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Environmental Entrepreneurs Update - November 2004
Environmental Entrepreneurs
November 30, 2004

Can Biofuels Replace Oil?

Future fuels for transportation could come from the cellulose in grass - reducing our need for imported oil, creating competitive pricing and a cleaner environment.

Gasoline and diesel are the dominant fuels used in transportation today. The U.S. spends well over $151 billion per year on crude oil with over 60% of this going overseas. Increasingly, the developing world will compete with the U.S. for this oil. New sources of crude oil will not be able to keep up with growth in demand. Finding a domestic alternative to oil would give us greater national security, a stronger economy and avoid the environmental problems caused by using fossil fuels.

The timing is right for a major push to create alternative fuels made from agricultural products and by-products that can compete with petroleum fuels on price, domestic availability and environmental properties. These "biofuels" have existed for as long as petroleum products yet historically they have not been competitive. In this article we will look at why that has been the case, and why it has changed. For background on transportation and alternatives to oil, please read our June 2004 Newsletter "What comes after oil" and our August 2003 newsletter "Hydrogen - Is it the Answer for Clean Cars".

Types of Biofuels

Biofuels fall into three categories; biogas, biodiesel, and ethanol.

Biogas (or biomethane) is a gas that is captured from decomposing organic matter including sanitary landfills, wastewater treatment plants and farm manure. The material is decomposed anaerobically (without air) in a methane digester and then either burned for electricity or compressed/liquefied and purified for use in specially modified vehicles. It is also possible to convert the gas to hydrogen for use in a fuel cell vehicle.

Advantages: Capturing the methane gas keeps it out of the atmosphere where it is 22 times more polluting as a greenhouse gas than CO2. Biogas can be extremely cost effective since it converts a waste product into inexpensive electricity or vehicle fuel.

Disadvantages: Methane gas sources are typically found in relatively small quantities compared to our total energy fuel requirements and its combustion can increase NOx (Nitrogen Oxides) air pollution from improperly designed engines.

Biodiesel is a substitute for diesel made either from oils in plant seed, waste oil from restaurants or food processing plants and other waste products rich in carbon. For large-scale use, it is generally blended into regular diesel (B5 for example is 5% biodiesel), though it can, after minimal treatment, be used unblended as a substitute for diesel. For more background, please see the "EPA Biodiesel report". Researchers are also testing ways of producing biodiesel from algae ponds (see "Widescale Biodiesel Production from Algae").

Advantages: Only minimal treatment is needed to burn it in diesel engines, and it produces significantly less air pollution (except for NOx) when blended with diesel fuel. Cost is competitive when made from waste oils.

Disadvantages: Relatively little waste oil is available. Biodiesel made from plant seeds is quite a bit more expensive than diesel. It isn't clear that there is enough feedstock (i.e. sources of raw material for biodiesel) to address more than 10% of total diesel demand - without a major technological breakthrough - like algae ponds.

Ethanol is made from the sugars, starch or cellulose in plants and blended into gasoline. The majority of ethanol in the U.S. is derived from the starch in corn. In Brazil it comes from the sugars in cane sugar. One third of all cars in the U.S. have some ethanol in their tanks. Each source for ethanol has its own distinct pricing and environmental issues that we will discuss in more detail.

Advantages: If recent advances in bioengineering prove commercially viable and substantial amounts of agricultural land are devoted to energy production, enough feedstock could be produced in the U.S. to supply the majority of the gasoline market. It is likely that advances in research can reduce costs to be competitive with gasoline. Ethanol makes gasoline burn cleaner. Blends of 40% or more ethanol are less polluting than gasoline.

Disadvantages: Ethanol isn't price competitive yet with cheap oil (oil receives significant federal subsidies) without some technical breakthroughs. When blended in small quantities with gasoline, it causes increased nitrogen oxides and hydrocarbon evaporation emissions in older cars but also lowers some emissions from the engine (The amount of the increase and decrease is subject to great debate and research). The farming practices used to produce the feedstock have varying environmental impacts depending on the crop and how it is grown.

