For people in production agriculture, these soaring new sources of crop demand are pretty heady stuff. They are creating ethanol euphoria,

—Keith Collins, Chief Economist, USDA, 2006

Ethanol used to replace gasoline is 200 proof corn whiskey. If it would stabilize the climate, there would be no shame in letting our cars drink good whiskey. But as with most subsidies, the corn-whiskey subsidy likely has more to do with local profits than with global policy. In this case, that would mean production agriculture, ethanol refineries, and as it’s called in the Midwest, ethanol euphoria.

For the past five or six years a controversy has raged around whether corn ethanol is green. Does its production and use, in place of gasoline, reduce greenhouse gas emissions and help reduce global warming. Throughout this debate, one factor has been consistently ignored—the world oil market. As this chapter shows, that changes everything.

As we have seen, conservation and increased supply of non-OPEC oil forced the world price of oil down from $90 to $30 (in 2007 dollars) back in the early 1980s. We also saw that the world oil price stimulated a huge reduction in oil demand. These two dramatic effects also apply to ethanol. Increasing the supply of ethanol works just like increasing the supply of oil. It reduces the world price of oil, and that price reduction increases the world’s use of oil. This is not rocket economics. If something gets cheaper, people buy more of it. So the world oil market translates our good deed—saving oil with ethanol—into more oil use by the rest of the world. Fortunately, as we will see shortly, the increased use of oil by others only cancels about a quarter of our ethanol’s replacement of oil.

Subsidies and Ethanol Mileage

Before tackling the mysteries of the world market, let’s take a look at ethanol as you might buy it at the local gas station. Ethanol will never save you money at the gas pump. On average it costs the same per gallon as gasoline and you can only drive two thirds as far—or slightly less—on a gallon of ethanol.

Paying $3.00 a gallon for ethanol is like paying $4.50 for gasoline, plus you have to pay the subsidies—through income taxes—on one and a half gallons of ethanol to replace one gallon of gasoline. The federal subsidy is 50¢ per gallon. That brings us up to $5.25 to replace a gallon of $3 gas, and that doesn’t count the subsidies for growing the corn. President George W. Bush set a goal of 35 billion gallons a year of ethanol, which will replace 23 billion gallons of gasoline at an extra cost of more than $2.25 per gallon. That’s an extra $50 billion a year, and this goal is now law.

If we’re going to spend that kind of money, it makes sense to shop around. The government should have made a list of all the energy policies we could subsidize, and how well they worked. Instead, the government did not even evaluate corn ethanol, the government’s choice for big bucks. The U.S. Department of Agriculture, which knows a lot about corn subsidies, but not too much about climate change and energy security, did what little evaluation was done. Not surprisingly it looked at the wrong variable—net energy.

What’s “Net Energy” and Why We Don’t Care

The net energy of ethanol is how much energy there is in a gallon of ethanol minus how much human-supplied energy it took to make that gallon. I say “human supplied” because solar energy shining on the corn plants is not counted. The U.S. Department of Agriculture found that it takes 0.73 units of input energy to make 1 unit of ethanol energy, so ethanol’s net energy is 1 – 0.73, or +0.27. So they say the net energy balance of corn ethanol production is 27 percent positive.

Some anti-ethanol professors at Cornell and U.C. Berkeley say the net energy balance of ethanol is negative. But their calculations look biased to me and I don’t buy it. Others come up with a net energy that’s more positive than 27 percent, and so there’s a continuing debate over net energy. But do we care?

Suppose we used coal to run an ethanol distillery, but pumped all of the carbon dioxide from burning the coal deep into the ground and stored it there almost permanently. Suppose it took two units of coal energy to make one unit of ethanol energy.

This hypothetical ethanol has a net energy balance of negative 100 percent—it’s just terrible according to net-energy theory. But it’s very good for the climate because it has zero emissions of carbon dioxide and it replaces gasoline which has high emissions. The ethanol itself has no emissions because its carbon was taken out of the atmosphere by the corn plant, and burning it just puts that same carbon back in the air, so there is no net increase in atmospheric carbon. And remember, the energy to make this ethanol came from coal with all its carbon dioxide captured.

Since the coal used to make the ethanol was not imported, it causes no energy-security problem. So replacing gasoline, 60 percent of which is made from imported oil, with local coal and corn is a real help for energy security.

So in this example, ethanol has a 100 percent negative energy balance, but it’s very good for the climate and for energy security. So, is this ethanol good or is it bad? And why do we have conflicting results? The trouble with the net energy analysis is that “energy” is not the problem. Energy is a good thing. Actually, it’s fantastic. No one wants to walk everywhere. We all prefer using some non-human energy to get around. The only problem is that some energy has bad side effects. But it is the side effects of climate change and energy security that matter, not the energy itself. Energy and net energy don’t matter. They’re not bad. Only the side effects matter.

So we can ignore the net-energy debate. It’s over the wrong question. The real questions are greenhouse gases and energy imports.

Is Ethanol Green?

Does the production and use of ethanol increase or decrease total greenhouse gas emissions? That is all I mean by green, although there are numerous other ecological problems with producing corn ethanol. For example, an article in the July Proceedings of the National Academy of Sciences, tells us that

[Corn agriculture is] a major source of the nitrogen inputs leading to the "dead zone" in the Gulf of Mexico and to nitrate, nitrite, and pesticide residues in well water.

