Do we need a pollution exporting policy?

It occurs to me that there is a missing piece to the talk about what a future with biofuels would look like. In particular, if carbon-based pollution has a significant social cost – and indeed we discuss a pricing for carbon in cap-and-trade policies – do we need to more clearly regulate this issue in the future?

Biofuels, when successful, might close the gap on overall CO2 emissions. But they still do emit CO2 (and other stuff) when combusted in our cars; it’s still a local pollutant in cities where it is consumed.

Today, ethanol is grown in Iowa and shipped to, say, Illinois for refining then sold in Minneapolis or Chicago. The CO2 was removed from the atmosphere in Iowa, but re-emitted as a pollutant in Minnesota (who suffers all of the local effects).

Does Iowa “owe” Minneapolis or Chicago something for exporting its CO2 as a pollutant? Did these cities assume this risk when they decided to sell Iowa-based ethanol? How would anyone know where the ethanol came from to collect on such a debt? Should Chicago or Minneapolis only allow ethanol that was made nearby?

This is a strange sort of thinking on my part. I don’t know the answer to it and, frankly, I would hate to see what type of policy these politicians would mutate from this. What this scenario illustrates is that there are still issues to be solved regarding how we balance our global environmental opportunities with our local environmental responsibilities. While we all want to be carbon neutral (or, given the name of this blog, carbon-free), there’s always more to consider than just the technological capability.

Fortune article paints 1-D picture

Fortune currently has an interesting article, Soylandia, on the success of the Brazilian soy bean industry. The overall message the story presents is “Brazil is beating the U.S. in soy beans…and they could beat us at everything else”. While there is certainly credence to the success of the Brazilian agricultural market, I think the article is rather one dimensional in its outlook.

Only movies take such an elementary arc in their story lines. This article, while telling the “truth” doesn’t incorporate the entire story of what is going on.  Here are a couple things to think about when reading this article:
Low costs part of the equation
The big hole in the Brazil Ag argument is that Brazil is still a fairly poor country.  While they can produce a lot of ag products to be sure.  But they also don’t have high costs of labor.

Some notes about Brazil’s productivity from the article:

Soybean yields in Brazil have surpassed the U.S. in three of the past six years. Average costs per bushel in the U.S. are about $6.70, including domestic and ocean freight, while Brazilians weigh in at $5.05.

The United States was built this way – relatively high productivity with relatively low wages.  We even still fight about high wages today even though much of the duties of a farm are automated.  As Brazil matures politically and grows wealthier (meaning people can move to cities as has happened in all developed nations) then Brazil will face the same issues.  But they will certainly do well in the mean time.

Not Zero Sum
A strong Brazil is good for everyone.  Obviously what is going on there is shocking to Midwestern farmers and to the U.S. in general.  But the end game of all of this is affordable food for everyone.  The Midwest isn’t going to go out of business over this.  And I love adamame so I know nothing’s going to happen to soy beans.   So the undertone of “the U.S. is in trouble” isn’t really true or relevant.

Given the improvements the article notes on the growing strength of anti-deforestation efforts, the rest of the world will certainly benefit:

Given the Amazon’s recent history of anarchic brutality and environmental mayhem, one would expect Sting and Leonardo DiCaprio to be flying planeloads of eco-activists to Mayor Franz’s doorstep to denounce Lucas do Rio Verde and the other rising agricultural capitals in Mato Grosso. But Soylandia is jacking up production even as it greens itself – or, more precisely, becomes considerably less brown than it was. According to the Brazilian space agency, the Amazon’s annual rate of deforestation fell by 64% between 2004 and 2007. And much of the decline was in Mato Grosso.

Still more work to do
As the citizens of Brazil grow wealthier, they are going to want more freedoms.  Brazil still isn’t a free and open society.  They have their traditional means of governing and making economic policies.  Their oil and ag industries are still pretty closed off to internationals.  So as they grow, they will ultimately have to address this issue as well.  This is a good thing too as it will help their nation to continue its prosperity.

GM parters with Coskata

Below is a video of GM’s Alternative Fuels strategy including the announcement of a partnership with Coskata (skip to 16 Min for that part).

Presentation by Cosan CFO

Cosan CFO Paulo Diniz gave a great presentation on his company recently at Stanford Graduate School of Business (click here to view).

There are two big take-aways from this presentation:

1.  Cosan wants to stay independent.  There have been several big companies to take a swipe at them (including ADM).  But their ability to go public both in Brazil and on the NYSE shows their management quality and dedication to being a global biofuels leader.

2.  They’re looking for new growth opportunities.    Diniz notes that they are able to hedge some of their operation through switching capacity between sugar and ethanol. Some of the waste product is used to produce energy for their facilities.  But the leaves, however, go unused.  While he did not elaborate on this, it seemed to indicate an opportunity for creating cellulose-derived products using this waste material in the future.  While you don’t need a crystal ball for this, it’s nice to have seen an executive of the company make such an insinuation.

Who killed the flying car?

