Big Thoughts: we could be a carb economy, not an oil economy

The Once and Future Carbohydrate Economy
The carbohydrate economy could transform agriculture as well as energy, reviving producer co-ops, and giving farmers a hedge against volatile commodity prices.
By David Morris

Less than 200 years ago, industrializing societies were carbohydrate economies. In 1820, Americans used two tons of vegetables for every one ton of minerals. Plants were the primary raw material in the production of dyes, chemicals, paints, inks, solvents, construction materials, even energy.

For the next 125 years, hydrocarbon and carbohydrate battled for industrial supremacy. Coal gases fueled the world’s first urban lighting systems. Coal tars ushered in the synthetic dyes industries. Cotton and wood pulp provided the world’s first plastics and synthetic textiles. In 1860, corn-derived ethanol was a best-selling industrial chemical, and as late as 1870, wood provided 70 percent of the nation’s energy.

The first plastic was a bioplastic. In the mid-19th century, a British billiard ball company determined that at the rate African elephants were being killed, the supply of ivory could soon be exhausted. The firm offered a handsome prize for a product with properties similar to ivory, yet derived from a more abundant raw material. Two New Jersey printers, John and Isaiah Hyatt, won the prize for a cotton-derived product dubbed collodion.

Ironically, collodion never made it as a billiard ball: The plastic, whose scientific name is cellulose nitrate, is more popularly known as guncotton, a mild explosive. When a rack of cellulose nitrate pool balls was broken, a loud pop often resulted. Confusion and casualties ensued in saloons where patrons were not only drinking but sometimes armed.

People did find other uses for collodion, however, in dentures and buttons. Later, a new cotton-based plastic called celluloid spawned consumer photography. To this day, many in Hollywood still call their films celluloids, although Steven Spielberg may not remember why.

At the end of the 19th century the names of chemical companies and products often contained a form of the word cellulose, a living chemical consisting of a long string of carbon and hydrogen and oxygen molecules (thus the word carbohydrate). The name of one of the country’s largest chemical manufacturers, Celanese Corporation, was a contraction of “cellulose” and “the easy feeling” of wearing acetate apparel. After celluloid, cellophane, the world’s first film plastic, was introduced to instant success.

By 1920, however, the nation had reversed the vegetable-mineral ratio, using two tons of minerals for every one ton of vegetables. Coal displaced wood for energy. Gasoline-powered cars roamed the streets. Yet outside the nation’s energy markets, living carbon still held its own against fossilized or dead carbon. Rayon, made from wood pulp, was the world’s best-selling synthetic fiber. The first injection molding machines in the 1930s made plastic products from cellulose acetate.

The Great Depression, the collapse of international trade, and then World War II spawned a worldwide effort to replace imports with domestically produced products. Brazilians made plastics from coffee beans, Italians made fine suits from milk protein, and by the 1940s, four million vehicles in European countries were operating on ethanol blends of up to 33 percent. Arthur D. Little wowed and charmed the world by literally making a silk purse from a sow’s ear.

In 1941, when Japan cut off access to Asia’s rubber plantations, the United States launched a crash synthetic rubber program. Washington drafted into service both the nation’s oil refineries and breweries. In 1943, most of America’s synthetic rubber was made from ethanol. By 1945, the United States produced over 600 million gallons of ethanol, a level not again attained until the mid-1980s. A small amount of ethanol was made from wood.

Up until the end of World War II, some companies were still hedging their bets on the material base of the future chemical industry. In 1945, the large British chemical manufacturer ICI still maintained three divisions: one based on coal, one on petroleum, and one on molasses.

Meanwhile, the carbohydrate economy was featured in the popular press and newsreels, reporting on such sensational developments as Henry Ford’s biological car. The body of the 1941 demonstration vehicle consisted of a variety of plant fibers, including hemp. The dashboard, wheel, and seat covers were made from soy protein. The tires were made from goldenrods, bred by Thomas Edison on his urban farm in Fort Myers, Florida. The tank was filled with corn-derived ethanol.

The next time you watch the obligatory Christmas showing of It’s a Wonderful Life , pay close attention to this scene: Jimmy Stewart is on the phone with his brother, who excitedly proclaims he is going to be rich because he is on the ground floor of the next major industry, soybean-derived plastics!