While all three fuels will play important roles in reducing the need for oil, this report will focus primarily on ethanol. We will return to biogas and biodiesel in subsequent newsletters.

A Brief History of Gasoline (and Ethanol)

As gasoline engines grew in power in the 1920s, the industry needed to make changes in the fuel formula to prevent knocking. The original choices were lead and ethanol. Lead was chosen because it was less expensive. As the poisonous effects of lead in the atmosphere were understood, and with the introduction of catalytic converters in the 1970s, which were damaged by lead, it was phased out (through NRDC's leadership) and replaced with other chemicals - although these proved to be cancer causing as well. They in turn were replaced by MTBE in the 1980s. However, MTBE (now also identified as a carcinogen) gets into the water table and stays there. Thus in the last two years, MTBE has been banned in California and some other areas and is being replaced with ethanol. Over the last 80 years, the role of additives has moved from just anti-knocking formulations to those that burn cleaner in the engine and reduce smog-forming emissions.

Current federal law requires blending a minimum amount of oxygen into fuel, equivalent to 5.7% ethanol, in regions that do not attain clean air standards. Ethanol is the preferred oxygenate now that MTBE is banned in some of these regions. The state of California and the state's oil refineries believe that a cleaner fuel can be blended without ethanol, and consequently, the state has requested a waiver from the requirement to blend ethanol to meet the oxygen requirement.

The oxygen requirement has created an expanding national ethanol market of 3.3 billion gallons annually (out of a total gasoline market of 150 billion gallons or 2.2%) with 84 ethanol plants operating in 20 states. California replaced MTBE with ethanol in the last two years. The resulting 900 million gallon increase in ethanol was easily met by an expanding Midwest corn ethanol industry.

Is Ethanol Good for Automobiles?

Car manufacturers warranty vehicle use with up to 10 percent ethanol blend in the gasoline. As one moves beyond 10%, the vehicle needs adjustments to account for the differences between ethanol and gasoline. So called “flex fuel” vehicles solve this problem by having a sensor that tells the computer running the engine what percentage of ethanol is in the tank. (Legally there is always some gasoline blended into ethanol to prevent it from being used as alcohol for human consumption. This law is left over from prohibition! Pure ethanol can be turned into a cocktail by adding ice and your favorite mixer!). Some gasoline also needs to be mixed with ethanol to avoid cold-start problems.

The Alternative Motor Fuels Act of 1988 intended to support the use of alternative fuels by providing incentives for manufacturers to build and sell flexible fuel and bi-fuel vehicles. Bi-fuel vehicles operate on both gasoline and natural gas; flexible fuel vehicles originally operated on any mix of gasoline, ethanol, and methanol, but interest gradually dissipated in methanol. The incentive consists of extra credit to automakers in calculating the fuel economy of vehicles they sell to determine compliance with Corporate Average Fuel Economy standards (CAFE). This program has expanded production of flex-fuel ethanol vehicles, but has had no real effect on ethanol use. According to the Department of Transportation, flexible fuel vehicles currently run on gasoline more than 99% of the time. Therefore the net effect of the fuel economy credits for producing flexible fuel vehicles is an increase in overall oil consumption.

General Motors, for example, makes the following flexible fuel vehicles: Tahoe, Suburban, Yukon, Silverado, Sierra and Avalanche, i.e. their largest and most fuel in-efficient vehicles. GM plans on introducing flex-fuel passenger vehicles in 2006. They already provide flexible fuel vehicles for fleet sales. The total new flex-fuel vehicle from all manufacturers is approaching 2 million annually.

Is Ethanol Good for the Environment?

Ethanol has mixed benefits. When blended with gasoline, it tends to reduce carbon monoxide, hydrocarbon, and toxic emissions. The effect is minimal with modern cars, however, since the emissions are already very low and car engines automatically recalibrate for different gasoline compositions. In older vehicles, using 5% to 10% ethanol, there is an increase in emissions from the permeation of ethanol through the fuel system.

