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The great green rush

By Darryl D'Monte

Everyone -- including venture capitalists -- seems to be jumping onto the global biofuels bandwagon. But the ethanol needed to fill an SUV just once requires 200 kg of corn, which could feed a person for a whole year

If venture capitalists -- not necessarily known for their 'green' proclivities -- start investing in biofuels, it would appear as though they had finally seen the light and realised there are greenbacks to be made in clean technologies, now that the world is belatedly waking up to the problem of global warming. If, in addition, those who have made a killing in the share market follow suit, under normal circumstances it would send everyone scurrying to uncork the champagne.

Led by California-based Vinod Khosla, who made a fortune as a founder of Sun Microsystems, at least four rupee billionaires are taking a stake in biofuels in this country, which are being seen as the "free world's" answer to fuelling cars in an era of spiralling oil prices.

At a Delhi summit on sustainable development a couple of years ago, Khosla made a strong pitch for biofuels, stressing the need to reduce reliance on "unstable" oil producers like Sudan and Nigeria (he was curiously silent about Saudi Arabia ). In Pune last year Khosla made a case for the government entering into long-term contracts to import 'gasohol' from Brazil -- the world's largest producer, converting half its sugarcane into this automobile fuel.

There are two kinds of biofuels in the world. Ethanol, which is produced in larger quantities, is made from sugarcane or corn. In his adopted home country, Khosla advocates the cultivation of a grass known as miscanthus to provide the raw material -- cellulose -- for biofuels. Biodiesel is made from a wide range of biomass like oilseeds, wood and farm waste.

Taking their cue from Brazil and the concessions the US government is extending to ethanol producers, Indian financiers are investing in biofuel equipment companies like Praj Industries in Pune and Nandan Biometrics in Hyderabad . They are also investing in start-up biofuel companies, in the expectation that these will prosper in the years ahead.

Other Indians too are eyeing the market in the US and elsewhere. C Sivasankaran, who sold his cell phone company Aircel to a Malaysian conglomerate for over $ 1 billion, invested $ 200 million last year to set up E85, which produces ethanol in Raleigh , north Carolina .

Khosla has backed a Brazilian renewable energy company and also made investments in a company formed by two Russian scientists to produce renewable chemical products. "It's not very often that we see a new market opening," he says. "It would be worth hundreds of billions of dollars if we can replace petroleum." No wonder that biofuels are being seen as one of the hottest investments globally, after IT and biotechnology.

Renewable energy, as a broad category, is an area where the government in this country has been several steps ahead of private investors, although the Ministry of Non-Conventional Energy Sources appears to be somewhat dormant of late. The exception is wind energy, where private companies like Suzlon and, earlier, NEPC-Micon, made huge inroads into both the domestic and global markets. However, domestically, their success is largely due to the huge concessions, like tax write-offs and depreciation benefits, which the finance ministry extends to them.

The government does do its bit to support biofuels. Four years ago, the petroleum ministry compelled nine states to sell petrol blended with 5% ethanol, but the initiative had to be postponed after two successive crop failures led to a sugar shortage. The Planning Commission's Biofuels Mission plans to supply a fifth of all diesel from this alternative source by 2012, which appears excessively ambitious considering that ("dirty") diesel fuels eight out of every 10 vehicles in India .

Automobile manufacturers too have got into the act. Daimler-Chrysler India has conducted road trials on its biodiesel cars; Mahindra and Mahindra has done likewise for commercial vehicles. Tata buses have already been running on biodiesel, and Reliance has bought large areas to plant jatropha, the "wonder weed" whose seeds yield biodiesel.

Since jatropha can grow on degraded land, everyone in the biofuels business sees this as a win-win solution. Pune University 's geography department is being funded by the Indian Space Research Organisation (ISRO) to undertake remote sensing studies to identify suitable wasteland for jatropha cultivation.

But before the euphoria gets the better of us, several caveats are in order. Two US economists fired a powerful salvo in the recent issue of Foreign Affairs , with an article titled 'How biofuels could starve the poor'. They cite how President Bush, by no means a green warrior, in his latest State of the Union address, said he wanted to quadruple production of renewable car fuels by 2017. The problem is that while Brazil , the world's leader, uses cane, the US employs corn that is a staple food in many countries.

"In agricultural terms, the world appetite for automotive fuel is insatiable," says Lester Brown, founder of the Worldwatch Institute in Washington . "Investors are jumping on the highly profitable biofuel bandwagon so fast that hardly a day goes by without another ethanol distillery or biodiesel refinery being announced somewhere in the world. The amount of corn used in US ethanol distilleries has tripled in five years, jumping from 18 million tonnes in 2001 to an estimated 55 million tonnes from the 2006 crop. In some US Corn Belt states, ethanol distilleries are taking over the corn supply. In Iowa , a staggering 55 ethanol plants are operating or have been proposed. Once built, they would use virtually all the corn grown in Iowa .

