The United States has aggressively supported ethanol development and production for the past few years in the name of energy independence and because of its potential as a renewable fuel source. Though skeptics raised serious questions about the cost-effectiveness of ethanol subsidies, biofuel supporters have recently sought to bolster their argument by suggesting that ethanol will rebuild rural livelihoods. However, the recent global food crisis has shone a bright light on flaws in the case for ethanol. It's time to suspend dramatic increases in biofuels targets and instead consider a new approach that balances the needs for food and energy sovereignty around the world.
Energy security is a serious concern for U.S. policymakers, since this country depends on petroleum imports to meet 58% of its fuel needs. In response to the need for alternative energy sources, numerous state and federal programs support biofuels production in the United States. The largest single subsidy for biofuels production is a 51 cents-per-gallon tax credit provided to ethanol blenders (to be reduced to 45 cents-per-gallon in the 2009 fiscal year under provisions in the Farm Bill). The Global Subsidies Initiative estimates total U.S. subsidies for ethanol production at $7 billion in 2006 (about $4 billion of which is from the tax credit) and calculates that subsidies could reach $13 billion in 2008.
U.S. and European energy policies that set biofuel consumption targets are probably driving production even more than the supply-side subsidy support. The 2007 Energy Security and Independence Act increased consumption targets in the earlier energy bill, starting with 9 billion gallons in 2008 and increasing to 36 billion gallons by 2012, of which 21 billion gallons must be composed of "advanced" biofuels. The European Union has instituted similar targets, setting biofuels consumption at 10% of total fuel use by 2020.
Bigger Problems
However, the expansion of biofuels production to increase the supply of transportation fuel ignores the bigger problem of the unreasonably high demand for fuel that U.S. consumers generate. A real solution to U.S. energy security would include measures to reduce fuel consumption through improved vehicle efficiency standards and increases in the availability of public transportation, among other things.
Many U.S. farm organizations have embraced the expansion of biofuels as a new and profitable market for their crops. It's certainly true that cheap commodity prices, supported by the U.S. subsidy system, and driven by a reliance on opening new export markets, created real problems for farmers everywhere. The danger is that a policy primarily focused on achieving domestic energy security and boosting farm profits also has serious consequences for agricultural markets around the world. With the advent of biofuels production and the consequent increases in grain price volatility, developing countries once swamped by subsidized U.S. grain exports now face dire threats to land rights and stable prices as fuel demand competes with food.
During the 1990s, more than 1.5 million Mexican farmers were driven from their land by a wave of cheap corn imports from the United States. The aftermath of that crisis is just as troubling. During the 1990s public support to agriculture in Mexico diminished at the same time that several large U.S. and Mexican corporations gained control over corn distribution. When prices started to rise because of the biofuels boom, those companies hoarded grains in publicly funded warehouses, driving prices up even further to create the "tortilla crisis." The problem in that case was triggered by the abrupt rise in corn prices, but it was also the result of deregulation and the concentration of supply chains.
Market Volatility
While the U.S. government provides support for domestic production of biofuels, it limits potential imports through a tariff of 54 cents-per-gallon on ethanol. This is designed to offset the tax credit, so that U.S. taxpayers do not subsidize imported ethanol. While this measure limits ethanol imports, provisions in the Caribbean Basin Initiative (CBI) and the Central American Free Trade Agreement (CAFTA) allow for duty-free imports of ethanol produced in Central America and the Caribbean. Ethanol produced in other countries but processed in CBI countries is also eligible for duty-free status. This has led to an increase in shipments of "wet" ethanol imports from Brazil to the region, which are then dehydrated and exported duty-free to the United States. As of 2007, imports represented about 6% of national consumption, about half of which was received from CBI countries, but most observers expect this figure to rise in the near future.
While this new market access could create opportunities for Central American producers, it also presents unanticipated threats. ActionAid Guatemala reports a significant rise in land conflicts as large landowners rush to increase sugar and palm oil production to take advantage of the biofuel markets in both the United States and Europe. This has increased the concentration of land ownership, as farmers sell land titles to investors, and land "re-concentration," as large plantations are consolidated and tenant farmers evicted.
