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Sunday, May 17, 2009


The Economics of Innovation is finally getting public policy attention proportional to its impact on the economy. David Landes, "Unbound Prometheus....” Cambridge Press, 1969, demonstrated this point. Innovation since has not impressed many economists per Robt. Gordon's "Does the New Economy Measure up to the Great Innovations of the Past."NBER WP 7833, Aug, 2000.

The recent effort to use technological innovation to solve the energy problem is showing promise in the transportation sector in the form of hybrid cars, but they still use gasoline. Much hope has emerged that biofuels would prove to be the innovation of major status that will solve the problem

Unfortunately, most worthy policy initiatives (bio fuels no exception) were exploited by the Bush Administration for the purpose of lining the pockets of GOP legislators and their constituent voters, namely the notably red states of the farm belt. Much of the commercial effort is focused on ethanol. with a push from Congressional reps in farm states that grow corn, the initial raw material of interest in producing ethanol. The prospect of replacing an imported fuel with a home grown one is an added benefit. But there is less to ethanol, unfortunately, than meets the eye. First, a standard barrel (42 gal.) of ethanol is only worth 28 gal of gasoline because it contains only 80k BTU’s. Vs. 119 k for unleaded regular. Second, the US has abundant corn, but lacks the copious amounts of natural gas needed to produce ethanol. A gal. of ethanol requires 36k BTU’s of natural gas which as risen from $3 per mil. BTU’s to $14 per.(Pimentel, D., “Ethanol Fuels, Energy Balance, Economics and Environmental Impacts are Negative, Natural Resources Research, June 2003 v.12.20. Further, 100% of the US corn crop could produce only 7% of the fuel consumed by US cars annually. Moreover, ethanol fuels need 15% gasoline (i.e. E85) to prevent damaging car engines. which must be enhanced to tolerate the fuel. Regarding externalities, the 20 lbs. of CO2 generated by gasoline production is not significantly different from that generated by ethanol production.

To reduce the natural gas requirements required and the effluent generated by ethanol, cellulose from corn stalks, grain straw and grasses offers promise given it requires a bit more than half the natural gas than does corn.(Brown, L, “Plan B2.0: Rescuing a Planet Under Stress and a Civilization in Trouble, Norton, 2005). It siphons off no edible food supply and generates both fuel and from emitting heat sufficient to boil water electric power. The natural supply of cellulose type plants in Brazil has expedited the production of low cost ethanol. As to externalities, this production process generates little to no CO2. Therefore, it’s the fuel mix of hybrid that may hold the key to its innovative impact. Since there are more profits for farmers in corn based ethanol production, don’t expect the Bush Administration to set policy that leads to the much more cost effective plant derived cellulose ethanol production. Since there has been virtually no economic policy leadership during the eight years of suffering under the Bush Administration, i.e., no transportation (autos, airlines) or energy policy, even a perverted corn based ethanol initiative will be touted by the GOP as visionary energy policy.


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