Miliband steps into biofuel row between EU and US

Biofuels: The great green con
Biofuels: The great green con
By Tim Webb
Published: 06 May 2007
Independent UK

So by blending crops such as sugar and corn with petrol, biofuels will slash carbon emissions and save the planet. Right? Not when the price is escalating food prices and the clearing of the rainforests

Arnold Schwarzenegger, the Governor of California, uses it in one of his Hummers. Sir Richard Branson, the Virgin boss, wants to fuel his planes with it. American President George Bush hopes it can wean his country off oil imports from the Middle East. And next year, if tough new targets are met, it will be in every other litre of petrol sold at the pumps in this country.

Biofuel is the latest green craze. It is made from crops such as wheat, rapeseed, corn and sugar, and less commonly, waste products such as used cooking oil and tallow (animal fat). According to biofuel's many fans, blending conventional petrol and diesel with these crops or waste reduces the amount of crude oil needed and the overall amount of carbon released into the atmosphere.

Everyone is jumping on the biofuel bandwagon. In his State of the Union address in January, Mr Bush announced a 15 per cent target for the replacement of petrol by biofuels in US vehicles. Over the next 18 months, American biofuel production capacity will double to some 7 per cent of the petrol that the country consumes. The EU has set a less ambitious target of just under 6 per cent by the end of the decade; this could rise to 10 per cent.

But questions are starting to be raised about just how green biofuels really are. They encourage deforestation - responsible for around a quarter of the world's carbon emissions - as land is cleared to grow the crops. Biofuels have also driven up food prices, hitting the world's poor the hardest. According to the International Grain Council, at the end of this financial year the world's grain stocks (corn, wheat and barley) will be the lowest since the 1970s, mainly because of soaring demand from biofuels. Some of these "green" energy sources also use up more energy during the manufacturing and refining process than they save.

Politics - particularly the interests of big agricultural businesses - is starting to dictate the biofuel market. The US has imposed punitive import tariffs on Brazilian-made ethanol - one of the world's most efficient biofuels - and subsidises the export of its domestically made corn-based ethanol, which is one of the least efficient. This subsidy could lead to a trade war between the EU and the US.

The biggest drawback with biofuels is the deforestation that it directly and indirectly causes. How much deforestation takes place is hard to measure, but if new demand emerges - such as from biofuels - more land has to be found from somewhere.

Biofuel crops thrive best in tropical climates. For example, Brazil can make 6,000 litres of ethanol from a hectare of sugar cane (the staple crop for Brazilian biofuels), which is five times the output of a hectare of rape seed in the UK. It is also cheaper to produce biofuels in countries such as Brazil. According to Department of Transport figures, to grow and process ethanol in Brazil costs less than half what it does in the UK.

Sugar cane production in Brazil rose by halfbetween 1993 and 2003, from 2.8 million hectares to 4.2 million hectares, mainly to feed domestic demand. It is expected to increase by half again by the end of the decade to meet global demand.

It does not necessarily follow that sugar cane grown in Brazil to make biofuels will be planted on cleared rainforest or tropical savanna. According to a study commissioned by the Dutch government, sugar cane plantations usually replace land used for grazing cattle or other forms of food production. But the effect of sugar's advance is to displace other food production into the cerrado - tropical savanna covering a quarter of Brazil which, according to the World Wide Fund for Nature, is biologically the richest grassland in the world. According to scientific body the Brazilian Agricultural Research Corporation, around a 10th is already being used for cattle grazing, but this will grow.

Because of the growth in sugar-cane farming, the Dutch report says, "livestock production is moving - particularly to the central part of Brazil, and particularly at the borders of the present agricultural land, into cerrados".

Deforestation caused by growing palm oil - another cheap biofuel staple - in Asia, principally Indonesia and Malaysia, is also causing concern. The Friends of the Earth environmental group estimates that 87 per cent of deforestation in Malaysia between 1985 and 2000 was to make way for palm oil plantations.

The British Government has admitted that a "significant proportion" of UK biofuel demand will be met by imports. Indeed, analysts at Goldman Sachs believe that to meet the 2010 target wholly from domestically grown plants would take over a quarter of all available crop land in the country. This means buying biofuel crops from places such as Brazil and Indonesia, with all the environmental consequences - direct and indirect - of deforestation which follow.

Chris Brodie, a partner at the Krom River commodity fund, argues that agricultural prices will keep heading higher as more land is devoted to biofuel-crop production. Global grain stocks are already at historical lows because of biofuel replacement levels in the US, he says. When American biofuel demand doubles - and when the EU targets kick in - grain prices will increase even further. "You really need to apply common sense. The further we impact grain inventories, the impact on grain prices will be multiplied."