Yet only 25 years later, movie audiences hear Dustin Hoffman in The Graduate ask an older man for career advice. The man responds with one word, “plastics,” and everyone in the audience knows he means petroleum-derived plastics.

In a quarter of a century, the carbohydrate economy had virtually disappeared, a victim of remarkably low crude oil prices (the price dropped to under $1 a barrel in the late 1940s) and rapid advances in making an ever-wider variety of low-cost products from crude oil. American farmers didn’t mind; the Marshall Plan alleviated the 20-year-old agricultural depression by creating a large export market for U.S. surplus crops.

By 1975, not a drop of ethanol was in our nation’s gas tanks. Indeed, industrial ethanol was made from petroleum. Bioplastics disappeared. Mineral oil inks replaced vegetable oil inks. Americans used eight tons of minerals for every one ton of vegetables.

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The Pendulum Swings Back
Beginning in the 1970s, the carbohydrate economy slowly began to reemerge, the result of three mutually reinforcing trends.

The first was technological. Advances in the biological sciences lowered the cost of making bioproducts. At first, entrepreneurs focused on high-priced and low-volume markets, like medicines and medical equipment. As production expanded and firms moved down the learning curve, costs dropped and larger markets opened up.

In the 1980s, for example, polylactic acid (PLA), a chemical derived from milk sugar (lactose), was used to make a suture that could be absorbed inside the body. The cost was high, some $200 per pound, but only an ounce or less was used in the surgery. By the late 1990s, the price of PLA, now made from less expensive corn sugar (fructose), had fallen to about a dollar a pound. PLA is increasingly competitive with petrochemicals for use as a textile, in car bodies, and in containers.

The second factor was political. Fossil fuels are attractive because, under great pressure over eons, the oxygen contained in living material was squeezed out (hence the name hydrocarbon), leaving a very dense energy source. One pound of coal contains the same amount of energy as four pounds of wood.

However, the same geological pressure that squeezed out oxygen squeezed in several unnatural and unwelcome elements, like sulfur and mercury. As an environmental movement emerged and as governments began to regulate these pollutants, the cost of using hydrocarbons rose to reflect their true environmental cost, and biofuels and products became more competitive.

As a clean air measure, for example, the federal government required oxygenates in gasoline. That created a large market for oxygen-containing additives like ethanol. Regulations reducing sulfur levels in diesel helped open up a market for biodiesel. When governments required degradable plastics, bioplastics became more competitive. When phosphates in detergents were restricted, enzyme markets expanded.

The third factor was the rising price of oil and natural gas. In 1970, the price of crude oil was $1.80 per barrel. The price soared to $34 a barrel in 1982, and then fluctuated between $10 a barrel and $30 a barrel for the next 20 years. Finally, in 2005, high oil and natural gas prices seemed here to stay, a result of the rising cost of producing oil and the risk premium an unstable Middle East imposed on oil markets.

With oil at $50 a barrel, many biochemicals have become flat out competitive with petrochemicals. At $60 a barrel, ethanol derived from corn is competitive without subsidies.

These three factors made a significant market for bioproducts possible. They did not make their use inevitable. Remember, bioproducts must invade markets long controlled by the oil and petrochemical industry. In many cases, bioproducts actually need their competitors’ permission to enter these markets.

Consider the instructive history of fuel ethanol.

After World War I, car companies introduced high-compression engines. Existing fuels caused knocking, a result of uneven combustion. The industry feverishly sought an anti-knock additive. Ultimately, it narrowed the choice to two: ethanol or lead. Ethanol would require 10 percent of the gas tank. To achieve the same effect, lead needed less than 1 percent. The car companies, unsurprisingly, chose lead, and stuck to it even after outcries from the public health community about the effects of leaded gasoline.

In the 1970s, as part of its air quality efforts, the Environmental Protection Agency phased out leaded gasoline. Oil companies again could have substituted ethanol. Instead they chose to reformulate gasoline to increase the proportion of aromatic chemicals like benzene, toluene, and xylene. Then, in the late 1980s, the nation discovered these chemicals were carcinogenic and imposed limits on their use. The oil companies again could have switched to ethanol. Instead they chose MTBE, a product made from natural gas–derived methanol and isobutylene, a byproduct of the refinery process.

