As any reader of this column likely knows all too well, the U.S. ethanol industry is facing some major issues today. The one we hear the most about is indirect land use change and its impact on calculation of greenhouse gas (GHG) emissions from corn ethanol. More on that later. I want to start with what I think is the biggest issue facing the industry today – the blend wall.

Many have talked about possibly hitting the blend wall some time in 2010-11. I think we have been at the blend wall for many months already. We cannot blend 10 percent everywhere for many different reasons – infrastructure, evaporative emissions rules in summer months, lower blending limits in California, etc.

So the current situation is that the industry is capable of producing much more corn ethanol than the market can technically absorb. This is a regulatory limit – not a market condition. We have too much ethanol chasing a limited market. The impact is that all the excess supply drives the price down to the break-even price with corn. Less efficient producers shut-down, reduce production, or go out of business. That winnowing process brings supply back down to the blending limit – the blend wall.

We are there, and the ethanol industry has nowhere to go without an increase in the blending limit. What about E85? It is tiny and cannot grow fast enough even under the most favorable circumstances to help much. Only 2,000 of 160,000 service stations in the country can dispense E85. Only about 8 of 300 million vehicles are flex-fuel capable of using E85. These numbers cannot grow fast enough to matter much in the next five years.

What does this mean for the biofuel of the future – second generation ethanol? It is dead on arrival. There is no room at the inn. Corn ethanol is cheaper and will completely fill the blend limit leaving no space for second generation ethanol. That is one reason there is more talk today about non-ethanol second generation biofuels.

The possible change to E15 buys some time. In the Midwest, for example, where most fuels are blended at or near 10 percent, it would mean a 50 percent increase in demand. That is huge for the corn ethanol industry, but it does not leave a lot of room long-term for cellulosic based ethanol. There are many factors that must be considered in making the blend rule decision, and I’m not advocating a particular position. I’m just saying the decision has huge implications for the ethanol industry.

The other big issue facing biofuels is GHG emissions associated with land use change. According to the EPA draft rule, there is no problem for cellulose-based biofuels. The problems are corn ethanol and biodiesel. All current and under construction corn ethanol production is grandfathered, so the regulation does not apply, but the issue is still relevant.

The argument on land use change is that if we divert corn from feeding hogs to feeding ethanol plants, the hogs still have to be fed. That corn will come mainly from increased corn grown in the U.S. It may be from decreased soybean acreage, or reductions in area for cotton or wheat, or even converted pasture. Let’s suppose it comes out of soybeans that in turn displace cotton. Then more cotton has to be grown somewhere to replace lost cotton production. As the displacement effects ripple through the global economy, ultimately there may be pasture plowed under or deforestation to accommodate the increased demand for corn for biofuels. These changes result in significant release of carbon into the atmosphere thereby negating some or all of the carbon sequestration benefits when the corn was grown.

There is little doubt that some land use change occurs. You cannot take one-third of the U.S. corn crop for ethanol and argue there will be no land use change induced by that shift. The question then is one of measurement. Can we accurately measure the land use change induced by increased U.S. corn ethanol production? Of course, we can measure the change. Our economic models can be simulated with and without biofuels, and the changes estimated. But how much uncertainty is associated with these estimates? Are they accurate enough to use in setting fuel standards? My answer is that it depends on how you are going to use the information.

The U.S. Renewable Fuel Standard is what I call a threshold standard. Congress has mandated that more renewable fuels be used than the market would provide. One of the reasons Congress established that mandate was to reduce greenhouse gases. It is entirely appropriate, then, that the government be able to answer the question – has the mandate reduced GHG emissions? Have the biofuels met the threshold established by Congress? Yes or no? End of story.

In my view, a low carbon fuel standard, as enacted by the State of California, and being considered by other states and regions, is a different story. The low carbon fuel standard requires that the carbon content for each possible fuel be estimated with precision since value will be attached to the estimate. While I firmly believe that the GHG emissions estimates we have provided are the best possible estimates science can provide today, I have serious reservations whether these or any other estimates will be good enough to guide a low carbon fuel standard. With a low carbon fuel standard, every percentage point change is potentially worth millions of dollars. That would seem to call a degree of accuracy that may not be possible for any fuel – biofuel or otherwise.

So on this issue, my view is that land use change is real, and it is important to determine if we are generally meeting GHG reduction objectives embedded in national policy – the Congressional threshold approach. However, using life-cycle measurements to establish fuel value, as in a low carbon fuel standard, is fraught with difficulties that go well beyond the land use change issue.

About the Author:  Wally Tyner is a Professor and Energy Economist in the Department of Agricultural Economics at Purdue University.