Brian Fallow: By George, he's got it: biofuels

There's one for connoisseurs of irony. In his State of the Union speech last week, President George W. Bush pledged to increase funding for research into the production of ethanol, not from things we can eat like corn or sugar but from cellulosic materials such as wood chips and corn stalks.

The goal was to make ethanol from such sources practical and competitive as a transport fuel within six years, the President said.

Never mind that the justification he advanced was all about energy security and reducing America's reliance on imported oil, rather than reducing its contribution to global warming. Advocates of biofuels can only applaud such an initiative.

The irony is that in New Zealand, a land-based economy, precious little similar research happens. The taxpayer is confronted instead with the prospect of having to find hundreds of millions of dollars to cover a burgeoning liability under the Kyoto Protocol's rules for deforestation.

A country earns credits under Kyoto when land is switched from a low-carbon use like grass to a high-carbon one like forestry

But the reverse is also true. When a forest is felled and not replanted, the country is liable for the emission of that stored carbon.

That is happening more and more.

Officials warned the Government in a Cabinet paper in December that: "Latest indications are that forest owners intend to deforest about 47,000 hectares during the first Kyoto commitment period (2008 to 2012). If this level of deforestation occurs it will add around 32 million tonnes of carbon dioxide equivalent to New Zealand's deficit, in effect nearly doubling it."

The Government confessed last June that New Zealand was likely to fall short of its Kyoto target by 36 million tonnes, a turnaround from previous estimates which, assuming continued planting of new forests, had us comfortably exceeding it by a similar amount.

The Treasury estimated the shortfall would cost the taxpayer $300 million.

But that is a low-ball estimate based on an international price of only US$6 a tonne for "carbon" (tradeable rights to emit greenhouse gases) and an exchange rate of 70USc.

The price of carbon is much more likely to rise than fall from such a level and exporters desperately need the exchange rate to drop, which would make buying credits more costly in NZ dollar terms.

Officials tacitly concede as much when they advise the Government to start buying credits soon, before the price rises.

Current climate change policy towards forestry is calamitously bad.

By retaining ownership of (foresters would say swiping) the credits engendered by Kyoto forest sinks, the Government gives no incentive to plant more of them.

At the same time, for fear of an uncapped fiscal liability, it has not had the decency to accept responsibility for all of the liability that arises from deforestation. It will only pick up the bill if less than 10 per cent of the land cleared over the period 2008 to 2012 is switched to other uses.

What happens if, as seems increasingly likely, that cap is exceeded, nobody knows. It is a perverse incentive to deforest early, just in case.

Jim Anderton, the Minister of Forestry, said: "It is clear that the current policy does not send strong signals to encourage landowners to keep their land in forests and establish new forests."

Talks are continuing between the Government and the industry.

We can only hope that what they come up with recognises that forestry, or more precisely the sequestration of carbon by growing trees, is the best contribution New Zealand can make to reducing net greenhouse gas emissions, short of figuring out how to stop cows from belching methane.

A passionate advocate of the role of biomass in addressing climate change is Massey University's Dr Peter Read, an engineer turned environmental economist.

His starting point is to avoid the "plausible fallacy" that just because man's use of fossil fuels for energy is the problem, solutions will have to come from developing whole new technologies for propelling vehicles and generating electric power. We haven't got that sort of time.

Rather than abandoning carbon-based fuels and the massive capital stock of machines that use them in favour of a hydrogen economy or the like, we should develop sustainable sources of carbon fuels.

You might say that for carbon, as for food and information, fresh is best.

The natural flows of carbon between the atmosphere and plant life dwarfs the billions of tonnes of fossil carbon we mine, burn and dump in the atmosphere to meet our energy needs.

The trick, in Read's view, is to increase the amount of carbon taken up by growing plants, and to make better use of it before it returns to the atmosphere.

The obvious questions are: Is there enough land and is the technology required available and affordable?

After all, the demographers tell us there will be another 3 billion mouths to feed before the world's population stabilises. And as it is, some pretty marginal country is being farmed already.

But Read cites an estimate from the United Nations Food and Agriculture Organisation that 2.3 billion hectares of potentially arable land globally is not being used that way, mainly in Africa and Latin America. Would changes in land use increase the amount of carbon sequestered (taken from the atmosphere and stored) compared with what's there now? Hasn't nature already optimised that?

No, says Read. "Nature goes in for resilience. It survives by developing eco-systems that are robust against changing circumstances. If you raise the efficiency the system becomes less resilient and you need good management to protect it. But mankind gets far more per hectare out of the land than nature ever did," he said.

"Nature is in stasis. If you go to the Amazon you say, 'Gosh what a huge amount of biomass'. But it is no more next year than this year. It's stuck. Mankind can and does through cropping take biomass off the land, which nature cannot do."

Read advocates developing a global biofuels industry by diverting the flow of investment from an overcapitalised industry - the search for oil - to an undercapitalised one, agriculture in the Third World.

For such a change to make sense from a climate change point of view you would have to ensure that you did not create more emissions by, for instance, clearing rain forest to plant oil palms, than you saved by using the subsequent palm oil as biodiesel.

International agreement on what is sustainable practice and a monitoring regime would be required.

Read is also attracted by the idea of taking some of the biomass produced, carbonising it into stuff similar to charcoal and using that as a soil conditioner, to reduce the leaching of nutrients and act as a sort of microbial coral reef in the ground.

Amazon Amerindians seem once to have used that technique to allow continuous cultivation of their land but the knowledge has been lost and scientists are trying to rediscover it.

In the meantime, to return to President Bush's initiative, techniques for the hydrolysis, fermentation and distillation of cellulosic material have been around for decades. It is already being done on a commercial scale in Canada and Finland, Read says.

"Is it competitive with oil at $60 a barrel? I don't know."

But it is an invalid comparison, he argues. "What it costs to get oil out of the ground in 10 years' time depends on how much effort you put into finding more oil."

And on how much more oil remains is to be discovered. Chevron points out in its advertising that we consume two barrels of oil for every new barrel of reserves discovered.

Read says if we stop spending money looking for oil in extremely inconvenient places like Central Asia and spent it instead in developing bio-energy, then very soon ethanol will look cheap. Learning by doing would ensue.

"So relative prices now are a poor guide to what relative prices will be in 10 years' time."

Investors will not want to commit to building biofuels plants until they can see where the raw material is coming from and have some comfort about a market.

So it makes sense for policymakers to encourage the building up of a large stock or reserve of biomass. In short, in the New Zealand context, forests.

"The Government could say we are going to have a biofuel obligation in our transport fuels mix and it is going to be 2 per cent in 2008 and 4 per cent in 2010 and 8 per cent in 2012. These are commitments,"aid.

"And we also have the aspiration for 2020 that it will be 30 per cent and for 2025 that it will be 50 per cent. If those signposts were put up with a clear obligation in the near-term and signals about long-term aspirations, then the industry will sort it out."