In the late 1990s, the nation discovered that MTBE was polluting ground water. Nineteen states began to phase out MTBE. So long as the Clean Air Act’s oxygenate requirement remained, highly polluted urban areas had only one alternative: ethanol. The phase out of MTBE is the primary reason U.S. fuel ethanol consumption has doubled in the last three years.

Regrettably, this does not necessarily mean the market is embracing biofuel. Beginning in 1999, California petitioned the federal government to exempt it from the oxygenate requirement. The oil companies, not surprisingly, liked this idea, and promised to formulate a gasoline that could meet all performance standards without compromising public health. Last August, the federal government eliminated the oxygenate requirement. California Senator Dianne Feinstein, the leader of the anti-ethanol fight, exulted. Instead of using 5.7 percent ethanol blends, California could now revert to a gasoline composed 100 percent of fossil fuels.

There’s an old saying: Fool me once, shame on you. Fool me twice, shame on me. To which I would add: Fool me four times, I’m an idiot.

Despite the rocky road traveled by biofuels, it appears that they are now here to stay. Production has doubled in the last two years and may double again in the next three years. In Brazil, ethanol now constitutes 40 percent of all automobile fuel; 80 percent of new cars are flexible fueled cars, capable of using any proportion of ethanol and gasoline.

Half a dozen countries now mandate biofuels; a dozen more may soon. DuPont is developing a carbohydrate-based division. Vegetable oils have displaced 40 percent of black inks in newspapers. Hydraulic fluids increasingly are made from vegetable oils, not mineral oils. Bioplastics are here.

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Fashioning the Rules
For the first time in 60 years, the carbohydrate economy is back on the public-policy agenda. We may be changing the very material foundation of industrial economies. Whether and how we affect that change can profoundly affect the future of our natural environment, our rural economies, agriculture, and world trade. It is an exciting historical opportunity, but one we should approach with deliberation and foresight.

As we design new rules we should keep in mind several key points:

• First, plants must play an important industrial role if we are to achieve a sustainable, renewable economy.

Plant-based energy sources and materials, often termed biomass, boast two essential features not found in other renewable resources, like geothermal, hydro, wind, sunlight. Biomass can be made into physical products and comes with built-in storage.

Wind and sunlight are intermittent. To count on them, we would need a way to store them. Plants are, in effect, batteries of stored chemical energy.

Wind and sunlight can be harnessed only to produce some forms of energy -- heat, mechanical, electrical. Biomass can be used to make physical products. Thus biomass, but not wind or sunlight, can substitute for petrochemicals.

• Second, we need to pay attention to farmers.

The wind blows regardless of public policy. Policymakers can focus on developing effective harvesting technologies. But agriculture requires the enthusiastic participation of cultivators -- farmers. Unless the farmers have the economic incentive, biomass energy and materials will not appear in significant quantities.

• Third, a carbohydrate economy could have grave environmental consequences.

Unlike most other renewable resources, biomass can be cultivated, harvested, and processed in nonsustainable ways. Soil erosion, fertilizer and pesticide runoff, and industrial pollution all can result from biomass inappropriately grown and processed. Public policy also needs to ensure that, when using biomass by-products such as cornstalks and wheat straw, farmland is not denuded of nutrients that nature needs to regenerate the land.

• Fourth, unlike other renewable resources, agriculture can satisfy a wide array of needs: food, fuel, clothing, construction, paper, and chemicals.

Policymakers must be careful if they introduce incentives that favor energy over other end uses of farming. In the hierarchy of uses of agriculture, food is still the highest and best use. And there may be other uses more valuable than making energy.

In the late 1970s and early 1980s, Congress subsidized garbage incinerators that generated electricity. Then we found that more fossil fuels could be displaced, at a lower cost, and with a more positive environmental impact, by recycling the paper and composting the grass and leaves.

Another case of misguided subsidy: Congress and the state of Minnesota recently offered handsome incentives for the generation of electricity from poultry manure. They overlooked the fact that it is a dry manure, high in nitrogen and inexpensive to transport, and an increasingly attractive substitute for natural gas-derived fertilizers. In Minnesota, most poultry manure is currently sold to farmers. But by the end of 2007, because of the new incentives, more than half the dry manure generated in the state will be diverted into making electricity, forcing farmers to look for fertilizer substitutes. Ironically, the fastest growing segment of agriculture is now organic foods, which cannot be grown using synthetic fertilizers.

