2d-Generation Ethanol: Comments and Reply

I recently submitted to AOL Daily Finance a story about the distinctions between corn-based and cellulose-based ethanol production.

I'm happy to say that the story received a lot of hits and generated a spirited exchange in the comments section.

Instead of wading into said comments section myself, I'll reply here to some of the more persistent themes.

First, a lot of the commentors complain of what I didn't write. There's nothing there about hydrogen, or nuclear power plants, or natural gas, or shuttles to the moon to mine the resources there. The only answer is the obvious one: I did not set out to write a treatise on The Future of Fuel or anything so all-encompassing. I sought to contribute a small piece to a lot of broader puzzles. There exists a circle of investors and entrepreneurs who are confident a cellulosic ethanol breakthrough is near, and I tried to give them a voice, to encapsulate their way of viewing their market and prospects.

Second, some of the commentors were unhappy about the fact that the second-generation ethanol industry, like its precursor, is in search of public subsidies. To the cry, "No subsidies to anybody!" I am entirely in sympathy. Yet in the meantime, we live in the world "that is the case," as a great philosopher put it. My own view is that some subsidies are worse then others. Some are just plain stupid. A public subsidy that encourages some people to burn what might otherwise be other people's food is in the stupid category.

Third, some of the commentors quarreled with the idea that the creation of corn ethanol raises the price of corn as food. On this point, let me note that the distinction between corn for direct human consumption and corn for livestock consumption hardly matters. The latter simply throws an extra link into the segment of the food chain under examination. Presumably, unnecessary price increases of corn intended for either purpose is a bad thing for the ultimate consumers.

More importantly, a straightforward understanding of supply and demand would indicate that corn prices should have been rising as the use of corn for the production of ethanol moved, as it has in recent years, to 15 percent of the world's total corn supply. Empirical evidence supports this expectation. Indeed, biofuel subsidies may increase the price even of foods that aren't used to make ethanol. If some consumers switch from corn meal to wheat bread as a result of the increase in the price of the former, this increases demand and thus the price of the latter.

The OECD has estimated that "[C]urrent biofuel support measures alone [would] increase average wheat prices by about 5 percent, maize by around 7 percent and vegetable oil by about 19 percent over the next 10 years."

That's just sad.

Finally, some of the commenters (like bnordq) have understood my article and in fact proven generous in their praise of it. They have my gratitude.