seeing this as the next wave of technology in where things are headed.
I think if we continue to see negative publicity and we continue to see efforts to rollback the RFS, we could actually have a chilling effect on new investment.
I think Andy Kartchner, the assistant secretary of energy, testified a couple of weeks ago that suspending the RFS would be devastating for these next-generation biofuels. So that's a larger concern.
Monica Trauzzi: OK, I think we're going to open it up to the audience.
Question: ... ethanol production on carbon emission?
Joel Velasco: I brought it up quite clearly. At least one sugarcane ethanol we have a reduction of 90 percent, 80 to 90 percent in greenhouse gas emissions as compared to yesterday's gasoline. So if you compare it to tar sands gasoline, we'll be doing very well.
In fact, the OECD report that came out yesterday pointed out that if you take in consideration the other byproducts that we're producing in electricity mainly from sugarcane ethanol we're actually on positive territory.
In other words, we're absorbing more carbon out of the atmosphere. You'd actually, I'd hate to say it, but it paid to drive on ethanol.
Scott Faber: Well, and I'm putting on my old EDF hat for a minute. You know, there's no question that the increase in corn prices, driven largely by the surge, the recent surge in ethanol production is contributing to planting decisions that are ultimately resulting in pasture and forest land being converted.
That's releasing carbon into the atmosphere. It's also eliminating the ability of those pastoral lands and forest lands to act as sinks for carbon. So, we can argue about how much of a contribution, but there's no question that this is basic agricultural economics.
Prices go up. Land that was marginal or not worth plowing up is now suddenly worth plowing up and that activity is going to release more carbon into the atmosphere.
I think that's why getting the second generation of fuels, the cellulosic biofuels and advanced biofuels, to commercialization is so important.
They hold a lot more promise to displace our traditional sources of fuel, which is obviously very important, but they also potentially have a significantly smaller carbon footprint and significantly smaller impact on the environment if they're done right.
And so I think that's critically important. But there's simply, on the margins, corn ethanol may be slightly better, may be slightly worse from a carbon perspective, but, frankly, we don't know because we didn't sort out the science before we made this enormous investment through the last energy bill.
Bob Dinneen: Well, I think we do know a lot and I don't know how you can say that there's no question that some of these land-use issues would have a negative impact when 35 scientists wrote to California just a week ago questioning some of their assumptions in terms of land use, because there's a lot of uncertainty about that issue.
What we do know is that the DOE's existing GREET model, which is the only tool really we have today to measure the impact of an industry on global warming, greenhouse gases, suggests that on average the ethanol industry today, from corn, will get about a 21 percent reduction in carbon.
Now, the GREET model does not account for some of the indirect effects that Scott was talking about, that's true. But there's just a lot of uncertainty about how to do that.
Now, that includes of course a lot of ethanol that is today produced from coal, that is produced at plants that maybe don't have the advanced technology that some of the newer plants do. And at some of those newer plants you could see a 30, 40, or 50 percent reduction in carbon.
The point is you have to have policies in place that are going to encourage more sustainable technologies. That's what the energy bill that passed last year did.
It set specific thresholds for future production, both for corn ethanol, they have to meet a 20 percent reduction, and for advanced biofuels they would have to meet a 50 percent reduction, and cellulosic ethanol a 60 percent reduction in carbon.
This is not a static industry. We're moving forward. We're evolving and we're utilizing new technologies. And when we understand the science around carbon better, and there are a lot of questions about it, we'll be able to get there.
Scott Faber: There are a lot of questions and I have enough gray hair now that I can sound like an old man and say that I know, because I remember how hard environmentalists fought in the 60s and 70s and 80s for the basic principle that we ought to get the science right before government makes these big sorts of investments and policy choices.
And so, for all of those of you who are thankfully not as old as me and don't know people like Jim Tripp and the great lawyers who fought to get NEPA and the Endangered Species Act and the Clean Water Act enacted, and to embody the simple principle that we ought to get the science and economics right before we make these big policy choices, ought to be really troubled when some of the newbies are saying, hey, we can figure this all out.