"In Asia, China and India are both building ethanol distilleries. In 2005, China converted some 2 million tonnes of grain -- mostly corn, but also some wheat and rice -- into ethanol. In India , ethanol is produced largely from sugarcane. Thailand is concentrating on ethanol from cassava, while Malaysia and Indonesia are investing heavily in additional palm oil plantations and in new biodiesel refineries. Within the last year or so, Malaysia has approved 32 biodiesel refineries, but recently has suspended further licensing while it assesses the adequacy of palm oil supplies."

The US produces 40% of the world's corn and accounts for half the total exports. It is estimated that the ethanol needed to fill an SUV just once requires 200 kg of corn, which can instead feed a person for a whole year. Brown cites data to show that the increased global demand for grain in 2006 was 20 million tonnes; 14 million went towards ethanol, leaving only 6 million to feed the world. Brown warned that last year the world had just 57 days worth of foodgrain as stocks, a perilous situation should there be a sudden drought or other catastrophe.

Last year, the price of flour in Mexico for tortillas -- that country's equivalent of chapattis -- doubled: 80% of this flour is imported from the US . According to the International Food Policy Research Institute (IFPRI) in Washington , this 'cornucopia' will raise global corn prices by a fifth by 2010, and 41% by 2020. Cassava, which is consumed by the poorest in sub-Saharan Africa, Asia and Latin America , will rise by a third and 135% by the same two deadlines.

The prices of oilseeds, which include soybean, rapeseed and sunflower, are similarly expected to rise precipitously. The World Bank cites that when world prices of food staples rise by 1%, the calorie consumption of the world's poor declines by 0.5%. IFPRI estimates that the insatiable thirst for automobile fuel could drive 600 million more people into chronic hunger by 2025, making nonsense of the UN Millennium Development Goals set for a decade earlier.

The two Foreign Affairs contributors are no critics of the market but point out how the ethanol industry is subsidised by the US government. In 2005, corn producers received nearly $ 9 billion directly. The government extends a tax credit of 51 cents per gallon of ethanol. The European Union, which produced 80% of the world's biodiesel in 2005, mainly from rape and sunflower, also subsidises this fuel, as well as ethanol made from a combination of sugarbeet and wheat. The authors argue that the biofuels market is distorted by politics and the interests of a few large companies. For example, former Vice President Hubert Humphrey championed the cause of Archer Daniels Midland Co, the largest ethanol producer in the US , when he was a Minnesota senator.

There are two other considerations that militate against biofuels. Despite all the subsidies and other benefits extended to the industry in the US , even if its entire corn crop was diverted to cars it would only replace 12% of current gasoline consumption in that country. Hence, the climate change benefits are by no means as great as its proponents make out. The total energy needed to produce alternative fuels is only slightly less than the energy they deliver, though better than the negative 'net energy' of petrol and diesel. Biodiesel also emits nitrogen oxide, which is a greenhouse gas. And the pollution from industrial-size plantations of corn and soybean is already well documented.

Many of these criticisms may not appear to apply to the cultivation of jatropha on degraded land. If this plant were to be grown by small farmers on marginal plots and then sold to ethanol distilleries -- an equivalent that comes to mind is the cooperative dairy system promoted by Amul in Gujarat -- it would be a big advance. However, as moves by Reliance indicate, industry will always opt for large-scale cultivation, which not only deprives the poorest of their common property resources but is also environmentally damaging since it will employ scarce water and pesticides. As it is, the per capita protein intake of people in this country is declining. The conversion of large tracts for automobile fuel rather than food or cooking fuel will impoverish the poor further.

Most of all, if combating climate change is a self-professed priority in the drive to produce biofuels, what about the mania for using motorised transport that the use of alternative fuel encourages? Close on the heels of the Rs 1 lakh car being manufactured by the Tatas somewhere in West Bengal, foreign automobile makers are queuing up to enter the Indian car market -- sooner rather than later, the biggest in the world -- with models worth around that much. This may sound like a bonanza for the middle class, but what will it do to emissions that are already well over every limit?

Environmentalists like Lester Brown and Jonathan Lash of the World Resources Institute in Washington believe that hybrid automobiles, which switch from petrol to electricity, are the answer for the future. But if everyone has even a fully electric car, there is going to be such mayhem on the roads, particularly in the congested cities of developing countries, that no one will be able to go anywhere.

Finally, since the craze for biofuels is being driven by investors these days, there is a salutary lesson from the experiences of 1973, when Arab oil producers raised prices sharply. For a few years after that shock there was a flurry of investments in renewable technologies like wind, solar and mini-hydro. Once the supply of oil eased, the incentive to invest in these technologies evaporated, and the world lost the opportunity to make breakthroughs on this front.

While oil companies are seeing the writing on the wall, and some like Shell are investing in renewables -- BP (formerly British Petroleum) has even reinvented itself as "Beyond Petroleum" -- they are quite canny about the driving force behind biofuels. It is a heady mix of politics (an aversion to despotic Arab and left-wing Latin American oil-producing regimes) and economics. As regards the latter consideration, a perceptive observer like Vikram S Mehta, Chairman of Shell in this country, recently pointed out in his column in The Indian Express that the current mania is only being fuelled by high oil prices. Were this to change, though there is every indication to the contrary, through demand management or global caps on emissions, investors may no longer make a beeline for this technology.

InfoChange News & Features, July 2007


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