Ethanol can potentially reduce global warming pollution (GWP) to near zero since the carbon dioxide released by burning ethanol comes mostly from CO2 removed from the atmosphere by the plants. Thus the CO2 is simply recycled. In contrast, the CO2 from gasoline is stored carbon coming from fossilized organic matter underground and is adding CO2 to the atmosphere. The actual effect of ethanol depends upon how much energy is used in growing, harvesting, and processing the ethanol, and the GWP associated with that energy use. In theory, no fossil energy could be used, resulting in zero emissions, but that is not the case today in the U.S.

The US corn-ethanol industry has become steadily more energy efficient over time. Recent studies indicate that the total amount of fossil energy used in growing, harvesting, and processing ethanol is less than the gasoline replaced by ethanol. The net effect of today's corn ethanol on GWP per gallon ranges from about 30% better to slightly worse. In Brazil, where the sugar cane stalks are used to co-generate heat and electricity at the processing plant, thus eliminating the need for fossil energy; the GWP is greatly reduced to near zero. The challenge for the U.S. industry is to become more energy efficient and to develop better ways of making ethanol.

Ethanol production in the U.S. comes primarily from corn. The corn itself has all the potential environmental problems of agriculture (pesticides, soil erosion, fertilizers, untested genetic modifications, etc). The chemical process of making ethanol from biomass, however, is inherently cleaner than the process of making gasoline from crude oil.

In summary, it is possible to design ethanol production methods and vehicles where ethanol can meaningfully reduce our dependence on oil and improve our environment. The next question is can ethanol compete with gasoline on price?

Economics of Ethanol and Gasoline

The California Energy Commission maintains an excellent web site with data tracking the pricing of all transportation fuels: Weekly Transportation Fuels. For example, gasoline costs per gallon in California for the week ending November 15th averaged as follows:

Crude oil cost
Distribution, marketing, profits
Refinery cost & profit
State and local sales tax
State excise tax
Federal Excise tax
Total (retail price)

In other words, ethanol needs to complete with the crude oil and refinery costs of gasoline which were $.98 + $0.61 = $1.59. The price for ethanol during this same time period on the "spot market" was $2.05 (up from $1.20/gallon when California first began buying ethanol). The federal government currently provides a $0.51/gallon excise tax credit for ethanol blending into gas. An independent refinery (i.e. one which does not own its own oil production) saves money with each gallon of gasoline it can replace with a gallon of ethanol:

Ethanol on spot market
Less excise credit
Ethanol cost to refiner

versus $1.59 for gasoline or 5 cents savings per gallon of gas displaced

A refinery probably has a long-term contract for ethanol closer to $1.50/gallon so each gallon used saves $0.60! The attractive pricing of ethanol has started to attract new plants in new states. See "Ethanol in California - A Feasibility Framework".

Refineries can use ethanol both for its anti-knock and pollution reducing properties. Outside of California, most refineries blend 10% rather than the minimum 5.7% because it is more profitable to do so. A falling price of crude oil makes the economics less attractive but it is fair to say that above $30/barrel for crude oil, ethanol with the federal $0.51 cent excise tax credit is attractive. At about $50/barrel, ethanol is attractive even without the federal credit. If you believe that crude oil will be above $30/barrel for the foreseeable future, these are happy times for the ethanol industry! Longer term, however, the ethanol industry needs to reduce costs and compete with other fuels without the federal excise tax credit.


When making ethanol from corn or biodiesel from soybeans, the fuel is not the only sellable product. The remaining grain from corn is called "distillers grain" and is sold as animal feed. For soybeans, the primary value is the "press-cake" sold as animal feed and the extracted oil is refined into biodiesel.

Animal feed co-products are important beyond their ability to make biofuels economically viable. In the U.S., 225 million acres (out of 300 million total harvested acres) are used to grow animal feed. If we assume for the moment, that we can very optimistically produce 1,000 gallons of ethanol per acre, we would need 75 million acres to produce 50% of the current 150 billion gallons of gasoline consumed in the U.S. This would cause a large drop in available animal feed unless the feed could be made as a co-product of the ethanol.