Politicians and the industry are aware of the deforestation that can result from biofuels and are taking steps to try to address this. Earlier this month, the Dutch government unveiled a framework to allow companies to measure the sustainability of the biofuels they are buying. Other European countries are considering similar, voluntary schemes. Under World Trade Organisation rules, individual countries are not allowed to ban imports for being unsustainable, which is why these standards are voluntary only.

Industry executives believe that as public awareness of biofuels and how they are made grows, consumers will increasingly choose to buy petrol labelled as sustainably sourced.

Andy Hunter, the director of Argent Energy, which makes biodiesel with tallow and used cooking oil rather than crops, says this will gradually discourage the production of non-sustainable biofuels as they will have a lower value. "As companies look at [the issue], it will put pressure on some crops. In the future, biofuels which can be branded as sustainable will command a premium."

But it is debatable how effective such standards will be in practice. Even if the EU managed to source all its biofuels sustainably, the effect - apart from easing consumers' consciences - would be to displace other forms of food production or biofuels destined for less ethical markets, which could be grown on cleared rainforest instead. "The EU tagging their biofuels as sustainable is hot air, unless everyone can persuade Brazil to stop cutting its rainforests down for crop production," says Mr Brodie.

The industry and the environ- mental lobby are facing a dilemma. Many leaders of biofuel businesses, such as Lord Oxburgh, the chairman of AIM-listed D1 Oils, appear genuinely motivated by concerns about climate change. They freely admit that biofuels are not perfect and present many challenges, both to the environment and ethically. Lord Oxburgh, for example, says one of the reasons he took up his post with D1 Oils was a desire to make biofuels using jatropha, a non-edible crop, which he says will only be grown on marginal land.

Lord Oxburgh - like the green lobby - holds out most hope for the second generation of cellulose-based biofuels, which use household waste and sewage, rather than crops, as feedstock, and promise to be much more efficient. He is concerned that by attacking the biofuels industry, environmentalists will prevent the development of this second generation of greener and more sustainable source.

Lord Oxburgh insisted earlier this year: "It's not a con. It's important that NGOs and others don't push too hard and damage what is movement in the right direction. The climate-change problem is so urgent that we must start with what we have and improve as we go along."

The view that it is better to press on with the biofuels we have and improve them later is common throughout the industry. Jonathan Johns from the Ernst & Young renewable-energy team says: "We recognise there are some compromises that need to be made if climate change is the priority. Getting biofuels established as a market is the main thing. Crop-based biofuels are a stepping stone to the second generation of biofuels, which is the real long-term solution."

But after investing billions of pounds in refineries to turn crops into biofuels, companies are unlikely to shut them down on environmental grounds once the second generation becomes commercially applicable, possibly in five years time. As Mr Johns admits: "It would be a mistake to get trapped into the first- stage technology of biofuels."

Experts say that the refineries could be converted to manufacture cellulose-based biofuels, but since this technology has not yet been fully developed, it is hard to say.

A spokesman for the World Wildlife Fund, which encourages greater investment in second-generation biofuels, argues: "It's dangerous to create the industry and then try to make it sus-tainable."

Any new industry is bound to have teething problems. And it would be grossly unfair to blame biofuels for all of the world's deforestation and rises in food prices. But there is only so much land to go around. As long as biofuels are made using crops - barring some technological breakthrough to increase the efficiency of crop production - then this could be the biggest green con of all.

Against The Grain: Corn conquers the American landscape

The US is the world's biggest gas guzzler. Last year, motorists consumed 140 billion gallons of petrol. America's ambitious targets also make it the world's largest biofuels market.

Partly because of the strong political influence of the agricultural lobby, as well as concern over reducing the country's dependence on oil imports, Washington wants to meet biofuel demand largely from domestically grown corn. The US currently accounts for two thirds of world corn exports. But as domestic demand for biofuels rises, these exports will fall, pushing up prices and encouraging countries like Brazil to clear more forest to make up the shortfall.

The amount of land needed to feed its biofuel craving is staggering. In the US, five billion gallons of ethanol were consumed last year out of a total of 140 billion gallons of petrol (although this is 3.6 per cent of the total volume, it is only 2.4 per cent of the energy, as ethanol is less efficient than petrol). In February this year, US ethanol production capacity was 5.6 billion gallons. This is set to double in the next 18 months.

Analysts estimate that some 12 million acres are needed to meet current US ethanol demand. As production capacity doubles, so will the amount of land needed to grow enough corn.

It is also estimated that to feed ethanol consumption of 7 per cent (by volume) will take up 40 per cent of total US corn production. It is expected, for example, that Iowa, the heartland of the US grain belt, will have to start importing some agricultural commodities because so much of its land will be turned over to corn.

The US Department of Agriculture reported at the end of March that farmers would plant 90.5 million acres of corn next year, the highest since 1944. US corn prices are up by half on a year ago.