Ethanol - hype, threats and opportunities

News was out a few days ago that Goldman Sachs picked up a $30 million piece of Iogen, which is backed by Shell and is one of the two big cellulose ethanol players (along with Celunol (formerly BC International) http://www.bcintlcorp.com/ of Dedham, MA).

There’s no doubt the hype is growing in the ethanol space – as this article from my brother points out – certainly wouldn’t recommend buying stock at this point. But I think there’s little doubt that ethanol and other biofuels (methane, biodiesel) will play a significant role in a sustainable future – as they already are in Brazil and Sweden.

Another big piece of news in the space is that the IRS just published Form 8911 Alternative Fuel Vehicle Refueling PropertyCredit which provides the first ever federal income tax credit for the installation of E85 fueling systems. It was part of the 2005 Energy Policy Act and provides a 30% federal income tax credit, up to $30,000 per property, to install alternative fuel dispensing systems (this news from the National Ethanol Vehicle Coalition)

Clearly the momentum is building in the US, which is great. There are some criticisms and concerns, however.

First: ‘ethanol takes away from needed food production.’ This is a marginal concern – we subsidize farmers not to grow food, global hunger is not a supply issue, and obviously it’s irrelevant in the case of biomass ethanol (produced from crop residues or other biomass, not necessarily food like corn, sugar cane or beets).

Second: ‘it still emits CO₂.’ This is true, but it theoretically could be a ‘carbon neutral’ process because the carbon from the biomass will be stored in new biomass – so it’s not a violation of Sustainability Principle 1 (substances from the crust). In reality it's not completely true - E85 means 85% ethanol, 15% gasoline, which is sometimes needed for cold starts. Also, currently in practice, ethanol uses fossil fuel inputs for production, transport, agricultural production, etc.

Third: ‘it deprives the soil of nutrients.’ Here’s where it gets interesting. Fritjof Capra (fantastic writer on sustainability) more or less writes off ethanol for this reason. And he’s got a valid point – soil is the basis of civilization, and oil is not the scarce resource of the future – phosphorous is (with Morocco and China holding the cards). Closely related, is the huge issue of unsustainable agriculture and forestry. Regardless of the source for the feedstock for ethanol (corn, sugar, or other biomass), it must be sustainable in terms of growing (without chemical fertilizers and pesticides – Sustainability Principles 1 & 2, substances from the crust, substances produced by society) and harvesting (Sustainability Principle 3, physical degradation). But I think this could be solved in a sustainable way – primarily through closing the loop on nutrient losses from human and animal waste, and implementing large scale composting operations.

A whole-system perspective highlights some of the threats of a large-scale shift to ethanol – and there are more than those addressed here, many specific to various regions (particularly water) – but it also highlights the opportunities. While there are only ~600 filling stations with E85 pumps in the US, that number is growing and that tax incentive will surely help. There are already over 5 million flexi-fuel vehicles on the roads in the US – not a huge number, but significant and growing, with more and more models available (check your VIN # to see if you already own one). Here's a shot of the thesis team - all business with our rented Flexi-Fuel Volvo V50:

The shift to a renewable fuel base will likely happen fast once it reaches a critical mass, as is happening in Sweden, and as it does, it will be vitally important to have this whole-system perspective to ensure that it’s done right. Stay going…