• Fifth, biomass is not a silver energy bullet.

But it can play a crucial role in reducing our reliance on oil.

Worldwide, tens of billions of tons of biomass potentially are available for making chemicals and fuels. But we will need every one of those billions to meet even a minor portion of our future needs. Overall, biomass may satisfy 10 to 15 percent of our future energy needs. But it can displace a more significant part of our transportation fuels and an even more significant part of our oil fuels.

In the United States, about 60 percent of our oil is used for transportation. (An additional 15 to 18 percent is used to make petrochemicals.) Biofuels’ compactness and relative ease of transport make them attractive transportation fuels.

Sufficient biomass exists to potentially displace 100 percent of our petrochemicals and 50 to 100 percent of our oil-based transportation fuels.

• Sixth, even in transportation, biomass will be the minor partner in a dual-fueled strategy.

The most efficient and environmentally benign transportation system will be powered primarily by electricity. Electric vehicles get over 100 miles per gallon. Unlike today’s hybrid cars, which are internal combustion engine vehicles with a motor assist, tomorrow’s plug-in hybrid cars will charge their batteries from the electricity system and become electric cars with an engine backup.

Between 50 percent and 100 percent of the vehicle’s motive power will come from electricity. Sufficient biomass exists in this situation to provide 100 percent of the biofuels needed by the backup engine.

• Seventh, a carbohydrate economy will have a profound impact on agriculture and world trade.

The carbohydrate economy may have a far more profound impact on agriculture than on energy. Biomass may satisfy only a small part of our energy needs. But the additional amount required will be enormous, perhaps tripling the total amount of plant matter currently used for all purposes (food, feed, textiles, construction, paper). Thousands, perhaps tens of thousands, of biorefineries producing a variety of final products will dot rural landscapes.

Public policies to date have focused on expanding the use of biofuels. We need to pay as much attention to quality as we do on quantity. What do we want the new carbohydrate economy to look like? Aside from oil displacement, what are our long-term objectives, and our strategy for achieving them?

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Farmers and Local Ownership
More than a century of bitter experience has taught farmers that when they simply sell a raw crop, they fall ever further behind. Farmers receive about the same price for their crops today as they did 30 years ago, while the cost of farm inputs has more than doubled.

In 1970, a bushel of corn could purchase about five and a half gallons of gasoline. Today, a bushel of corn is worth only three-quarters of a gallon of gasoline.

About 30 years ago, farmers reinvented the producer cooperative, a business structure in which farmers own the processing and manufacturing links in the value-added chain. The birth of the first modern producer cooperatives occurred in the 1970s: Minnesota and North Dakota sugar beet farmers learned that the area’s sole sugar beet processing plant would close, leaving them little market for their crop.

The farmers pooled their financial resources and bought the plant. The price of sugar soared. The sugar beet growers made a great deal of money. And in America, financial success begets imitation.

Other producer cooperatives emerged, slowly in the late 1980s and early 1990s, and then with increasing speed in the late 1990s and early years of the 21st century. Recently, the traditional cooperative has been joined by a new business form, the limited liability corporation.

Farmers today make substantial and ongoing investments in land and equipment. In the last decade they’ve discovered investing in a factory can be more financially rewarding than investing in land or equipment.

Iowa State University (ISU) estimates the five-year average after-tax return for an ethanol dry mill at 23 percent. On the other hand, 70 percent of Iowa’s counties averaged returns on farmland of 2.5 percent or less.

Farmers who own the factory benefit far more from increasing ethanol demand than those who do not. Increased ethanol consumption over the last 25 years may have raised the overall price of corn by 10 to 15 cents per bushel. Farmer-owners receive annual dividends four, five, even 10 times higher.

Farmer-owned biorefineries also serve as a hedge for farmers against volatile commodity prices. When corn prices decline, production costs of ethanol also decline. At least a portion of the income lost on the sale of the raw material can be recouped from the increased profits from the sale of ethanol.

Farmer ownership also benefits the broader rural community. An oil refinery gets its raw material from out of the state, perhaps from outside the country. A biorefinery usually purchases its raw material within 50 to 100 miles of the facility.

