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June 27, 2007

Biofuels: Keeping Good Intentions on the Right Path
    by Francesca Rheannon

With the biofuels industry growing by leaps and bounds worldwide, controversy is erupting over whether this important new energy source is truly as sustainable as it claims to be. -- Climate change, energy independence and the environment—as well as social justice issues such as food prices, land use and labor rights—are all factors that enter into the sustainability profile of biofuels. Given both the positives and negatives of biofuels, responsible investors will need to discern how well they conform to real sustainability.

Please support
our sponsorsKeith West is an eighth generation dairy farmer in bucolic Hadley, Massachusetts. He’s looking a lot these days at what’s happening to the market in biofuels—ethanol, to be specific. You might not think that the price of milk has much to do with ethanol, but there is a strong relationship between them.

Lately, milk prices are at an all-time high. There are a number of reasons for that, including a spike in world-wide demand for dry milk. But higher production costs are playing an important role, too. And one of the key costs that’s on a steadily rising course, analysts say, is corn—the corn that dairy cows turn into high quality milk. “With the ethanol plants, our costs are up 40-50% this year,” said West.

In 2006, more than a third of the US corn crop went to ethanol, nearly a 50% rise in one year alone. And the higher price that results from ballooning demand isn’t doing anything to improve the bottom line of the already beleaguered dairy industry in New England.

The rise in corn prices isn’t only affecting milk consumers in the US. It’s also affecting the price of tortillas in Mexico—and thereby making it harder for poor families to put food on the table. The problem threatens sharply higher food prices world-wide, and not just in corn-based foods, warns Lester Brown of the Earth Policy Institute in several articles.

According to Brown, “unprecedented diversion of the world’s leading grain crop to the production of fuel will affect food prices everywhere” because as “the world corn price rises, so too do those of wheat and rice.” As a result, Brown says, mass hunger could result among those populations that are already skirting the edge of starvation.

On the other hand, organizations such as the International Food Policy Research Institute believe rural populations could actually see a rise in incomes with biofuels, because the increase in corn prices could reverse the decline of small farmers world-wide, with widespread multiplier effects in rural communities.

But others are skeptical, arguing that the benefits will accrue to large, agribusiness firms like Archer Daniels Midland (ADM) and Cargill, while small farmers are further pushed off their land and rural environments degraded by increased loads of pesticides, herbicides, and the loss of diversity to monoculture.

The debate about the sustainability of biofuels is complex and wide ranging. Biofuels, like clean-burning ethanol, could lead to major reductions in carbon emissions—but not if they're produced by carbon-belching methods.

For example, experts say ethanol from sugar cane is far more efficient than that produced from corn. Sugar-based ethanol produces 8.2 units of energy for every unit of energy input, making it about 720% efficient. Contrast that to corn-based ethanol, which produces 1.3 units of energy for each unit of input, according a report from Cornell University. Some even believe corn-based ethanol actually uses more energy than it produces.

There’s also a growing concern that biodiesel plantations of soy and palm are already encroaching on major carbon sinks like the Amazon and tropical forests in Indonesia. If that trend is left unchecked, it will only exacerbate global warming.

Potential impacts on soil and water are also an issue: if farmed unsustainably, monocrop plantations of biofuel crops could severely deplete soils, as well as contaminate water supplies and aquatic environments with toxic chemicals and synthetic fertilizers. But if organic or at least more sustainable methods are used, such as intercropping and integrated pest management, soils could actually be improved.

Security concerns also come into the sustainability equation. For example, poor farmers have been massacred and driven off their land by paramilitary groups in Columbia who are betting on huge profits from cultivating palm oil for biodiesel.

But Allen Kahane of Global Foods, who recently put together a major sugar cane ethanol joint venture with Carlyle/Riverstone and Brazilian sugar producing giant Santa Elisa, says that once the technology to mass produce cellulosic ethanol is perfected, efficiencies will increase across the board.

“There’s a lot that we leave on the field that we would be able to use [with cellulosic ethanol]. So it adds to our efficiency,” Kahane said. He credits the current lower-efficiency corn ethanol industry with developing the market for more sustainable biofuels in the future.

Investors will undoubtedly need resources to sort through sustainability issues related to the biofuels industry. One example is a report on the Brazilian bio-ethanol industry put out by the Copernicus Institute at the University of Utrecht, Netherlands. While specific to cane sugar bio-ethanol, it offers guidance for thinking about biofuels in general. Among a long list of criteria are included such measures as greenhouse gas (GHG) balance, support for biodiversity, compliance with internationally recognized labor and human rights standards, and practice of sustainable agriculture.

The Copernicus report exemplifies the kind of analysis that must be done to determine if biofuels are really sustainable. Furthermore, as the report itself states, there is still much that is uncertain: sustainability criteria must evolve as the biofuel industry itself evolves and new issues are identified. Careful consideration of ecosystem needs, social justice, and economic sustainability of all stakeholders will be necessary to avoid following the fabled road paved with good intentions — but leading somewhere we don’t want to go.

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