Study Finds Government Mandates Superior to All Other Biofuels Policies, But Mixing With Subsidies Causes Adverse Effects; The Argument for a Direct CO2 Tax
17 February 2010
A new cost-benefit analysis of biofuels policies by economists Harry de Gorter and David Just at Cornell University has concluded that government mandates for biofuels “are clearly superior to all other policies, with few tradeoffs arising.” However, they write in a paper published in the journal Applied Economics Perspectives and Policy (AEPP), as soon as different types of policies are combined, there can be negative economic interactions.
For example, adding a biofuel subsidy with a consumption mandate fails to increase ethanol consumption but instead subsidizes oil consumption. A more effective policy would rely on specific taxes and subsidies targeted directly at achieving specific environmental, energy and agricultural policy goals, according to the study.
When used in some combinations, biofuel policies can be contradictory, where the effects of a policy are reversed. These biofuel policies never complement each other, but can on rare occasions be complementary to energy or environmental policy. Rarely does a biofuel policy have a neutral effect.
The effects of each biofuel policy and their interaction with other policies (biofuel or otherwise) are very complex, the economics of which can seem impenetrable. This is due to the intricate interrelationships between energy and commodity markets and the varied environmental consequences. Nevertheless, in this paper we disentangle the key interactions in this byzantine system of policy instruments by analyzing each biofuel policy on its own merits, in relation to each other, as well as to other environmental, energy and agricultural policies. As complex as the economics are, however, once understood, a set of relatively clear policy implications emerge.
—de Gorter and Just
Foremost among those findings is that a quantity-based biofuel mandate is superior to a price-based consumption subsidy. While a mandate can potentially increase social welfare substantially, a consumption subsidy likely decreases welfare significantly, primarily because of the taxpayer burden but also because it encourages negative externalities related to vehicle miles traveled, local air pollution and CO2 emissions.
Other findings from the study include:
Ethanol policy can have a substantial impact on corn prices. However, production costs of US corn-ethanol are very high. The gap between the intercept of the ethanol supply curve and the oil price creates large deadweight costs that may overwhelm any external benefits.
Subsidies and mandates by themselves do not discriminate against international trade. However, production subsidies, import tariffs and sustainability standards do. These trade distorting policies can create huge inefficiencies; US production would otherwise be replaced by Brazilian production, resulting in far lower CO2 emissions.
Sustainability standards which set a maximum amount of CO2 emissions per gallon are ineffective because of leakage to other sectors or countries not covered by the standard. Further, the US standard is highly unlikely to survive a legal challenge in the WTO under the exception for the environment, because the latter requires a measure that is necessary and least trade-restrictive, and not discriminatory or arbitrary (criteria that a sustainability standard does not meet).
Historically, corn subsidies were also required in addition to ethanol policy for US ethanol production to occur. Because farm subsidies make ethanol policy more inefficient, and vice-versa, the claim that ethanol policy reduces the tax costs of farm subsidy programs may not be borne out.
Biofuel policies are clearly inferior to a portfolio of specific taxes and subsidies that directly target environmental, energy and agricultural policy goals.
Taxpayer costs of biofuel and renewable energy policies in general are very high, especially relative to their benefit (which can easily be negative and highly so).
Biofuel subsidies may be warranted in specific situations like compensation for volumetric fuel taxes that discriminate against biofuels because of lower miles per gallon obtained, or if lower CO2 emissions with ethanol due to sequestration occur while growing the crop.
These conclusions are extremely relevant to the current debate over how the United States can best reduce its dependence on fossil fuels while simultaneously improving the environment and reducing greenhouse gas emissions. In his remark on ethanol policy, Stephen Colbert, a comedian, may have anticipated the paradox uncovered in this article when he stated, “The ultimate sacrifice is sacrificing the idea of sacrifice itself.” Taxing CO2 directly will represent a sacrifice in productivity but using various renewable energy policies in its stead generates huge inefficiencies and exacerbates the exact situation it was intending to avoid. Surely, the increases in CO2 coupled with the staggering inefficiencies that accompany the cocktail of renewable energy policies together represent a sacrifice that is ultimately more pernicious than would be the sacrifice of directly taxing CO2.
...biofuel policies that attempt to curb CO2 without directly cutting energy use are clearly wasteful. This approach may have worked (or done little harm) for other economic issues in the past, but renewable energy policy is proving to be unique. We are implementing a lot of policies to find that in return, we are paying even more to achieve less.