When I was a kid, I never wanted an electric car. I wanted one that flew. Like the Delorean in Back to The Future II. It’s almost 2008 and still no flying cars.

Why is that an important question? Because it underscores that maybe our dreams and our needs aren’t always the same thing. I now know that a flying car would be a really bad idea (if you doubt me, drive on the 405 in Los Angeles and then imagine it in 3D). But perhaps the design challenge wasn’t in making a car fly, but making it as ultra efficient and human-friendly (not just earth friendly) as possible.

That’s the difficulty with what the cleantech industry is trying to do, I think. While we want bigger houses and bigger/faster cars, it is coming at a price. Our environment at large is suffering. Air pollution still causes severe health effects in our cities. And gas is expensive (economically) and costly (politically) .

The electric car wasn’t killed by Big Auto, Big Oil, or SCAQMD.

We killed it.

The Energy Bill Impact

It’s done. It’s signed. The 2007 Energy Bill (officially as HR 6 The Energy Independence and Security Act of 2007) has several far-reaching policies. I wanted to take a look at two important ones: the expanded renewable fuels standard (RFS) and the increased CAFE standard.

Expanded RFS
The Expanded RFS standard, if achieved, could go a long way to reducing our petroleum-based fuel demand. I ran a few numbers using the schedule included in the bill (and the Renewable Fuel Association website) to see what type of investment would be required to meet the volume capacity requirements. If we assume that capital costs for a corn ethanol facility are around $1.50/gallon of annual capacity and that advanced ethanol facility run around $2.50/gallon, we get the following investment amounts:

This is doable, from a magnitude standpoint. It would require a lot of renewed enthusiasm around the industry. It’s important to note, not surprisingly, are that corn ethanol has a limited future and that the future of the industry requires advancements in cellulosic ethanol…right now.

Senate Expands Farm Subsidies

You read that right. The Senate passed 79-14 to expand the farm subsidies. This is clearly a political move to appease the farm states before the 2008 election. But be that as it may, even Senators from those states noted the conflict of expanding farm subsidies during the time of high corn and other commodity prices.

From CNN:

President Bush has threatened to veto the legislation, saying it costs too much and should instead be cutting subsidies at a time of record-high crop prices. He also has threatened to veto a House version passed in July.

White House opposition and criticism from fiscal conservatives has so far had little impact on the politically popular bill.

Farm-state senators deflected several attempts to derail the bill and reduce government payments to large growers. Still, even some from farm country acknowledged the bill doesn’t do enough to trim the government’s massive subsidy programs.

I don’t have much else to say about this. I’m pretty agnostic about farm subsidies. But if the objective is to keep farmers from going broke, the elevated prices we have right now seem adequate for accomplishing that goal. This bill seems ill timed. Support for ethanol and other crop-based biofuels are a means for the government to increase the value of crop land giving farmers more opportunity to generate revenue. This should, over time, eliminate the need for subsidies. Or at least I would think that’s the objective.

But what do I know?

Done – New Energy Bill Passes

The Senate finally passed the latest energy bill. Many provisions remain in it including a 35 MPG CAFE standard, support for 36 Billion gallons of ethanol use by 2022 and more.

From the Detroit News Article:

Senate Democrats stripped out requirements that utilities produce 15 percent of their energy from renewable resources by 2020 and also agreed to drop $21.8 billion in new taxes, mostly on oil companies, to try get approval.

While I understand why the taxes didn’t get imposed, I’m wondering what the sticking point was with a renewable porfolio standard. This would require utilities to use a given percentage of their electricity production from renewable sources (15 to 20% seems to be popular). Many of the states contain RPS standards and are actively pushing to meet them. They are a mix of states (mostly sunny and windy ones of course). While I can understand why a federal mandate would be uncomfortable to some (particularly those who don’t really support the need for renewables). But there seems to be a significant support for it in the country. Maybe it’s just ahead of its time.

Pacific Ethanol falling off a cliff

Pacific Ethanol has been facing some really tough times of late. I reported earlier that Bill Gates’ fund is seeking to sell its shares of the company which have significantly diminished in value in recent years.

Recently, PEIX has halted its construction of its Imperial Valley plant. This is undoubtedly due to the falling ethanol prices and high corn prices affecting its financial performance (which its latest report in November also wasn’t good).

While these issues are common to the rest of the industry, Pacific Ethanol had very high hopes of becoming a market leader. Unfortunately, it doesn’t look like that’ll continue to be the case. While there’s still certainly life left in them, they will continue to be behind the 8-ball until somebody buys them.

Are they worth purchasing?

It’s hard to say. They only have 200 MM gal/yr of plant capacity. There are many players in the industry with that much capacity. They don’t have any particular intellectual property (I’m willing to bet they don’t have the key to cellulosic ethanol hidden in their basement). So an acquisition isn’t so clear at the moment.

But they seem like a pretty determined, scrappy company. I’ll at least give them the benefit of the doubt. We’ll just have to see if they can really weather the storm.