Greenpeace takes on biodiesel

So I’m in week two of a three-week trip through Argentina, which is why I haven’t been posting.  Basically, I’ve had limited internet access, and frankly have been more focused on eating steaks and goat than on economics. 

But last night I was half-watching TV at the café, and in between skits centered on the hilarity of men wearing wigs and news segments alternately worshipping and subtly mocking Diego Maradona, there was an advertisement from Greenpeace Argentina (in conjunction with GP Germany) blasting soy biodiesel production.  Basically, it pointed out how the nation is literally burning through its land to plant energy crops.  Over 2 million hectares of forest have been converted into energy croplands in the past nine years — much of this goes to fuel German diesel vehicles that are widespread in Europe.  Diesel vehicles are indeed often longer-lasting and more efficient than the US’s gas-fueled fleet, but as with ethanol we must be careful about leaping too enthusiastically on the biofuel bandwagon.  Not this is that new to anyone; it’s just becoming more and more apparent to me that the solution to our transport emissions has to involve a move away from liquid fuels through a combination of efficiency and the tricky electric car. 

Anyway, I’ll be back around June 10th or so, with (hopefully) better thought-out posts not hastily written in an internet café.

Farm bill

I’ve been surprised by the lack of attention that the U.S. farm bill has received in the corners of the blogosphere I frequent. The current food crisis is getting lots of attention, but the farm bill… not so much. I’ve refrained from commenting largely because of how shamefully little I know about U.S. farm policy.

I suspect that some of the current silence among bloggers is a result of similar ignorance, but a larger portion represents a combination of shame and despair. Nearly every policy wonk of any political persuasion agrees U.S. agricultural policy is a disaster — conservatives hate it (or should) for the massive governement handouts, while liberals decry (or should) who the handouts go to and the environmental damages they cause. But at the same time the political interests entrenched behind leaving policy ‘as is’ mean that substantive reform is a non-starter. Hence the shame and despair.

Now that the bill has passed (over the President’s veto) I thought I’d point you to the best post I’ve seen so far on the bill’s problems: Greg Mankiw quotes an insider at the White House on some of the bill’s most distasteful provisions. Do read the whole thing, but here’s a couple candidates for worst part of the policy:

Too much spending: The bill increases spending by almost $20 billion over the next ten years, at a time when net farm income is at an all-time high. …

New sugar program: The bill would make the government buy sugar for 2X the world price, store it, then resell it at about an 80% loss to the taxpayer. Sugar sells for about 11¢/lb on the world market. The US government would have to buy sugar for about 22¢/lb, store it, and then auction off the excess to ethanol plants. …

Using food aid $ inefficiently: Under current law, US food assistance for hungry people around the world must be spent purchasing US crops. The President proposed to allow up to 25 percent of US global food assistance to be spent purchasing food from local farmers (in the country where the people are starving). This allows US dollars to be spent purchasing food, rather than paying transportation costs.

Meanwhile, the WaPost editorial page highlights another real loser from the bill:

…the bill could authorize up to $16 billion more in crop subsidies than previously projected…

The culprit is a new program called Average Crop Revenue Election, or ACRE for short. ACRE gives farmers an alternative to direct payments, which come regardless of how much money they make, and other subsidies. Starting in 2009, farmers can choose to trade in some of their traditional subsidies in return for a government promise to make up 90 percent of the difference between what they actually made from farming and their usual income. …

[ACRE] pegs the subsidies to current, record-high prices for grain, meaning farmers would get paid if prices fall back to their historical and, for farmers, perfectly profitable norms. A program that started out as a streamlined insurance policy against extraordinary hardship has mutated into a possible guarantee of extraordinary prosperity. [emphasis added]

As the editorial makes clear, the policy change could have actually been a welcome reform, by providing a way to transition from direct subsidies to a more insurance-based model where farmers got paid in bad years. The problem is that by using record-high grain prices as the baseline for ‘usual income’, the program is insuring that farmers make bank. On the other hand, there’s always the chance that this won’t cost the government as much as we think:

The farm bill’s defenders insist that a budgetary disaster will not come to pass, because grain prices will not come down much during the five years the bill will be in effect.

