Defending Tomorrow's Ethanol Today - Q&A
Recognizing that the arguments for advanced ethanol as well as the challenges facing producers are unique from those of first-generation producers, Brooke Coleman and the Advanced Ethanol Council have been charged with educating policy makers on the importance of maintaining the commitment to commercialize next-generation biofuels. AEC member companies face an uphill battle to develop economically viable production strategies amidst a constrained capital market. Add to that a contentious policy battleground featuring open calls to waive the vital production waypoints established in the renewable fuel standard (RFS).
Your biography points to time spent predominantly on the coasts, yet you’ve been working in renewable fuels for nearly 15 years. How did you get involved in an industry that was classified as regional and championed largely by advocates and policy makers from the Midwest?
Four letters. MTBE (methyl tertiary butyl ether). One second, I was leading an effort in California to ban MTBE to protect drinking water resources; the next second, I found myself in the middle of a national debate about ethanol versus MTBE. I did not realize at the outset that I was wading into a 100-year battle between ethanol, methanol and petroleum. But I realized very quickly, both from an environmental and economic perspective, that we are better off making biofuels from plentiful domestic resources than buying petroleum from dwindling foreign ones. But I get the insinuation, and it is largely true, people on the coasts generally have no clue when it comes to agriculture and land use (even while they seem to have all the answers when it comes to saving these valuable resources).
The drought certainly brought out the opposition to the industry and the RFS in full force this summer. What is the industry’s strongest counter to claims that ethanol production should be curtailed in times of tight supply?
It really comes down to a simple tradeoff. If we use less ethanol, we probably get a very small reduction in grain prices, but we take high-octane fuel out of a highly constrained liquid fuel marketplace, which will raise gas prices and send a terrible signal to investors in advanced biofuels. At some point, though, we need to stop refuting and start going on the offensive. The livestock industry is not getting its $2 corn back with oil prices at the new equilibrium. What a waste it would be to backslide on biofuels in pursuit of the fantasy that $2 corn might come back.
Parties obligated to buy gallons of advanced ethanol like cellulosic ethanol are quick to point out that the industry hasn’t yet delivered the volumes they are required to purchase. With a handful of cellulosic facilities under construction, how soon will this change, and why are these volume requirements so important to continue defending?
First of all, let’s frame the emergence of this industry properly. RFS2 was signed just five years ago. Going from the laboratory to commercial deployment is difficult enough in five years without a historic global recession to completely paralyze lending markets. But, to be sure, the first wave of plants is expected to come online this year. So 2013 should be the year that we produce commercial gallons. And that’s a heck of an accomplishment given the circumstances. As for the second question, the issue is off-take. Preserving the targets sends a signal to the industry that they should plan on using the fuel, which ultimately translates into off-take agreements with cellulosic biofuel producers and private sector investment to produce those gallons. In the ideal world, we do not need blending targets to bring our fuel to market. But in that world, fuel markets are competitive, price-driven and reward innovation. It’s a wonderful ideal, but it’s not reality. If we are going to fix the OPEC/foreign oil dependence problem, it’s going to take market-forcing mechanisms like the RFS. Being passive is not going to change anything.
Is there a historic precedent for the rise of a replacement for such a well-entrenched energy incumbent like petroleum-based fuels? If so, what are the lessons to be learned from it?
Ethanol is arguably the most disruptive alternative fuel in the world. But what ethanol has accomplished to date is totally different from what we aim to accomplish. Ethanol use exploded because there was a massive void in the marketplace (MTBE) in combination with federal policy (the Clean Air Act, and later, RFS1) that basically ensured ethanol would replace MTBE. In addition, the regulatory and market barriers for 10 percent ethanol blends were small in comparison to those we face today. It was a good choice, but it is also true that incumbents ultimately decided to cede the MTBE markets to ethanol, because MTBE was deemed by U.S. courts to be a defective product and blenders needed the octane. So lesson No. 1 is when the political, market and regulatory stars align, energy portfolios can be overhauled in a very short period of time. Now, ramping up to 20 to 30 percent ethanol market share is a different animal. In the immediate term, we need to protect the RFS and take the bias for incumbents out of the U.S. tax code. Without that, we are not going to get where we want to go. But more broadly, we need to accept as an industry that we are battling with our customers for market share, and act accordingly.
Act accordingly? Can you expand on that?
While the oil industry continues to be our primary customer base and frequent business partner, their trade associations and affiliated third parties are trying to bury us alive. If the oil industry has no problem compartmentalizing everyday business propositions and the territorial realities of protecting and expanding market share, neither should we.
Why was it important for advanced ethanol producers to have an industry voice that was unique from the associations already advocating for ethanol producers?
The formation of AEC had more to do with concerns about the discussion about second-generation biofuels than first-generation biofuels. Not all advanced biofuels are created equal, and different types need different things to excel in the marketplace. I think the AEC founding companies felt like our story was not getting properly amplified and, in some cases, was getting distorted to serve the interests of other advanced biofuels. Advocating for the entire advanced biofuels industry, for example, is easy when policy makers are asking only general questions. But when someone asks how to reform a $2 billion biofuels program, you better have someone at the table who cares about your stuff and is not weakened by a conflict of interest. That’s the gist of it.
When you are speaking with policymakers who aren’t supportive of the industry, what reasons do they use to support their positions?
Not surprisingly, it’s the issues our adversaries work so hard to put at the center of the political discussion about biofuels. Grain and food prices, livestock interests, and in some cases, ecological concerns like land use. The problem is, it’s not good enough to have good answers for each of these questions because in politics, perception is reality. The livestock industry may be barking up the wrong tree when it comes to the cause of higher feed prices, but if they are convinced and vocal, we have a political problem.
You once noted that the first lesson you learned in law school is never allow your opponent to control the narrative of any argument. What is the narrative you most often see industry opponents trying to establish about biofuels?
It’s a long list. Oil prices are the primary cause of higher food and grain prices, yet they set the parameters of the debate with food versus fuel. Unconventional sources of fossil fuels are the primary threat to the future health of this planet, yet it is biofuels (via indirect land use change) that need to be avoided. You have to give them credit. Incumbents protect their market share well and use third parties to do it. But the biofuels industry needs to learn from it, stick together and start playing some offense, because we are on the right side of every issue involved, from food prices to land to subsidies.