In recent years, many argued that the path away from Middle East oil and toward reduced vehicle greenhouse gas emissions would be led by a switch to ethanol and biodiesel. That argument—and the biofuels movement championed by entrepreneurs, industry leaders, and some researchers—is quickly dying. In the past week alone, VeraSun—the largest public ethanol producer in the country—filed for bankruptcy, and Germany became the first country to formally scale back its commitment to biofuels.

From the beginning of the biofuels movement, three critical questions have remained unanswered:

  • Cost

    Can biofuel be produced in quantity at a competitive price to conventional fuels?

  • Food Prices

    Can biofuel feedstock—the stuff used to make fuel—avoid being diverted from use for food?

  • Emissions

    Can you produce biofuels without harming the environment?

The answers to these questions appear to be: no, no, and no—especially for ethanol derived from corn, and biodiesel from soy or palm oil.

The first question is the one crippling much of the US biofuels industry. VeraSun, which filed for bankruptcy last week and secured some bank financing to reorganize, said its only alternative was to shut down production—despite its large scale operations and the United States’ commitment to ethanol.

The numbers just weren’t there, as prices for corn and natural gas—the main feedstock and the fuel used to turn it into ethanol—increased this past year while retail prices for ethanol failed to keep pace. As companies cancel planned ethanol and biodiesel plants, the road to viability for biofuel alternatives becomes rockier—even with government subsidies.

The so-called second generation of biofuels, such as cellulosic ethanol made from feedstocks including wood chips and switchgrass, face similar financial challenges. One company, Xethanol, changed its name and is switching its strategy from cellulosic ethanol to methane.

“You can make cellulosic at a price but it’s not going to be economical when there are depressed prices for ethanol.”

David Ames
president and CEO, Xethanol (now Global Energy Holdings Group)

Biofuels with a Tarnished Image

Meanwhile, as biofuels disrupt food supplies in developing nations—see “As the prices for soybeans rise, so does hunger in Indonesia”—the image of biofuels becomes tarnished. The latest poster child for biofuels’ negative image is palm oil, the rising demand for which had some countries chopping down rainforest to plant palm trees. Negative press led Germany to rescind its commitment to using a higher percentage of biofuel in its diesel—while outright banning biodiesel derived from soy or palm.

With Germany backing away from its biofuel commitment, the focus turns to the United States. The State of California is wrestling with how to achieve the goals of its Low Carbon Fuel Standard (LCFS), signed into law in 2007. The LCFS aims to reduce the carbon intensity for gasoline, diesel, and other fuels by 10 percent by 2020—but ethanol producers are struggling and researchers continue to debate whether increased reliance on biofuels will have a positive or negative effect on carbon emissions. Last month, California Air Resources Board posted its draft regulations, which are still very much under review.

President-elect Barack Obama wants a carbon copy of the same goals as part of a National Low Carbon Fuel Standard—with the additional requirement of 60 billion gallons of advanced biofuels to be phased into our fuel supply by 2030. In his campaign, Obama expressed support for the multi-billion dollar annual government subsidies that domestic ethanol has long enjoyed—as well as the 54-cent-a-gallon tariff that the United States slaps on imports of ethanol made from sugar cane.

The outcome of debates in Sacramento and Washington, DC—and the resulting government mandates, incentives, and subsidies—will likely determine if biofuels can be brought back from the brink of collapse.