The Biofuel Blues, or, it’s the Opportunity Cost, Stupid!

As I woke up this morning BBC Radio 4 was telling me the very encouraging news that an adviser to Barack Obama has questioned his policy on biofuels. I can find no reference to this story on the Web, but Obama’s website still leads its entire discussion of energy with a speech made in Des Moines, Iowa, capital of the corn belt. For some reason the BBC suggested the policy was to win votes in Illinois. I wonder whether they’ve muddled the two states: won’t Obama win Illinois anyway, being already senator for that state, and isn’t it Iowa that is famous for being corn-country? Though corn does grow in Illinois, too.

Anyway, apparently the adviser is a university professor and has pointed out that ethanol from corn does not reduce greenhouse gas (”GHG”) emissions because of all the inputs to produce the crop. He also noted that it displaces soya-growing from USA which leads to more GHG emissions if it is then grown in areas of virgin forest.

At this point I realised that my arguments about biofuels may be going over people’s heads. Not because it’s such a high-falutin’ line of reasoning. But because, owing to short-comings of the education system (more on this astonishing story in due course), not to mention the political process and processes of public discourse, the average decision-maker or influencer is no better than a drunk lying in the gutter, in terms of the analytical tools they are able to deploy.

Much as I want to get on and discuss the other aspects of my agenda to save the planet, I realised, while waking on a rapidly warming day of a sticky British summer (which, fortunately, inductive reasoning suggests is likely to last only a few days more), that I would have to spell out even more carefully how the issue is not just one of biofuels displacing crops into virgin forests. Such displacement is fairly inevitable, but even if it didn’t happen – let’s say the total global area of land being used for agriculture declines even as we produce more biofuels – then there is still the question of what you could do with the land instead of growing biofuels. A point people seem to find extraordinarily difficult to grasp. Sigh! I have a case of the Biofuel Blues. It’s Too Damn Hot, as someone once sang.

A small amount of progress has been made in thinking about how to deal with global warming (henceforth “GW”). A book discussing “Kyoto2″ is due out this week. George Monbiot (and I believe Mark Lynas) is enthusiastic so I looked at the web summary of the idea (if the book is out a few days early, as often happens, I’ll buy it today so I can sit under a tree out of the heat and read it!). The idea represents considerable progress. It advocates a supply-side solution, that is, restrictions on the production of fossil fuels rather than just their consumption. Correct. Targeting emissions alone will not in itself keep any oil, coal and gas in the ground. Much better to limit the amounts that are dug up, or pumped out. And, in conjunction with a supply-side solution, Kyoto2 advocates the use of existing market mechanisms – i.e. the price of oil etc. – to try to influence the whole global economy. Good work.

I too have been thinking along these lines. I too would like to treat the world as one global economy. I’ll comment when I’ve read the Kyoto2 book, but one problem is that we can’t do this. Unfortunately, as I’ve outlined, and even revisited once already, states and trading blocks distort the global economy. Massively. This has to be taken into account. I look forward to reading Oliver Tickell’s book to see if he’s done this.

But here’s what really baffles me. Why, oh why, does everyone advocate short-term – often annual targets for emissions? GW is a long-term problem. Any solution must be resilient through booms and busts, even wars. That’s why I’m Abebooks best customer right now for books on financial crises! If we’re going to try to solve GW through the price of commodities, such as oil, then we have to take account of the fact that demand and supply and hence commodity prices naturally fluctuate considerably.

GW is a long-term problem. Hold that thought.

Back to biofuels. Almost everyone analyses the problem in terms of the annual emissions of growing biofuels. So they consider the displacement of food crops onto other land as a short-term problem. This is fundamentally the wrong way of looking at the problem.

The last time I penned this argument I had Winnie the Pooh talking to Piglet about “100 Hectare Wood”. Very witty it was too, and highly topical just now, since the EU has banned the “acre”. (Sad, but maybe one less unit conversion to worry about). But then I got worried about whether or not Disney Corporation would be happy about a lengthy spoof on their “intellectual property” and wimped out of posting it. (I’ll leave it to another time to discuss whether we actually want a world where our rights to reference our cultural heritage actually are or should be allowed to be restricted in such a way).

