Biofuels Are Dead. Long Live Biofuels!

Story Stream
recent articles

Are you concerned about the environment? Do you worry about our country's dependence on foreign oil?

Welcome to the club.

Do you believe in magic? Have you got a printing press in your basement that spits out dollar bills?

Well then, you must be a member of Congress.

Hailed by environmentalists as the solution to global warming, touted by economists as the key to energy independence, showered by politicians with enough grants, subsidies, and mandates to convince hot-money hedge fund managers and rock star VCs that they could make a killing, the biofuels industry took less than a year to collapse. Even Jimmy Carter couldn't fall on his face that fast when he tried a similar trick 30 years ago.

Isn't it a shame that passing laws justified by the noblest of intentions doesn't automatically guarantee results?

According to the National Biodiesel Board, two-thirds of U.S. biodiesel production capacity now stands idle, stranding billions of dollars in sunk investments. This desperately short risk capital could have been used to launch thousands of new businesses to help us work our way out of this recession. Why did this disaster happen? The cost of production - even with all the tax credits and subsidies - vastly exceeds the price that biofuels can command on the market. How was an error like this made? Shucks, who could have imagined that oil is a commodity whose price goes up and down!

Cellulosic ethanol, the purported solution to the environmental devastation wrecked by corn-based ethanol, remains a high-risk science project awaiting unknown breakthroughs in genetic engineering. Cheap Brazilian sugar cane ethanol can't penetrate the US market due to the tariff barriers erected by Congress. Thriving under this protectionist trade policy, corn ethanol producers can bleed the public treasury to the tune of $5 billion dollars a year in return for those farm-state votes that keep our democracy humming.

This is all for the public good? This is how we are going to save the environment?

Picking emerging technology winners is hard, even for brilliant investors gambling with their own money. Witness the shame of Vinod Khosla, dean of the cleantech venture capital community. According to a federal jury, Khosla and others were defrauded out of millions by a biofuel startup named Cello Energy that claimed it could produce diesel fuel from grass, hay and used tires. I am not making this up. The EPA announced it was going to blend 70 million gallons of Cello's miracle juice into our fuel supply next year. Is this how central planning works?

Do you think our representatives in Washington will own up to their mistake and allow this disastrous bit of malinvestment to quietly liquidate so capital can flow to more sound and sustainable energy initiatives? Has anyone pointed out the consequences of using industrial policy to warp the flow of risk capital when big, synchronized bets like this thought "too big to fail" don't pan out? Might some other carbon-free energy sources like nuclear power get another look?

Fat chance.

The Energy Independence and Security Act of 2007 commands the use of 500 million gallons of Biodiesel in 2009, 650 million gallons in 2010, 800 million gallons in 2011, and 1 billion gallons in 2012. You heard it right, One Beeelion Gallons. No one in their right mind believes that this is going to happen despite the $33 billion dollars in tax credits the biofuels industry is estimated to consume through 2013. Yet this fantasy remains the law of the land.

So, what does Congress do when it finds itself deep in the hole? What it always does after a vocal, campaign contributing constituency gets a lip lock on the flow of government largesse. Keep digging!

Twenty-two Congressmen from both parties recently sent a letter to President Obama demanding that he issue an Executive Order to "provide greater certainty for the 2009 and 2010 volume mandates for biomass-based diesel." The urgent rationale for scaling up a business that has been proven not to work? To save the jobs of 29,000 people that this poorly thought out industrial policy sucked into an employment black hole.

Will the biofuels lobby get its way? Follow the flow of campaign contributions and you will get your answer. All the industry needs now to build a cover story good enough to satisfy the craven journalists ready to promote any expansion of government control of our economy is an economic analysis from a Nobel Prize winning New York Times columnist suggesting we pay unemployed biofuels workers to "sequester" all that carbon by pumping biodiesel into the strategic energy reserve.

When will we stop pouring billions of dollars we don't have into public policies that are proven failures? When will scandals like this get covered by the press, naming names of the Congressmen and campaign donors linked along the money trail? When will Congressional actions be measured not by stated intentions but by actual results?

When pigs fly.

Bill Frezza is a fellow at the Competitive Enterprise Institute, and a Boston-based venture capitalist. You can find all of his columns, TV, and radio interviews here.  If you would like to have his weekly columns delivered to you by e-mail, click here or follow him on Twitter @BillFrezza.

Show commentsHide Comments

Related Articles