Meanwhile, the ambitious new biofuel consumption targets have contributed to extremely optimistic projections about the profitability of ethanol and other biofuels. These expectations have in turn led nontraditional investors to jump into commodity markets, creating volatile swings in prices that have exacerbated the food-price crisis around the world. Corn prices at the Chicago Board of Trade (the principal global commodity futures exchange) increased from an average of $2 a bushel in 2006 to nearly $8 in June 2008 before plummeting to less than $4 a bushel in October.
These wild price swings, and their consequent impacts on world food prices, have been driven in part by speculative investors buying more commodity futures than they used to. While those markets have traditionally served to reduce volatility in prices by locking in prices for set time periods, they are becoming havens for investment capital. These institutional investors aren't tomorrow's ethanol producers; they are managers of hedge funds, pension funds, sovereign wealth funds, university endowments, and investments seeking profitable havens for capital, especially in the wake of the collapse of the housing market. According to hedge-fund manager Michael Masters, this kind of investment rose from about $25 billion in 2004 to $55 billion in the first 52 trading days of 2008. While many of these investors have fled those markets in the wake of the current financial crisis, the impact on food price volatility remains.
The increased renewable fuels targets and speculation go hand-in-hand. While certainly part of the increase in speculation results from fund managers seeking safe new havens for their investments, it is also driven by the expectation that the demand for biofuels will outstrip supply over the next few years. Unfortunately, neither the targets nor the speculative activities take into account the devastating impacts on food prices around the world.
Flawed Policies
The demand for biofuels was an important factor in the sharp rise in food prices around the world earlier this year, both because of its impact on corn prices and because the diversion of croplands into biofuels production led to increases in prices for wheat and other grains. Estimates of the extent of biofuels' contribution to food prices range from U.S. Agriculture Secretary Ed Schafer's assertion it represents only 3% of the price gain, to a report in The Guardian of a leaked World Bank study attributing 75% of the price increases to biofuels. The truth is undoubtedly somewhere in between those two extremes.
Biofuels have cropped up in the U.S. presidential campaign. Barack Obama, who is from the corn-producing state of Illinois, supports biofuel production to increase energy independence. He emphasized the importance of transitioning to second-generation biofuels and is particularly enthusiastic about switchgrass, a native prairie grass, as a more sustainable fuelstock. Switchgrass, like other cellulosic feedstocks, holds promise but is not yet commercially viable.
John McCain, while supportive of the use biofuels, opposes subsidies for ethanol production. He supported Texas Governor Rick Perry's request to lower the renewable fuel targets and is a cosponsor of Senate Bill 3031, which would reduce the use of corn-based ethanol renewable fuels standards to nine billion gallons between 2002 and 2022. "I believe in renewable fuels," McCain said at a rally in Iowa, another corn-producing state, "I don't believe in ethanol subsidies, but I believe in renewable fuels." Instead, he pledged to open foreign markets to U.S. goods and to explore offshore drilling to increase oil production.
Balancing Energy and Food
The general public opinion on biofuels in the United States has swung from wild optimism to increasing concerns about impacts on the environment and food prices. Unfortunately, in an increasingly globalized world, little of this public debate has focused on the impacts of the expanding biofuels markets on food and land prices in developing countries.
Moreover, the current debate misses two underlying problems. First, there's an urgent need to strengthen rural livelihoods and food sovereignty, both in the United States and in developing countries, as even former President Bill Clinton recently acknowledged. Second, we must address our over-consumption and over-reliance on petroleum.
Balancing the needs of our global food and energy systems will require a major shift in biofuels targets and subsidies, as well as new policies to promote healthy local food production around the world. To continue with our current biofuel policies will just lead to new cycles of volatility in prices, investments, and production, to the detriment of consumers and farmers around the world.
Karen Hansen-Kuhn, a Foreign Policy In Focus contributor, is the policy director for ActionAid USA.
