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How Big A Deal Is The Alabama Biofuel Scandal?

In 2007, a tiny Alabama start-up called Cello Energy was running around telling people that it had devised a way to produce cellulosic ethanol at $16 per barrel, using material like hay, switchgrass, and wood chips. Investors perked up and started plunking down millions of dollars for the venture. Cellulosic ethanol, after all, is a promising concept—a low-carbon biofuel that wouldn't have all the problems associated with using corn or soy as feedstock. True, cellulosic ethanol isn't commercial quite yet, but scientists are perennially insisting that it's just around the corner.

Well, turns out the whole thing was too good to be true. Not only were Cello's promises overblown, but an Alabama jury just found the start-up guilty of fraud, ordering the company to by $10.4 million to one of its investors, pulpmaker Parsons & Whittemore. At Earth2Tech, Josie Garthwaite sorts through the court documents and points out that most of Cello's backers, including P&W and noted Silicon Valley venture capitalists Khosla Ventures, didn't really do due diligence on Cello at all. (A lot of venture capitalist are lavishing money on next-generation biofuels, and Khosla is one of the most hyperactive.)

Anyway, if this was just a case of a few investors losing their shirts, it would be mundane news. But there's a policy angle, too. It turns out the EPA may not have done its due diligence, either. The EPA's Renewable Fuel Standard, which is currently being updated, mandates 36 billion gallons worth of biofuel to be produced in the United States by 2022 (up from 9 billion this year). As part of the revised standard, the EPA is expecting 100 million gallons worth of cellulosic ethanol to be produced in 2010. But, as Garthwaite reports, the agency was counting on 70 million of those gallons to come from… Cello Energy. And Cello's not going to get anywhere near that amount—a best-case scenario is about 20 million gallons, assuming the technology even works.

So the EPA basically has two options: either offer up new subsidies to ethanol makers or reassess whether the targets in the revised Renewable Fuel Standard are too ambitious (the EPA's comment period for the updated standard is still ongoing). There's already been a great deal of concern that the frantic push for corn- and soy-based ethanol has been counterproductive from an emissions standpoint—since, if diverting crops for fuel leads to farmers elsewhere cutting down forests for crop land, some types of ethanol may actually be worse for the environment than gasoline. And there are worries that the push to increase the required ethanol blend in gasoline may damage motors or reduce mileage. Add to all that new questions about whether the EPA's targets for next-generation biofuels are unrealistic, too.

--Bradford Plumer