The biodiesel/ ethanol debate is heating up: What should investors conclude?

Cleantech investors have been watching with interest in recent days as the debate over the "net energy benefit" of plant-based fuels such as ethanol and biodiesel has heated up.

A couple of weeks ago, researchers at Cornell and UC-Berkeley released a report in which they concluded that "there is just no energy benefit to using plant biomass for liquid fuel... These strategies are not sustainable." The researchers examined ethanol production from corn, switchgrass and wood biomass, and biodiesel from soybeans and sunflower, and concluded that in every case it requires more fossil fuel-based energy to make the fuel than the fuel itself then carries -- a net negative energy benefit. Thus, the researchers conclude, agriculture-based ethanol doesn't make sense.

Coming as it did in the midst of a legislative battle over an energy bill, in which significant subsidies are at stake, the response (particularly in corn-growing regions) has been predictably swift and forceful. Newspaper and journal editors have attacked the study (reg. req'd for link), ethanol producers have cited other studies that reached different conclusions, and lobbyists and politicians have also had their say.

This study and the ensuing public debate has been confusing for cleantech investors. The cleantech investing strategy is about backing efficient technologies ahead of looming resource trends, and for many this study throws into doubt that ethanol and biodiesel are just such efficient technologies. But the counterarguments are also equally compelling, and it is hard for observers to gain clarity on the issue. Especially as investors have recently backed biodiesel and related technologies, I've heard a lot of questions about the report being asked by both investors already involved in cleantech and those still taking a look at the industry.

This site is not a venue for weighing in on such a debate on either the science or political issues. But there are several things that cleantech investors should keep in mind as they watch the action unfold:

• First and foremost, this is a political debate. While science is being used, both the pro-ethanol and anti-ethanol scientists and pundits who wrote the controversial report and the above linked columns are clearly motivated in some not-insignificant way by a desire to influence the current energy bill efforts. As one of the report's authors (Pimentel) says, "The government spends more than $3 billion a year to subsidize ethanol production when it does not provide a net energy balance or gain, is not a renewable energy source or an economical fuel." Subsidies are clearly uppermost in this researcher's mind. Investors need to view both sides' arguments with a grain of salt given this dynamic.
  

• While this report was released recently, it is just the latest in a long-running set of similar reports and studies. Here's an example of a 1995 study with some of the same factors and calculations, and these same types of studies have been coming for years before this one, on both sides of the debate. (Here's another link to the same study that purports to juxtapose some of Pimentel's results, for those curious, but I cannot vouch for the trustworthiness of this site, or the source of their figures and comments, so take it as you will). Investors shouldn't think that the recent uproar is a result of significantly new information.

• Regardless of the ultimate truth about the net energy benefit of liquid fuels as derived by those crops and processes covered by the recent report, there are a lot of other potential sources of biomass for biofuels that are very different. The Pimentel report appears to study only a few selected fuels for which crops were specifically raised. However, in recent years investors have backed biodiesel-related startups that use waste food grease, agricultural waste, and even emissions-fed algae as biomass. Biofuels sourced from such wastes may very well be more efficient than fuels from crops grown solely for the purpose. Investors shouldn't draw too many far-reaching conclusions about the use of biofuels in general from these specific studies.

In short, there is a lot of noise right now about the value of biofuels, but the debate is not new, is often influenced on both sides by political factors, and is built around a narrow scope of technologies. Cleantech investors shouldn't let the current debate confuse them or otherwise affect their existing point of view -- whatever it may be -- about the investibility of biodiesel and ethanol technologies.