Introduction

Biofuels are all the rage these days. Clean-burning motor fuels made from homegrown crops are rightly seen as a potential policy twofer: An answer (or at least a partial one) to the twin problems of oil addiction and greenhouse gas emissions from cars and trucks. Even President Bush, a recalcitrant by any measure on energy and environmental policy, has lately been peppering his speeches with mentions of switchgrass, wood chips, and other possible ingredients in the biofuels of the future.

Who can blame him for jumping on the bandwagon? There are in fact myriad reasons to promote biofuels like ethanol, biodiesel, and the coming generation of so-called "cellulosic" variants. For starters, biofuels are practical alternatives to oil. Unlike, say, hydrogen fuel-cell vehicle technologies -- which have only distant potential to be widely commercialized, and which would likely require a whole new service station infrastructure -- expanded use of biofuels will require minimal market adaptation. Corn ethanol already accounts for about 3 percent of the American automotive fuel consumption. Most car engines, without any modification, can run on a blend of 90 percent gasoline and 10 percent ethanol. And carmakers have built 5 million "flex-fuel" vehicles than can run on an increasingly popular blend of just 15 percent gasoline and 85 percent ethanol, known as E85. Meanwhile, most diesel engines manufactured since 1992 -- including the big-rigs, tractors, and other machines that do most of the nation's heavy lifting -- can run on biodiesel brewed from soybeans, peanuts, used cooking fats, animal fats, cottonseed, or canola.

Then, of course, there are the environmental benefits. Unlike gasoline made from oil, which releases carbon dioxide (CO2) into the atmosphere when it is used in internal combustion engines, biofuels are "climate-neutral." Burning them does not add new greenhouse gases to the atmosphere, since the growth and destruction of the crops that biofuels are made from is part of the natural cycle of CO2 absorption (during growth) and release (during destruction or decomposition).

Nearly all of America's farms, rangelands, and forests, moreover, have the potential to grow plants that can be converted into biofuels. This offers the possibility of injecting new life into the U.S. agricultural sector. Even more broadly, producing fuels domestically instead of importing them from abroad will keep the profits at home, spur new investments, and create jobs -- not just in the farm sector but also in processing plants and distribution systems. Industry-led studies estimate that new demand for ethanol helped create 153,725 U.S. jobs last year -- 19,000 of which were in manufacturing. Rural communities would stand to benefit the most from ethanol production because farmers own one-half of all existing ethanol refineries.

The Progressive Policy Institute (PPI) shares proponents' enthusiasm about the great promise of biofuels. But PPI believes policymakers must temper their expectations with two important caveats, which should have a direct bearing on government initiatives. First, there is a natural limit to the amount of corn that U.S. farmers can grow to produce today's standard type of ethanol. At best, it is estimated that America can produce about 14 billion gallons of biofuels from corn without seriously disrupting feed and food markets. That would constitute less than 10 percent of the country's current annual motor fuel needs. The real promise of biofuels will be realized when the next generation of cellulosic biofuels can be brought to market.

Cellulosic biofuels are functionally identical from a driver's point of view to the current generation of biofuels made from corn. But they can be produced from the left-over, non-edible parts of food crops, wild grasses, and trees -- which require less fertilizer, water, and energy to grow and harvest than corn. In their current state of development, cellulosic biofuels cost more than twice as much to refine, but technological breakthroughs promise to change the equation. Researchers believe they will soon be able to produce cellulosics in greater volumes, with less energy and at lower costs than corn ethanol, yielding greater net benefits in both energy and environmental terms. For now, government should certainly encourage increased production of the current generation of corn-based ethanol. But most experts agree that the real aim of such an increase in production should be to boost the supply and demand for biofuels generally, creating a ready market for cellulosic biofuels when they can be fully commercialized.

Second, even when the next generation of cellulosics have arrived -- which will take a number of years under any circumstance -- biofuels will still not constitute a silver bullet solution to America's oil addiction. Lawmakers must also aggressively spur the development and commercialization of other fuel-saving transportation technologies that are currently available or close at hand, such as hybrid-electric vehicles and plug-in hybrid-electric vehicles, a topic explored in a companion report to this one.10 Plug-in hybrids with flex-fuel capabilities will be able to travel up to 500 miles on a gallon of gasoline blended with 5 gallons of ethanol. Widespread use of such vehicles would indeed amount to a radical break from the country's current oil dependency.