Finding out if ethanol is green by my more restrictive definition requires two steps. First, how much greenhouse gas (GHG) emission does ethanol cause compared with the amount of gasoline, measured by energy. Second what is the impact of U.S. ethanol production on the world oil market?

Corn ethanol has two big GHG problems. It takes a lot of heat to distill the corn liquids into 200 proof whiskey, and that takes a lot of fossil fuel—sometimes that’s coal. Second, corn is the crop that uses the most nitrogen fertilizer, which is made with natural gas. There’s also a problem with gases released by soil microbes because of nitrogen fertilizer.

The report just mentioned in the Proceedings of the National Academy of Sciences adds up all GHG emissions from the production and use of both ethanol and gasoline. The conclusion is that for the same amount of energy, US corn ethanol causes 88 percent as much global warming as the gasoline it replaces. If this seems pessimistic, consider that UC Berkeley's Renewable and Appropriate Energy Laboratory puts this value at 92 percent—even worse. For the world-market part of this analysis, I will use the more optimistic value which says ethanol is only 88% as bad as gasoline for global warming.

Ethanol in the World Oil Market. World market effects are often ignored because it seems that the world is just too big to affect. But, the point of using ethanol is to affect global warming and global energy security. We can’t have it both ways. If we count the beneficial global effects we must also count the problematic global effects. They are all small, but they all add up. The exact effect I’m concerned with works like this:

The Global Rebound Effect

More ethanol use causes

→ less oil to be imported, which causes

→ a lower world “oil” price, which causes

→ more liquid-fuel use worldwide.

This same effect applies to conserving oil as well as to replacing it with ethanol, or even to pumping more oil from Alaska. Consuming a gallon less reduces imports by a gallon just the same as producing a gallon of ethanol, and the consequences follow just the same. In either case I call this the “global rebound effect” because cutting back on the demand for oil reduces its price and causes a partial rebound in the demand for oil. With conservation, there is a net reduction, but it is less than the amount conserved. The effect operates through the oil market, but remember, this is really a market for all liquid fuels.

To grasp the meaning of this effect more concretely let’s work a small example just to see what might happen. Trust me for a moment, that I have chosen a useful example. Suppose that replacing a gallon of gasoline with ethanol results in the world consuming 0.26 more gallons of liquid fuel—mainly oil. In other words, the strength of the global rebound effect from the world oil price being pushed down is 26 percent.

From experience, I know some will say that one gallon of ethanol can have no effect. But this example would work out the same if I said, “suppose that replacing 100 billion gallons of gasoline had a global rebound effect of 26 billion gallons.” That would have an effect on world price and everything would work the same because I am only discussing proportions.

Now I wish to discover the impact of the global rebound effect on GHG emissions. To discuss GHG emissions more conveniently, let’s call the GHG emissions caused by producing and using a gallon of gasoline, “100 percent.” This will serve as our unit of comparison. Just above we learned that replacing a gallon of gasoline with ethanol reduces emission from 100 percent to only 88 percent—a GHG emission savings of 12 percent. In this example we said that this replacement causes a global rebound effect of 0.26 more gallons of gasoline consumed. That increases emissions 26 percent.

The effect of replacing one gallon of gasoline with ethanol is then a 12 percent emissions savings plus a 26 percent increase in emissions. The net effect is a 14 percent increase in emissions world wide. If this is correct, then ethanol is not green. Making and using ethanol increases total, world-wide greenhouse gas emissions.

The 0.26 value used in this example is my best estimate of the actual global rebound effect. (See Rebound Effect) So the conclusion stands. U.S. corn ethanol is not green. The 0.26 value is based on two input values. I took the first one from the International Energy Agency. In its world energy model a 10 percent reduction in net demand causes the world price of oil to fall 15 percent. This is close to what I have found in other models, and it is certainly a modest effect compared with what we saw in the early 1980s. This value is discussed in more detail in chapter 13.

The second input value is the increase in oil use caused by a decrease in the price of oil. I took this from a July 2007 paper by William Nordhaus, a Yale economist and a leading authority on such matters.

The Global Rebound Effect (again)

When conservation or alternative fuel production reduces the demand for oil, this reduces the world price of oil and cause and increase in demand equal to roughly 26 percent of the initial reduction.

This global rebound effect makes it difficult for alternative fuels to break even with respect to global warming emissions, let alone make a large difference. One promising candidate, however, is ethanol made from cellulose. This is the part of plants that we don’t eat because, unlike cows, we have only one stomach. Early indications are that cellulosic ethanol should reduce greenhouse gases much more—possibly 60 percent. With a 26 percent global rebound effect, we would still be 34 percent ahead. That’s not quite half as good as conservation.

Conclusion

When it comes to climate change, all ways of saving oil are worse than they seem before taking into account the world oil market. Ethanol, which seems to reduce greenhouse gases 12 percent compared with using gasoline, actually increases greenhouse gases by 14 percent when the global effects of the world oil market are taken into account. Conservation of gasoline—using less—is still a winner, but it saves only 74 percent instead of 100 percent of the greenhouse gases it appears to eliminate.