The biofuels market is expected to grow four-fold globally in the next decade, from $20bn to $80bn. In the US, the president and Congress are both seeking mandated targets to increase biofuels usage five-fold, from a target of 7.5 billion gallons in 2012 to 35 billion gallons by 2017. The 2012 target may be reached three years ahead of schedule, mostly due to ethanol.

But the current US reliance on corn-based ethanol does not appear to yield optimal results, for the following reasons:

• It takes 0.8 British thermal units (BTU) of gas, oil or coal to produce 1BTU of corn-based ethanol. For cellulosic ethanol, such as that made from switchgrass, only 0.2 BTU is required.

• Corn ethanol emits about a third less greenhouse gas (GHG) than gasoline, but cellulosic ethanol approaches zero GHG.

• The surge in demand for corn may soon lead to higher food prices, as meat companies and corn syrup users pass along ethanol-inflated corn prices. This is already seen in Mexico, where the poorest are being priced out of buying tortillas.

• The viability of corn-based ethanol depends on the US’s 54 cent per gallon tariff on ethanol imports. The 100 or so US ethanol plants are doubtless counting on trade protection and government subsidies to make their business plans compute.

Given these challenges, even under the banner of energy self-sufficiency, the current corn subsidy approach to ethanol may not be sustainable. For example, some analysts suggest:

• Dropping the tariff on imported (especially cellulosic) ethanol to open the US market to a mix of global suppliers and new technologies and to create energy security by diversifying the source of suppliers. It is easier to raise capital for a plant if you know the US market will be open for business.
• Growing ‘energy crops’ – cellulosic, non-food plants – on less desirable agricultural lands to relieve pricing pressure on corn and farmland and still help meet home-grown, self-sufficiency goals.

At some point, consideration may be given to these alternative policies to build a more robust, more economically efficient and more environmentally friendly ethanol supply chain. But the installed base of rural US senators and an increasing number of venture capitalists with a stake in the current arrangements ($800m-plus) may combine politically to make it difficult to change course.

Daniel Malachuk works with business and government leaders on global direct investment strategies. He has advised many of the world’s leading companies and served in the public sector as director of White House operations.

E-mail:malachuk@oxford-analytica.com