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Special Report January 13, 2008, 12:01PM EST

GM Takes a Stake in Ethanol Maker

General Motors underscores its commitment to ethanol-powered vehicles by investing in a company that claims it can make the fuel more cheaply

By David Welch

Here's a tough sell. General Motors (GM) thinks it can make ethanol a big player in the quest to cut greenhouse gas emissions and wean America from its addiction to foreign oil.

GM is so adamant that ethanol can be a good solution that the automaker bought an undisclosed stake in Coskata, a private Warrenville (Ill.) company that claims it has developed an advanced process to make ethanol cheaply. GM announced the move Jan. 13 at the Detroit Auto Show.

GM and Coskata say that the company's highly efficient methods for making ethanol can take away many of the problems that have kept the fuel on the back burner. First, they plan to use agricultural waste and household garbage to make ethanol, which means fuel production wouldn't push food prices up. And second, Coskata claims its production will be so efficient that it won't give back all the oil savings just making the stuff.

"There is no question in my mind that making ethanol more widely available is absolutely the most effective and environmentally sound solution," GM Chairman and CEO G. Richard Wagoner Jr. said in a statement. "And it's one that can be acted on immediately."

Some Resistance

To date, ethanol has gotten plenty of resistance from a variety of corners—and for good reason. First, it takes a unit of energy to make about 1.6 units of ethanol using corn. Critics point out that there isn't enough oil savings to make it worthwhile.

Next, ethanol is 25% less efficient in cars than gasoline, so consumers aren't sold. And the few who are need to live in the Midwest, where most of the nation's 1,400 ethanol pumps are located.

That has been one of the biggest problems. Detroit's carmakers, which produce most of the vehicles that can run on a rich mix of gasoline and ethanol, get credits toward meeting their federal fuel economy requirements. Since so few ethanol-enabled vehicles actually use the fuel, it has amounted to giving Detroit credits for cutting gasoline use when those vehicles mostly burn gas.

Changing Ethanol Economics?

GM and Coskata think they can change the economics of ethanol. The company's process cooks agricultural waste, old tires, wood, and household garbage at 1,800 degrees. Then bacteria eat the carbon monoxide and hydrogen to make ethanol, says Bill Roe, Coskata's president and CEO.

He claims that one unit of energy can produce 7.7 units of energy, which is far more efficient than using corn. The cost for production is about $1 per gallon.

GM thinks that by making ethanol cheaper and eliminating the political hurdles, they could kick-start more ethanol use. GM sells 11 ethanol-capable vehicles now and wants half of its 80 or so vehicles capable by 2012, says Mary Beth Stanek, GM's director for environment and energy.

The ultimate goal is to reduce oil use. Right now, the U.S. uses about 140 billion gallons of oil a year and it's headed toward 180 billion, Stanek says. Last year, ethanol production was only about 8 billion gallons.

GM thinks that with more efficient production, it could get to 90 billion gallons a year. Already, federal requirements mandate that they use 36 billion gallons of so-called biofuels a year.

Environmentalists Weigh In

This is one issue where even the environmentalists agree with GM. The Natural Resources Defense Council backs ethanol as a renewable energy source, but only if it is made with more efficient methods than corn, says Roland Hwang, the NRDC's vehicles policy director.

"We can't gauge if [Coskata] can do what they say," says Hwang. "But it's the right approach. They're using waste products instead of food."

There is a catch. Roe says Coskata could even use wood. The company plans to take waste, such as bark, stumps, and thin branches from the paper and lumber industries. But he says the company could grow and harvest trees to use as a fuel source, which could prompt opposition from environmentalists. Those groups won't want to see the nation's forests thinned out to make fuel. "We are worried about that," Hwang says. "We'll have to be confident that the feedstock is harvested in a sustainable way."

That's why NRDC and others are pushing for requirements that govern what materials are used to make biofuels such as ethanol and how trees are harvested. "We won't put our green stamp on it yet," Hwang says.

But if Coskata and other ethanol producers can deliver what they say, they might be willing to push it.

Welch is BusinessWeek's Detroit bureau chief.

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