The first ethanol bubble bursts, what now?

Over the weekend there was a spat of articles about slumping ethanol prices and the end to boom days in the ethanol industry (WSJ subscription required). As the articles point out, the slump is caused by explosive growth in production capacity that has raced ahead of federal mandates and distribution capacity. Most industry observers that I know has anticipated this for a while now. A bubble has burst, and the interesting question is what happens now.

I think we can predict consolidation. Inefficient or poorly financed plants are already "under deathwatch." A lot of the plants on the drawing board will be postponed or scrapped (e.g. see this ditty about the demise of BioTown, USA). A lot of recent arrivals to the sector will loose their shirts. But in the end the industry will probably stronger for the shakeout. After all, the Internet did not slip into obscurity after 2002.

In a worst case scenario, the losses could be large enough and broad enough to take the steam out of clean tech investing generally, at least for a while. One hopes that investors separate conventional corn ethanol from advanced biofuels as Katie Fehrenbacher argues over at Earth2Tech. To stop global warming, we need biofuels to work and for the industry to be much larger than it is today.

Another outcome we can count on is increased pressures on Congress to increase the renewable fuel standard. As I've mentioned before, the Senate has adopted a 36 billion gallon mandate that would have to be reached by 2022 but it includes anemic environmental safeguards and performance standards. We were successful in keeping the House from adopting an RFS, but it is almost inevitable that if and when the Senate and House energy bills are reconciled in conference, the final product will include an RFS. So this report from E&E New PM (subscription required) that Senator Reid wants name conferees this week should be no surprise.

My mantra these days is that biofuels can be good or bad and our policies will determine which more than technology breakthroughs (they're necessary but not sufficient). The RFS is the best opportunity to start making sure that biofuels are good for the environment. The popping noise in the ethanol sector are going to put a new fire in the politics and hopefully make the industry more willing to accept new standards and safeguards. See this fact sheet from NRDC and this community fact sheet to see what we're pushing for.

About the Authors

Nathanael Greene

Senior Policy Analyst, Power Sector, Climate & Clean Energy Program

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