—de Gorter and Just
Resources
Harry de Gorter and David R. Just (2010) The Social Costs and Benefits of Biofuels: The Intersection of Environmental, Energy and Agricultural Policy. Appl. Econ. Perspect. Pol.32 (1): 4-32 doi: 10.1093/aepp/ppp010
.
"The temperature records cannot be relied on as indicators of global change," said John Christy, professor of atmospheric science at the University of Alabama in Huntsville, a former lead author on the IPCC.
The doubts of Christy and a number of other researchers focus on the thousands of weather stations around the world, which have been used to collect temperature data over the past 150 years.
These stations, they believe, have been seriously compromised by factors such as urbanisation, changes in land use and, in many cases, being moved from site to site.
Christy has published research papers looking at these effects in three different regions: east Africa, and the American states of California and Alabama.
"The story is the same for each one," he said. "The popular data sets show a lot of warming but the apparent temperature rise was actually caused by local factors affecting the weather stations, such as land development."
Meanwhile, the BBC carries an extraordinary interview with Phil Jones, director of the Climatic Research Unit at the University of East Anglia and the central Climategate figure. In the interview, Jones admits that the periods 1860-80 and 1910-40 saw global warming on a similar scale to the 1975-98 period, that there has been no significant warming since 1995, and that the so-called Medieval Warm Period calls into question whether the currently observed warming is unprecedented.
Drastically higher taxes, massive loss of freedom, and enormous government bureaucracies are NOT the answer top Earth's naturally changing climate cycles.
CO2 is no more a pollutant than H2O. Ever try breathing, without help, in a room full of H2O? H2O will kill you just as fast as CO2.
.
Posted by: The Goracle | 17 February 2010 at 09:35 AM
Remove all ethanol subsidies and tariffs and impose a carbon and/or oil import fee. This would make gasoline cost more and bio fuel cost less. Combine that with an FFV mandate for new cars and we are on our way to less imported oil.
Posted by: SJC | 17 February 2010 at 09:39 AM
.
If one is serious about energy independence put a floor on the price of oil at $80/barrel. Above about $70 per barrel alternatives become competitive and will flourish under the most efficient system - capitalism. Without a floor on the price, cartels will drop the price as soon as investment in alternatives ramps up, driving them out of business.
A tax on almost all energy use (CO2) will simply destroy the U.S. economy by doubling, or worse, electricity prices. Manufacturers will either have to jack up prices of their products or move overseas. Most have been moving overseas lately.
The "CO2 is the boogeyman" hoax is exactly that - a cruel hoax designed to bring in more $$$$$$$ to the government and government paid "researchers."
Lets be like enlightened Europe (France) have our electricity be 80% nuclear (no CO2 emissions for those who fear them).
.
Posted by: The Goracle | 17 February 2010 at 11:38 AM
Goracle,
Following your thinking for a minute, what is the mechanism for the floor price per barrel of oil? Is it variable tax equal to the delta between the spot price and $80, if the spot price is less than $80?
If so, we can predict that the oil cartels will ensure the price is just above $80, so no tax revenue is likely. However, aren't we just rewarding the cartels with predictably high prices?
Posted by: HealthyBreeze | 17 February 2010 at 02:12 PM
Climate changes denialist think our problems are just global warming (or lack off), our problems are much bigger than just global warming! No ones is going to care about global warming when oil hits $200 and beyond a barrel because there is not enough being produced to match world demand. Everyone going to start thinking about clean technologies not to be environmentally friendly but to try to bring down the cost of energy by bringing new sources to market and being more efficient with what we have.
Posted by: Ben | 17 February 2010 at 05:41 PM
Ben,
I could not have said it better myself. There is green for your pocket and green for the planet, the pocket usually wins. All new cars being FFV will make them capable of running M85. Methanol sells for $1 per gallon and on an adjusted basis makes it about $2 gge. When gasoline is over $4 per gallon again and stays there, people will want their car to run M85, not so much for cleaner air, but for lower fuel budgets.
Posted by: SJC | 17 February 2010 at 07:51 PM
.
HealthyBreeze, It is obvious that you were not able to follow my line of thinking. I'm not concerned with how much money oil cartels make. I am concerned that alternatives be allowed to earn a profit and compete in the market without stealing from tax payers in order to subsidize them. The best way to do that is to put a floor under the price of oil (what we are trying to gain independence from).
