One of the Decade's Biggest Examples of Wasteful Government Spending

http://moneymorning.com/2012/08/31/one-of-the-decades-biggest-examples-of-wasteful-government-spending/

August 31, 2012

 

By David Zeiler, Associate Editor, Money Morning

In February we told you that despite nearing $15 trillion in debt - now close to $16 trillion - the U.S. government decided to spend $592,000 last year to figure out why chimpanzees throw poop.

Now we've discovered yet another example of wasteful government spending that has burned up more than $1.5 billion of your tax dollars - with nothing to show for it.

We're talking about the fruitless pursuit of a biofuel known as cellulosic ethanol, surely one of the greatest government boondoggles of the past decade.

Cellulosic Ethanol Production: What You're Paying For

Both Republican and Democratic administrations have showered companies with grants and loan subsidies with the goal of turning materials like wood chips and switch grass into an ethanol fuel that could be used in automobiles.

 

 The 2007 Energy Independence and Security Act was so optimistic government spending could jump-start this unproven technology that it projected annual cellulosic ethanol production of 250 million gallons by 2011, 500 million gallons by 2012, and 1 billion gallons by 2013.

For good measure, the law also required oil refineries to buy the cellulosic ethanol to mix with their gasoline products, just as they do now with corn-based ethanol.

But five years and more than $1.5 billion later, cellulosic ethanol production is just a drop in the bucket.

Literally.

Until this year, no cellulosic ethanol had been commercially produced. So far this year, the sum total is 20,000 gallons produced in April (none was produced in May or June, the latest months for which data is available). 

 

That amounts to 0.04% of 2012's quota. 

Meanwhile, the government keeps throwing more tax dollars into the black hole of cellulosic ethanol, hoping someone will figure it out.

The Costly Dream of Cellulosic Ethanol 

 

Back in 2007, about a half-dozen companies received most of the initial wave of government spending to launch cellulosic ethanol production.

One company, Range Fuel, received a $76 million grant from the Energy Department and an $80 million loan guarantee from the Agriculture Department. Range's factory was supposed to process wood chips into 10 million gallons of ethanol a year.

The Range plant never produced any ethanol. Forced into liquidation, the Georgia factory was sold in January for $5.1 million.

Another company, Cello Energy, received no government money but was key to the EPA's rosy estimates of cellulosic ethanol production. Cello was projected to supply 70 million gallons in 2010, about 70% of that year's mandate. The company declared bankruptcy in 2010 without producing a drop.

The government brushed off those failures and instead turned its funding machine up a notch.

Last September, the Energy Department loaned Spanish-based Abengoa Energy $134 million to build a cellulosic ethanol plant in Kansas. Abengoa was also a recipient of a $76 million grant from the DOE back in 2007. 

The Energy Department said in December it would provide up to $80 million to help Mascoma build a cellulosic ethanol facility in Kinross, MI.

And just last week the Department of Agriculture announced a $99 million loan guarantee to Italian-owned Chemtex to build a plant in Sampson County, GA.

While it's possible the newer projects might bear fruit, it sure looks like the government is wastefully throwing good money after bad.

Forced to Buy a Biofuel That Doesn't Exist

Despite the lack of commercially available product, however, the Environmental Protection Agency (EPA) requires the oil companies to buy a fixed amount each year or pay a fine via "waiver credits."

Last year the EPA lowered the cellulosic ethanol requirement by nearly 98% to 6.6 million gallons. But with zero gallons available to purchase, the oil companies were forced to pay a $6.8 million penalty.

"As ludicrous as that sounds, it's fact," Charles Drevna, president of the National Petrochemicals and Refiners Association, told Fox News. "If it weren't so frustrating and infuriating, it would be comical."

For 2012, the EPA has lowered the requirement from 500 million gallons to 8.65 million gallons. However, with just 20,000 gallons produced so far, it looks like oil companies will again pay millions in penalties - for not buying something that's just plain unavailable.

"Congress subsidized a product that didn't exist, mandated its purchase though it still didn't exist, is punishing oil companies for not buying the product that doesn't exist, and is now doubling down on the subsidies in the hope that someday it might exist," scolded a Wall Street Journal editorial. "We'd call this the march of folly, but that's unfair to fools."

Why Cellulosic Ethanol Has Flopped

Turning grass and wood chips into a renewable fuel source sounds like a great way to reduce the country's dependence on fossil fuels, but making it a reality has proven very, very difficult.

Compared to corn-based ethanol, cellulosic ethanol is much more complicated to produce and costs about twice as much.

While cellulosic ethanol has existed in the laboratory for decades - the Germans first created it in 1898 -- the mass production riddle has remained unsolved.

That's also why relatively few private investors have gotten on board.

"It is expensive and it's difficult to do and it's relatively untried on a commercial scale," Ned Stowe, policy associate for the pro-renewable energy think tank, the Environmental and Energy Study Institute, told the Tampa Bay Times. "For private investors, it's seen as a risky venture because of the technological unknowns."

Solutions to those issues still may not make cellulosic ethanol viable as a significant fuel source.

Just to replace 10% of annual U.S gasoline consumption - about 13.4 billion gallons - cellulosic ethanol factories would need to process enough biomass each year to fill a line of semi-trucks stretching to the moon.

Last fall, the National Academy of Sciences weighed in with a report on the struggles of cellulosic ethanol. The main issue, NAS said, is "the high cost of producing cellulosic biofuels compared with petroleum-based fuels, and uncertainties in future biofuel markets."

In short, cellulosic ethanol isn't yet cheap enough relative to gasoline to make it a practical fuel option.

So, given the obvious futility of making this particular biofuel work, why does the government keep wasting money on it?

Politics, of course.

The government's generosity has helped the overall ethanol industry become a $42 billion behemoth that also happens to employ about 90,000 Americans. And farmers have become very fond of the various government subsidies they receive for growing ethanol "feedstock" such as corn.

"Ethanol would likely disappear from the market place absent federal subsidies and mandates," Sterling Burnett, senior fellow at the National Center for Policy Analysis, told Forbes. "Like so much of the federal pork bestowed upon special interests, ethanol is bad for the economy, bad for consumers and bad for the environment."