Let's go ahead. Let's make these big policy choices. We'll get the environmental ...
Scott, I feel like I'm in a parallel universe.
Scott Faber: ... analyses right as we go further down the road.
Brent Erickson: I feel like I'm in some time warp here or something. I actually worked on the Hill for 15 years and worked on the Clean Air Act and it was the environmental community saying we have to pass acid rain legislation. It was the industry saying, no, we've got to get the science right. So, you know ...
Scott Faber: We're not talking acid rain.
Brent Erickson: I know, but I mean that's neither here nor there. But I do want to say one thing about carbon. You know, we hear about plowing. The fact of the matter is that with new biotech crops they work better when you do no-till. And when you do no-till, you actually get carbon sequestration.
And you don't hear a lot about that because people are trying to fear monger. But if you look at the trend lines for no-till farming, they're going up. We're getting more and more acres every year in no-till and when you do that, what happens is the root ball of the plant stays in the ground.
You don't get degassing and it actually sequesters carbon. So there are a lot of good things happening with new, modern agriculture that you don't hear about that's helping the carbon footprint be much better for the environment.
Monica Trauzzi: May we get another question from the audience?
Brent Erickson: I hope the accuracy changes. I was here 30 years ...
Question: Well, you're all right because if you look any of the DOE charts that are out there, it shows that the renewable industry, which owns about 3 percent of the space, that you guys are knocking yourself out over 3 percent of the space.
There's other people that you should be expanding into that space so it needs all the players. This morning we talked about national defense and threats, which is the whole point of this. How are you going to come to a realization that you have to work together to get more renewables deployed?
Bob Dinneen: I agree with you. Look, our energy situation is thus that we need all forms of energy. We need wind. We need geothermal. We need solar. We need hybrids. We need plug-ins. We need it all. And ethanol is not the silver bullet. It's not the answer to everything, but it is one component.
So it's one factor that today is having a beneficial impact. And if Scott and his merry band of co-conspirators succeed and you waive the RFS and you do damage to the ethanol industry, you're going to be doing damage not just to second-generation ethanol production, but to all those other renewables as well. We need it all.
Scott Faber: Look, we agree. We need to get these second-generation biofuels to commercialization as fast as possible. We're certainly very supportive of expanding the tax credit for cellulosic and advanced.
We're excited about the parts of the mandate that accelerate the development of cellulosic and advanced. But look, we shouldn't solve our energy problems by driving up the price of basic staples. I mean this is a no-brainer.
The difference between producing 10 billion pounds of corn ethanol and producing 15 billion gallons of corn ethanol is a drop in the bucket when it comes to looking at the supplies of gasoline and liquid fuels in the United States. But it means a big difference in the cost of making a chicken for the cost of a dozen eggs.
And that's where the focus ought to be. And it won't make any difference in the pace of commercialization of the second-generation fuels. These things are going to make it because we've invested a lot of money through tax credits.
Brent Erickson: That's our point, you're wrong about that.
Scott Faber: Well, you know ...
Brent Erickson: You're absolutely wrong about that.
Scott Faber: Well, we disagree about that and I don't appreciate it when people who disagree accuse each other of being wrong or being factually incorrect. We simply disagree about that.
Brent Erickson: No, everybody is entitled to their own opinions, but nobody is entitled to their own facts. And if you do away with the RFS you're going to kill investment. You're going to cripple this industry.
Scott Faber: I think if Senator Moynihan were here, who said that, he would agree with me, that we should not be driving up food prices to try and solve our energy needs. It doesn't make any sense.
Brent Erickson: Scott, you keep saying what is the right question? I think the gentleman's point about national security is the right question. And so the question is, are we more concerned about a blip in corn prices or are we more concerned about national security and energy security?
Cheap, high fructose corn syrup is not an entitlement, but national security and energy security is.
Scott Faber: I wouldn't call a 200 percent increase in corn prices that is driving many farmers into bankruptcy a blip, respectfully. I think, clearly, and that would be concerned, I think the right focus is absolutely on how do we get these second-generation fuels to commercialization?