Reducing the Cost of Ethanol

Ethanol can be made from cellulose, starch or sugar. Currently, the process of converting cellulose into ethanol is the most expensive and converting sugar (in Brazil) and starch (in the U.S.) the least expensive. The cost of producing ethanol from sugar cane has steadily dropped in Brazil over the past three decades, and is now competitive with oil at about $30-35 per barrel. Sugar-ethanol replaces about a fifth of the gasoline in Brazil (See "Brazil Flex-Fuel Ethanol Cars to Stay in Top Gear". Thirty percent of new cars purchased in Brazil are "flex-fuel" and can take advantage of the fact that ethanol is up to 40% cheaper than gasoline in some areas.

U.S. consumers could benefit from imported, low cost ethanol from Brazil - except for the fact that the U.S. charges a $0.54/gallon import duty.

In the U.S., corn-based ethanol (made from the starch in the corn) is probably limited to 10-15 billion gallons per year based on available land and economics. The production cost is dominated by the cost of the corn and the energy used to process it (85% of total). Any breakthrough in costs and availability will most likely come from using new crops and processes that can convert cellulose, common in all agriculture, to ethanol. For an explanation of the various ways agricultural products can be converted into ethanol, please see "Ethanol Facts".

A Canadian company, Iogen, has a demonstration facility capable of converting a ton of wheat straw into 75 gallons of ethanol plus lignin that can be used to power the conversion facility and lower the energy costs. Next year they plan on starting construction on a 50M-gallon plant using wheat straw imported from Idaho. The plant will generate its own energy from the lignin - significantly improving the economics as compared to corn as well as reducing GWP. They ultimately believe they can produce ethanol for 45 cents per gallon.

Another company, Novozymes, under a multi-year contract from the National Renewable Energy Lab (NREL) has been able reduce the cost of enzymes used to convert cellulose from $5.50 to 27 cents per gallon of ethanol. While the total cost would include the feedstock and the other portions of the process, this could make the cellulosic ethanol price competitive with the price of corn ethanol. Large-scale production has yet to be demonstrated.

Genencor, a Palo Alto-based biotechnology company, also worked with NREL to reduce the cost of enzymes. Genencor isolated and synthesized enzymes from a fungus originally discovered 60 years ago in the Solomon Islands in order to convert cellulose to sugars. Scientists at Genencor have continued to enhance the enzyme cocktail and can produce them for $0.10-0.20 per gallon of ethanol, one thirtieth of the conventional cost today.

Biotechnology advances alone will not achieve lower cost ethanol. Process enhancements for better biorefineries are also needed. The Department of Energy currently has a program allocating $80M towards the development of pilot scale integrated biorefineries. These biorefineries are designed to produce commercial products (and electricity) from every usable molecule that flows through them. This program leverages industry partnerships and academia with the goal of completing a demonstration biorefinery by 2007 and establishing the first large-scale sugar integrated biorefinery by 2010.

The promise of cellulosic ethanol is appealing. You can get cellulose from waste plant material and from grasses that have much less environmental impact than corn. The timeframe for cost-effective, volume production cannot be predicted. The best way to accelerate development is to have a large, growing ethanol market, initially based on corn so private industry has a financial reason to make the investments in cellilosic ethanol without worrying whether an ethanol market will exist.

The strategy in the United States should be to grow the ethanol market in a way that encourages competition, creates new products for agriculture, protects the environment and allows distribution of the ethanol so consumers in the United States can have the same sort of choices as they do in Brazil.

Public Policy Options

Our public policy goal is to increasingly displace fossil fuels in transportation with bio-fuels in a way that creates market competition and lower transportation costs for the consumer. The policy should provide incentives for biofuels that replace the maximum oil and produce the fewest greenhouse gases. There are several benefits:

1. National security - reduced need for oil will make us less dependent on politically volatile nations in the Middle East, Africa and South America.
2. A large, distributed network of biofuels plants is much more secure from terrorism than a few large refineries located on the coasts
3. A competitive alternative to oil will provide more consumer choice and price competition at the pump
4. Biofuels provide a new cash crop for agriculture and new market for biotech products. As the World Trade Organization forces the elimination of national subsidies on exported food, those farmers can switch to domestic crops that have potentially higher prices and greater stability.
5. Biofuels can be more environmentally friendly, resulting in cleaner air.
6. Biofuels have the potential to dramatically reduce global warming pollution.
7. There are potential benefits in replacing existing crops with biofuels crops that use less water and require less environmentally harmful farming practices.

