California rule could end ethanol's honeymoon

NEW YORK Fri Apr 24, 2009 5:57pm EDT

NEW YORK (Reuters) - California's newly adopted low-carbon fuel standard may mark the beginning of the end of ethanol's coveted status as the sole U.S. alternative motor fuel.

The U.S. state with the most cars late on Thursday approved the world's first-ever regulations to slash emissions of planet-warming carbon dioxide from vehicle fuels.

The ruling, which will be subject to further studies, will not kill the ethanol industry. But it sets the bar higher for cleaner development of corn ethanol, which enjoyed an investment boost over the last few years thanks to generous federal incentives and mandates calling for increasing amounts of the fuel to be blended into gasoline.

The measure also sets the stage for emerging alternative fuels -- such as cars that run on compressed natural gas and electric vehicles like plug-in hybrids that run on both gasoline and rechargeable batteries -- to compete with second-generation ethanol.

That fuel, known as cellulosic ethanol, is expected to be made in commercial amounts from non-food feedstocks like switchgrass and fast-growing trees.

"The ruling is the first sign that the ethanol industry could be brought out of its honeymoon phase," said Sander Cohan, an alternative motor fuels analyst with Energy Security Analysis Inc in Boston.

"First-generation ethanol, especially corn ethanol, is a poster child for who might be put at a disadvantage."

To give fuel producers time to adjust, the bulk of the carbon limits required under the regulation do not go into effect until 2015.

But analysts said California has fired the first shot in a battle that could widen in coming years. At least 11 other states in the U.S. East are considering adopting a low-carbon fuel standard for cars by the end of the year. In addition, the main climate bill being considered in the U.S. Congress seeks to regulate greenhouse gas emissions from fuels.

California's regulators ranked 11 different ways of making corn ethanol. They found that traditional distilling methods used in the Midwest, accounting for the bulk of U.S. supplies, emit the most carbon over a lifecycle measured from production to combustion.

The state gave much better carbon savings scores to corn ethanol made in California with a distillery fired by a blend of natural gas and crop waste, also known as biomass.

In the race to make ethanol, little regard has been paid to emissions of the distillery itself. A handful of nearly 200 plants are fired by coal, the most carbon-heavy fossil fuel, while many others have been slow to convert to biomass.

Cellulosic ethanol faired better.

"The standard is favorable to cellulosic and to plug-in hybrid development, but not favorable to U.S.-produced corn ethanol," said Divya Reddy, an analyst with the Eurasia Group in Washington.

Cars fueled by compressed natural gas, which are not yet widely available, scored slightly better than California-made ethanol, and vehicles that run on batteries, which also are just beginning to be made in the United States, scored much better.

LAND USE

The ethanol industry challenged California's findings, and said it would fight the regulations.

The ethanol industry's biggest objection is that the standard calculates an indirect carbon footprint attributed to land-use changes from the clearing of grasslands and forests to cultivate corn.

Nathan Shock, a spokesman for private company Poet, the largest U.S. ethanol producer, said those land-use calculations are unfair because the rule as currently written applies to biofuels alone, putting ethanol at a relative disadvantage.

Bob Dineen, head of ethanol industry group the Renewable Fuels Association, said the ruling could hurt investments in the development of next-generation ethanol.

Paul Winters, a spokesman for the Biotechnology Industry Association, said the ruling could hit investments by the biggest producers of corn ethanol into cellulosic. Some traditional ethanol makers have plans to make cellulose-based fuel using readily available crop waste like corn cobs and stalks.

But as the ethanol industry argues its case, natural gas and battery-powered cars will likely make inroads in replacing petroleum, Cohan said.

"The strength of the low-carbon standard ... is that it forces attention toward non-agricultural alternative fuels that will likely play a role in any sort of alternative fuel mix," he said.

(Additional reporting by Steve Gorman in Los Angeles; Editing by David Gregorio)

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