How do we get cellulosic biofuels to commercialization? But the difference between having a 10 billion gallon corn ethanol mandate or a 12 billion gallon corn ethanol mandate or a 15 billion gallon corn ethanol mandate isn't going to make a difference in whether these things become commercially available and displace gasoline and a significant way.
Monica Trauzzi: There's another question in the back. Oh my God, there are many questions in the back.
Question: I have a question about there's a rulemaking required on the Renewable Fuel Standard. Corn ethanol is defined or required under the Renewable Fuel Standard to get 20 percent, as was mentioned, lifecycle reduction in carbon emissions. But there's a rulemaking that has to go through to establish that.
And so my question is, since there's differences here in terms of whether corn ethanol can or cannot make that based in part on this land use, how do people see that process playing out on that issue?
Scott Faber: Well, I think we all are following it closely and we all know how hard it's going to be for EPA to ultimately assign a default value to the indirect land-use effects associated with ethanol production. It's going to be very difficult to do. I'd be surprised if they do it by this fall, as they hope to do.
I'd be surprised if they do it by next year when ultimately the rule will probably go final. This is really complicated science and economics, which is why I think it makes sense to slow down and make sure we understand the implication of the decisions we've already made.
You know, I think the other thing that Bob didn't mention is that because of the grandfathering provisions of the energy bill, the 20 percent reduction requirement will only apply to roughly the production of the 1.5 billion gallons of corn ethanol.
The facilities that are under construction, broadly defined, will produce about 13 1/2 billion gallons of corn ethanol. So it's unclear how much of the ethanol will actually be touched by that 20 percent reduction. And I think, frankly, that grandfathering provision is still kind of up in the air.
Bob Dinneen: It's all up in the air. I mean we are, as Scott said, closely following the EPA process. It is going to be a difficult task and we hope that EPA is, while they're counting the angels on the head of the pin, looking at biofuels.
As Joel indicated earlier, we're the only ones that are really looking at it in terms of sustainability right now. And we hope that they are looking at the angels on the head of the pin for the oil industry. Because, were it not for ethanol, where are we going to be getting our increases fuel supply?
More and more of it today is of course coming from Canada and Canadian tar sands. What's the environmental impact, what's the global warming impact if, because we've eliminated ethanol, we have to have more Canadian tar sands? I mean it's sort of why this is such a difficult issue for EPA.
Question: Can I just ask you to clarify on the grandfathering part? There seems to be some indication that that's in question, how that's going to be interpreted.
Scott Faber: I think the question that EPA is turning over in its head, as they did in probably the New Source Review context, is what is the meaning of under construction? And so how you define under construction will determine how many of these new facilities would actually have to comply with the requirements.
Monica Trauzzi: Question? There are people behind you.
Question: I have a quick question for Joel. Well, first, how much did the Brazilian government spend to get the ethanol production up and running in Brazil? And how long did they have to support the industry before it became economic?
Joel Velasco: I mean it's very hard to figure out on a dollar figure, in large part, because you have, I mean I've said this publicly before, you have to remember, when this all gets started in the 70s, Brazil is a dictatorship.
The oil companies are controlled by the government. The president of Brazil happened to have been the president of the oil company prior to that. He was a military general. So, what got spent by Petro Gaz to retrofit all the gas stations? Who knows.
Let me give you an anecdotal example though, the costs that the people pay that also doesn't go in. My parents bought a 1980 white Chevette by GM in Brazil that was converted to run on E100. And we lived in Goias, which is in the boondocks of Brazil.
And to visit my grandmother it was a six hour drive. Despite all we say about the great infrastructure in Brazil, at the time we did not have enough ethanol gas stations. What happens? We carried an extra 20 gallons of ethanol in the backseat. When the car ran out of fuel we put some back in.
Why do I say that? Because it was necessity. It was a totally different circumstance than the U.S. faces today. We can't have everybody going around the Beltway with an extra 20 gallons of ethanol in the backseat. We've got to invest in the infrastructure.