Renewable Fuels Standard (RFS): A renewable fuels standard implemented either by a state or nationally would require an increasing percentage of fuel to come from a renewable source. The percentage could not exceed 10% for standard gasoline vehicles. The actual percentage would grow to 10% gradually based on available supply of biofuels and also making sure that there are no adverse effects on air quality.

Since government would be creating the ethanol market, it has a right to insure the maximum public interest is met. We care that the different production process used to create fuels are increasingly efficient and environmentally friendly. There are three possible metrics: (1) oil displacement - oil displaced minus the oil used to create the biofuels (farm equipment, transportation, etc); (2) energy efficiency - total energy used to create fuel, (3) total global warming pollution. While not mandating a particular technology, the RFS should employ one or all of these metrics to force competition and invention across different feed stocks and process technologies.

Fuels Public Purpose Fund: Many states implement a public purpose fund for their electric utility sector. For example, in California, every electric bill includes a 3% fee that is collected for the public purpose funds. Those funds are then used to finance reductions in energy use and for clean energy, i.e. rebates on purchases of energy efficient refrigerators, solar panels, etc. Over time, these funds have the effect of accelerating the market for energy efficiency and renewables and have provided rate-payers with an economic return significantly greater than the 3% payment.

A similar fund can be created at the state level to advance the renewable fuels market and mitigate the air pollution caused by fossil fuels. Possible uses could include: (1) early retirement of the most polluting vehicles, (2) investments in improved agriculture practices for biofuels crops, (3) research on new enzymes and processes, (4) building of infrastructure to support distribution of biofuels and hydrogen to enable dual-fuel vehicles.

Transformation of Agriculture: For biofuels to become a major part of transportation fuels, a quarter or more of all agriculture land will be affected. This level of transformation will not happen through the market alone. Local regions will need assistance in the form of knowledge transfer and funding for the "early adopters". One example project being undertaken by Sustainable Conservation is demonstrating two techniques for corn cultivation: conservation tillage (http://www.suscon.org/dairies/conservationtillage.asp ) and double cropping. These reduce soil erosion and the amount of energy needed to grow the corn. Double cropping produces two corn crops per year that is possible in California due to the longer growing season. Through its Sustainable Agriculture Research and Education Program the University of California has demonstrated biologically-integrated growing practices for numerous crops. (http://www.sarep.ucdavis.edu/ )

Development of a Large, Flex-fuel Market: Eventually, if ethanol production greatly increases and costs drop, ethanol could be blended with gasoline in proportions greater than 10%, up to E85. Already, Marathon Ashland is selling E85 in several states across the Midwest. We will need a large fleet of flexible fuel vehicles to utilize the E85. The added cost per vehicle is $150 and dropping. Consumers would then have the option of buying an ethanol blend like E85 when it was less expensive than gasoline. Assuming the average vehicle uses 600 gallons per year, it would take 2.5 million flex-fuel vehicles using E85 to displace each additional one percent of gasoline. Approximately 15 million new vehicles are sold each year in the U.S.

The disadvantages of E85 are lower fuel economy, higher costs and less availability. Because ethanol is less energy dense than gasoline, E85 provides 20 - 25% fewer miles per gallon. This could be overcome somewhat by designing an engine with different compression to take advantage of ethanol's higher octane. In Brazil, where a 22 percent blend is common, the engines are optimized for the higher ethanol blends.


In the coming months, E2 will work with NRDC and a variety of other environmental, farming and business interest groups to help promote both state and national policies to promote the development and adoption of biofuels. Our goals are to promote policies that displace fossil fuels, encourage competition, reduce global warming pollution and protect air quality; and on the creation of state public purpose funds that can fund accelerated market development for biofuels and their applications.