Moreover, virtually all the oil refinery’s profits leave the state for distant corporate headquarters and even more distant shareholders. Farmer- or local-owned biorefineries retain virtually all of the profits inside the state.

Consider Minnesota. For every dollar spent on ethanol in the state -- assuming the ethanol is produced in-state in a farmer-owned biorefinery -- some 75 percent stays in the state economy. For every dollar spent on gasoline, some 75 percent leaves the state economy. This equation makes biorefineries a powerful economic development vehicle.

How can we encourage farmer- and local-owned biorefineries? Here again, Minnesota’s record is instructive. In the early 1980s, Minnesota’s ethanol incentive mirrored that of the federal government by exempting ethanol sold in the state from a portion of the state gas tax.

The incentive worked. Minnesotans purchased ethanol-blended gasoline. But Minnesota didn’t produce the ethanol. In the mid-1980s, farmers persuaded the legislature that public subsidies could more clearly benefit the state economy.

The legislature converted part of the tax exemption into a direct producer payment. The new incentive had three important features:

1. Production had to occur inside the state.

2. The biorefinery could receive payments only for the first 15 million gallons of ethanol produced each year. This encouraged smaller facilities, which in turn enabled farmer and local ownership.

3. An individual plant could receive the incentive only for 10 years. It would not become a continual drain on public resources.

The incentive proved remarkably successful. Today, 12 of Minnesota’s 16 biorefineries are majority-owned by Minnesota farmers. Some 25 to 30 percent of Minnesota’s full-time grain farmers own shares.

We need to redesign the federal incentive with the Minnesota experience in mind. We could begin by converting half the federal incentive of 51 cents per gallon of ethanol into a direct payment to the producer. (The other half could be retained as an excise tax exemption but should be tied to an index comprised of the price of corn and the price of wholesale gasoline. When the spread between them rises above a certain level, the tax incentive disappears.) A producer could receive payments for no more than 10 years, and only on the first 20 million gallons of annual production.

The federal producer payment could differ from Minnesota’s in two respects. Production would not be required in any specific state. And farmer- and/or local-owned biorefineries would be favored.

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The New Brotherhood of the World’s Farmers
The carbohydrate economy has the worldwide potential to catalyze a cooperative farmer movement that displaces the traditional farmer-versus-farmer battles. Traditionally, the carbohydrate has battled other carbohydrates for market share. High-fructose corn sugar versus sugar cane. Brazilian soybeans versus U.S. soybeans. In the future, producers of carbohydrates can cooperate to capture another huge, untapped market: hydrocarbons.

Farmers have been slow to recognize this opportunity. In fact, U.S. agricultural organizations allied themselves with the coal and oil industries to attack the Kyoto treaty. Such an alliance is reasonable if farmers view themselves simply as consumers of fossil fuels. If they view their crops as competitors to fossil fuels, however, opposing Kyoto makes no sense. They should enthusiastically embrace treaties to reduce global warming because these treaties invariably impose penalties on the dead carbon contained in coal and crude oil, while offering rewards for the living carbon contained in crops and trees.

Today, agriculture is one of the most contentious issues in world trade. A carbohydrate economy can reduce and perhaps even eliminate that tension. Rather than Indian and Brazilian and Nigerian farmers fighting for European and American markets, they can sell into vast new domestic energy and industrial markets. Indeed, the case for import substitution is even stronger in the south. Most southern countries can buy imports only with hard currencies. They can obtain hard currencies only by increasing exports or borrowing from the IMF or other banks. Thus, displacing oil imports with domestic fuels can reduce their external debt while bolstering their rural economies.

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We live in an era of tumultuous change. Yet we should recall Bertrand Russell’s distinction between change and progress. Change, he argued, is inevitable. Progress is controversial. Change is scientific. Progress is ethical.

We will have change, whether we want it or not. But progress comes only when we design rules that channel human ingenuity and entrepreneurial energy and investment capital toward constructing a society and an economy compatible with the values we hold most dear.

The carbohydrate economy beckons.

{David Morris is vice president of the Minneapolis and Washington, D.C.–based Institute for Local Self-Reliance and directs its New Rules Project. He has been an advisor to the energy departments of Presidents Ford, Carter, Clinton, and George W. Bush. He is the author of The Carbohydrate Economy (1992) and A Better Way (2003).}