It's really pretty simple. I know that because my opinion is based on the best system in the world - capitalism founded in morality, not hate, it is very confusing to many environmental extremists.
.
Posted by: The Goracle | 18 February 2010 at 05:14 AM
Why do all of you insist that you need find a replacement for the proven method for maximizing efficiency and also removing use of product. That method is still free markets and capitalism.
The market and its inherent pressures, has taken some forty odd years to find and force the last substitute it needs, to answer the monopolistic pricing installed and enforced by the OPEC cartel. All the other needed substitutes, were found and are adopted, installed, in place, and working. Oil is minimized in use in industry, chemical feedstocks, HVAC, and electric generation. In every one of these former oil markets, we use l-e-s-s than an America, one third smaller, did in 1973.
Or didn't you know that?
The last expanding oil market is Transport Sector; and a suitable electric car substitute, answers that last vexing problem. Its successful introduction caps that market too, finally. The Oil Sheiks and Oil Commissars have no alternative in any other shrinking market. It will force the collapse of oil prices to the cost of production and normal profit.
Why must you gentlemen insist that you must have a solution to a non-existing problem. One that has been and is being solved in front of your eyes by the 'silent hand' of the marketplace.
Everyone of your 'solutions' has very bad side effects. Higher oil prices drive the cost of production of every item up, making more of our industry non-competitive.
That only ships jobs to China. What good does it do, if we are free of oil concerns, only to be now concerned with all our manufactured goods needed, being produced elsewhere, and no jobs, good or bad, available here?
The solution is the one our fore-fathers used successfully for 150 years. A modern tariff, aka VAT, in place of, and not besides, the income tax. A tariff helped create America.
I myself would not consider such a needed, simplifying move, without the repeal of the income tax amendment, as a prerequisite requirement. I simply don't trust politicians; and marxist ones like the Clueless One in particular.
You can apply the Japanese refinement to market capitalism that the other third world countries have copied and adopted, especially China, as well. Simply specify that every industry seeking access to the American market, and selling product in America of a substantial nature, like cars, machine tools, electronics, or any strategic industries, must have 50% domestic ownership, for its American subsidiary. That simple law changes everything.
It forced the creation of Nissan and Toyota and Mazda from the remnants of non-Japanese foreign car manufacturers, like Ford-Japan. Just as the rules force SAIC into the dominant position with GM China.
That is a non onerous requirement to impose. Even though the domestic manufacturers sell less than 50% of the cars in America, American factories manufacture 79% of the cars sold here. But most design, engineering and senior management as well as profits are directed to, and remain outside the US. The Japan rule changed that.
Or didn't you know that either?
Isn't it simply delightful to know that we have almost conquered genuine air pollution. I look forward to 'VE Day' and the national holiday declaring Victory for the Environment.
And CAGW has been exposed as a hoax. The advanced society, is proven to be a really a sustainable society.
Posted by: Stan Peterson | 18 February 2010 at 07:47 AM
Stan:
Cartels were created to fight free market (merchants) abuses. When producers found that they could get a sustained fairer (higher) price for their products by re-grouping, produce-commodities cartels were born. Free masons did the same about 1000 years ago. Todays Labour Unions play a similar role.
Unregulated Speculators, Embezzlers, Lobbies, Cartels and Unions, can bring about economic disasters for an industry, country and the world. We had many recent visible demonstrations in 1973, 1982/83, 2002 and specially in 2008/2009.
What is good in small doses can (and is often) be very dangerous passed certain limits. That is also true of most Free Market glamorized tools.
Many Free Market specialists are predicting a major (up to 90% drop) Stock Market down turn possibility as early as 2012 if new regulations are not adopted and implemented soon. Many countries are promoting the creation of improved stabilizing mechanism funded with a Tobin like transaction tax. Of course, countries currently controlled by speculators, lobbies and embezzlers are against it. They would rather have tariff barriers and 50+% local ownership etc to protect their own interests (playing fields).
Fairness and justice for all is not easy to implement and maintain in place. Current uncontrolled speculators, embezzllers, lobbies, cartels, unions etc are no longer compatible with with those essential goals.
Posted by: HarveyD | 21 February 2010 at 11:01 AM