The point is that if we have an area of land – say 100 hectares – we could use it to grow trees or we could perhaps use it to grow biofuel crops. The one is the opportunity cost of the other. If you do an MBA (and I recommend you do, since they are clearly not actually teaching how our society works in schools), one of the things you will learn is that for any investment project you have to tally up the costs and benefits of doing it and the costs and benefits of not doing it and compare the two. You may want to compare a number of alternatives.

For example, a project to manufacture widgets may make use of a factory already owned by the company you work for. You might mistakenly base your business case for manufacturing widgets on the cost of the factory being zero. If you did that, though, you would be sadly disabused of your opinion by your company accountant. It would be such a howler that he might even verbally abuse you as well.

Even if you weren’t charged for the factory space through internal company cost control processes you would still have to include in your business case a benefit in the alternative project of not manufacturing widgets. For the sake of argument this benefit would be the rental value of the factory through the period over which it is proposed to manufacture widgets. It is quite plausible that once the opportunity cost of renting the space to someone else is taken into account, it would make little business sense to use the factory to manufacture widgets. It might be much better to simply rent it out. This is the way you have to “run the numbers”. It is elementary.

In an MBA of course, costs and benefits are considered in cash terms. But we can do the same thing with carbon.

We could either grow biofuel crops on our land or we could simply leave it alone and trees would grow. Carbon would build up in the soil because it is not being ploughed. There would be other benefits, aesthetic and practical. All these benefits are positive to the project of not growing biofuel crops. Remember, to work out if the project makes carbon business sense we’re going to compare the two projects – growing biofuels and not growing biofuels – in fact, just as in the example of manufacturing widgets, we will have to subtract any benefits of not growing biofuels from the case for the project to grow biofuels.

When we correctly evaluate the case for growing biofuel crops it is a no-brainer. We could either grow crops for 100 years or grow a forest over that time. Even allowing for the possibility of fire, we can, on average, expect a hectare of forest to store at least 100 tonnes of carbon after 100 years. Once we allow for the energy costs of production, fertiliser and so on, it turns out that, in temperate regions, you will not be able to grow enough biofuel crops on a hectare of land to displace a tonne of carbon emissions a year. Nowhere near.

In tropical regions the case for growing biofuel crops also needs to be assessed in this way. I suspect, though, that, once realistic figures are used for the benefits of allowing forest to regrow (my 100 tonnes/hectare is a deliberately low figure, since the argument against growing biofuel crops in temperate regions is so strong there’s no need to make any potentially contentious assumptions), and for the carbon stored in forest soils, compared to the likely depletion of soils used to support annual biofuel crops, and for the value of water retention and maintained biodiversity, once all these figures are put together, the argument for growing biofuel crops will be seen to be remarkably weak.

This argument is developed further in my Biofuel papers.

I’m hoping that Obama doesn’t have straw for brains and won’t follow the yellow brick road being built by the corn ethanol lobby. Like that of the Wizard of Oz, their vision is an illusion. (Oh, sorry about the plot spoiler!).

Damn, I was hoping to end there, but now I remember I wanted to highlight two policies from Obama’s website:

Expand Locally-Owned Biofuel Refineries: Less than 10 percent of new ethanol production today is from farmer-owned refineries. New ethanol refineries help jumpstart rural economies. Obama will create a number of incentives for local communities to invest in their biofuels refineries.” [I won’t digress now – I’ll explain why “rural economy” is a contradiction in terms some other time].

“Confront Deforestation and Promote Carbon Sequestration: Obama will develop domestic incentives that reward forest owners, farmers, and ranchers when they plant trees, restore grasslands, or undertake farming practices that capture carbon dioxide from the atmosphere.”

Here’s a way out, Mr President-in-waiting (careful with the triumphalism, mate, we had a guy called Kinnock over here once, you may have heard of him). I’m not entirely unfamiliar with the political imperative to find ways to allow your constituency to have their cake and eat it. Here’s my advice: make it a no-brainer for land-owners to choose the second set of incentives over the first. That way you may still be able to tell everyone just what they want to hear! Isn’t politics great?

It’s hot – this flat wasn’t built for today’s climate so woe betide the poor wretch who has to live here in 50 years time. I’m going for a swim. Right now.