What I can tell you is what you really had in Brazil that the government was really implementing, it wasn't necessarily subsidy in terms of cash, but it was infrastructure investment that they did, that I think nobody would dispute that the U.S. government should be spending that money in the U.S.
What they did was also set up blending mandates. Today you can only have, there's no pure gasoline and Brazil. It has at least 20, 25 percent ethanol.
If you try to get rid of that, by the way, today the first person that would complain to the government of Brazil would be the auto makers because their cars can't run on pure gasoline.
And then finally, what the government did is it said it would provide, actually, the taxes that were charged on the cars that were pure ethanol were removed by the government. In other words, they created an incentive for people to buy pure ethanol cars.
So, you know, should maybe we reduce some taxes on flex fuel cars in the U.S.? I think so. My issue with the subsidies and the distortion in the U.S. is that we're not putting the subsidy in the hands of the farmer of ethanol. We're putting it in the hands of the oil companies.
The blender of gasoline, who I don't think is represented on this panel, they maybe should have, because I'd love to understand why he needs a tax credit to put cheaper ethanol, ethanol is cheaper than gasoline, into gasoline and sell it for the price of gasoline.
It makes no sense. It will be foregone revenue of about $4 billion to the U.S. Treasury. I know Bob's response to this, but I think, after 30 years, maybe it's time to revisit that.
Monica Trauzzi: Question? Final question.
Question: Thank you very much. We've heard it said several times here in the last hour that there is no alternative for renewable, low carbon transportation fuels than biofuels. And most of you have not yet heard, we have, in fact, just announced DoDI Energy, for the last several years we've been working on this.
The science is extremely sound, simulated in detail, it will be practical to make cost-effective fuels of all types from CO2 with renewable energy. We call it wind fuels because the cheapest source of renewable energy is wind.
The wind can be used to electrolyze the water. It produces the hydrogen, which is used to reduce the CO2 to CO. The CO plus hydrogen goes into a Fischer-Tropes, which I think most of you have heard about, where the hydrogen plus CO converted into all types of fuels.
We have determined, from detailed analysis and simulations that this process, ultimately, should compete with oil in most cases when oil is even at $80 a barrel, and in some cases even lower on some subsidy assistance. We are at a very early stage.
We have gone through all the science in detail. We are physicists and chemists. We are very sound science, scientists and engineers. The next step will be demonstrations. And one of the difficulties that we face of, of course, is that the DOE has not provided much support to outside-the-box proposals.
We are now at this stage of looking for funding from DOE and other sources. I think this is something that will really change the debate going forward.
It will take some time, but we believe that within seven to eight years we can be looking at millions of gallons per year and maybe even billions within 15 years of production from CO2 and wind energy.
Monica Trauzzi: Does anyone want to comment?
Scott Faber: Well, just to build on what Joel said, I think the right questions for Congress to be asking, clearly, whether we continue to need a tariff and whether we need to change the trajectory of the RFS.
But another is whether a better use of the $4 billion a year that we provide in a tax credit to gasoline refiners might be better spent incubating some of these really promising second-generation technologies.
Imagine if we made that sort of investment in cellulosic and advanced biofuels through R&D, how much of our gasoline supply we might displace and how much we might ultimately help lower food costs in the process.
Brent Erickson: That's a nice thought, but you have to have commercialization taking place along with R&D. We can do R&D forever. We've got to get some steel on the ground and get some large-scale plants built of these second-generation biofuels.
And yes, it's good to do R&D and to improve the enzymes and the feedstocks along with that, but it's not the answer. We've got to get steel in the ground.
Scott Faber: Right and I don't think anybody, on this panel anyway, would propose to change the credits and RFS schedule for these second-generation fuels.
And I think it would make more sense or something Congress at least ought to consider, whether it makes sense to continue to provide a tax credit to refiners to blend in corn ethanol and whether those dollars might be better spent on other promising technologies.
Monica Trauzzi: Great. That was great panel, thank you.
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