August 02, 2006
Biofuels May Not Be Sustainability Panacea, According to Bank Sarasin Report
by Bill Baue
The report identifies strengths and weaknesses of biofuels from social and environmental
perspectives, as well as positing minimum sustainability criteria to qualify for investment.
Biofuels (such as bioethanol and biodiesel) are touted as eco-friendly alternative energies helping
to solve a host of problems clouding the oil industry, including greenhouse gas (GHG) emissions
contributing to climate change, over-dependence on oil importation, rising prices, and peak oil.
While biofuels will clearly play an important role in addressing these problems, they may not
represent a panacea--yet. Basel-based Bank Sarasin recently conducted a study to assess
the actual sustainability of biofuels, identifying both their strengths and their potential social,
environmental, and economic limitations.
The report, entitled
Biofuels--Transporting Us to a Fossil-Free Future?, identifies six convincing arguments in
favor of biofuels from a sustainability perspective. Biofuels reduce dependence on fossil fuels,
produce far less carbon dioxide and other GHGs than oil, reduce other forms of air pollution (such
as carbon monoxide and sulfur dioxide), are high-quality fuels, are immediately usable within
current infrastructure, and support local agriculture development. Perhaps the most important of
these is the climate-mitigating factor, as environmental audits of the entire life-cycle of
biofuels show them to be not only carbon-neutral (since plants absorb carbon dioxide while growing)
but also carbon-reducing by anywhere from 20 to 100 percent.
However, report author
Matthias Fawer also identifies six countervailing risks associated with biofuels. These include
environmental impacts of monocultures, increased rainforest clearance in developing countries for
growing biofuel stock, negative impacts on food prices, higher costs than other forms of carbon
reductions, harsh agricultural labor conditions, and increased use of genetically engineered crops.
"Because of the risks described, biofuels cannot automatically be classed as
sustainable, despite their 'bio' label," states Dr. Fawer, the energy, food, and paper analyst in
Sarasin's sustainability research department. "We therefore think there are certain criteria and
developments that are essential if biofuels are still to be classed as renewable energies in
future, and ones that stand up to thorough sustainability analysis."
Sarasin also examines
the market for biofuels, and finds constraints potentially outweighing prospects and thus remains
somewhat lukewarm in its investment recommendations.
"It is clear from the sharp rise in
the share prices of biofuel companies that stock markets expect high growth rates to continue in
future," states Dr. Fawer. "We advise a more cautious approach, as growth could quickly come up
against natural barriers in the short term at least.
"This is mainly due to the limited
availability of raw materials (arable land, competition for use by the food & beverage industry),
but also due to the limited saleability of by-products," he continues. "[I]t is actually unclear
how much land is available for growing energy crops without having a negative impact on the needs
of the food industry, animal feed industry, fallow land, soil quality and biodiversity."
Fortunately, Sarasin does not just leave readers hanging but instead posits its criteria for
sustainable investment in the biofuels industry. From a raw materials perspective, Sarasin prefers
the use of local stock, but if procurement from developing countries is necessary, companies must
apply social and environmental criteria addressing how the crops are cultivated. Furthermore,
Sarasin supports a full life-cycle analysis of biofuel production.
The report also favors
bioethanol over biodiesel because it can be made from a wider range of raw materials and generates
a higher yield and better carbon reductions. It also notes the development of second-generation
technologies for making bioethanol with better eco-efficiency that create GHG emissions reductions
of about 90 percent, as compared to the more standard 30 to 50 percent with existing technologies.
"Until new technological advances enable biomass to be exploited more efficiently so that
not just the 'edible' part of the plants are burnt in our car engines, we place the present limit
for the environmentally and socially responsible use of biofuels at roughly 5 percent of current
petrol and diesel consumption in the EU and US," states Dr. Fawer in the report. "It should also
be noted that all initiatives to replace conventional fuels only make sense when combined with
further measures to improve efficiency in the manufacture of engines and vehicles."
Finally, the report performs a sustainability analysis on 16 companies in the biofuels
industry, and rates only 10 of them as qualifying for Sarasin's sustainable investment universe.
Pure-play companies that make the grade include US-based Pacific Ethanol (ticker: PEIX) and Xethanol
UK-based Biofuels Corp. (BFC.L) and Renova Energy (RVA.L). Companies
with biofuel niche businesses that qualify include Denmark-based Novozymes (NVZMF.PK) and Canada-based Sunopta
(STKL). One of
the largest players in the field, US-based Archer Daniels Midland (ADM), does not qualify because it
lacks sustainability criteria.