Ah, what a relief! The government won’t have to pay for this program because the world’s urban poor are going to continue to be choked by food prices for the next five years. Glad we got that cleared up.

If readers are aware of other good analyses of the farm bill I’d be thankful for a pointer. Here’s Tim Haab recently on the effects of U.S. farm subsidies.

Energy subsidies in the U.S.

Have I mentioned recently how absolutely amazing the Energy Information Administration (EIA) is? As much as researchers frequently run into problems getting exactly the data they need to do the analysis they want, it’s pretty remarkable to live in a time and place where such incredibly detailed information about energy in the U.S. is available at your fingertips.

The EIA’s latest feat is this new report on federal energy subsides. I’m pretty sure I’ll be revisiting this report frequently, but on first glance two things stood out.

1. What the heck is “refined coal”? Based on a cursory reading it sounds like coal used to produce synthetic fuels. It is getting a huge portion of federal energy subsidies (check out table ES1): around $2.4 billion of the $16.6 billion total. Part of my confusion though is that the EIA analysis classifies most of this subsidy under electricity generation (so is it a synfuel or coal?) and this makes refined coal the biggest subsidy recipient on a dollar-per-megawatthour ($/MWH) basis (see table ES5): it receives $29.81/MWH, versus $23.37/MWH for wind, $1.59/MWH for nuclear, and $0.44/MWH for (regular) coal. (These are the only electricity generating technologies which receive more than a $0.3B in federal support.)

2. Besides refined coal, who’s the other enormous hog at the trough? Three guesses, and the first two don’t count. That’s right, ethanol/biofuels chewed through $3.2 billion in 2007. The metric used to report subsidy payments here is dollars per million BTUs (table ES6), and ethanol is more than double the nearest competitor at $5.72/mBTU. It’s a little tricky comparing this subsidy level to the subsidies for electricity, since electricity is a more valuable form of energy than heat, but a simple back of the envelope calculation using standard conversion factors suggests that this is in the ballpark (slightly lower) than the dollar-per-output subsidies for wind I listed above.

So, to summarize, just with those two items, one-third of federal energy subsidies are going 1) to the most polluting fuel used today and 2) to a form of liquid food that is driving up world prices and at best is saving us a tiny bit of greenhouse gas emissions. Awesome.

Assorted links

1.  New York City’s congestion pricing plan dies in Albany.  Felix Salmon and Ryan Avent are depressed and disappointed, respectively.  Disgust comes to mind as well.

2.  Tyler Cowen has been providing a thought-provoking discussion on Jeff Sachs’ new book Common Wealth: Economics for a Crowded Planet.  The first three installments are on climate change, water policy, and biodiversity.

3.  Someone was listening to Rich’s complaint about the lack of coverage of escalating food prices: Paul Krugman discusses it on the New York Times Op-Ed page.  Plus the blogosphere is on the case – Energy Outlook examines the food-energy nexus, Free Exchange questions whether grain markets are behaving rationally, while this guy just wants to know he’ll still be able to afford his craft beer.

4.  David Zetland is blogging on the economics of water.

5.  Tim Haab issues a green jobs analysis challenge.

6.  And speaking of Env-Econ, UCLA couldn’t push me past Tim on Saturday night, so he edged me out in the Env-Econ NCAA tournament pool. But the combination of the Memphis win and UNC loss actually put Evan in front of both of us and gave CT bragging rights in the EE-CT showdown.  I think I’m now supposed to thank Evan for providing me cover when my “mouth starting writing checks my ass couldn’t cash.”  Or something like that.

Biofuels quote of the day

From The Onion, in regard to the recent article in Science claiming that biofuels do not have a positive impact on GHG emissions:

“Just once, why can’t one of our poorly considered quick fixes work?”

The Ethanol Recession?

If you had qualms about corn ethanol before, how about facing the prospect of an Ethanol Recession? From the LA Times:

Economists are cautioning that the nation’s growing dependence on corn would make for a double jolt in the event of a drought across the Midwest: soaring prices not just for food but also for gasoline. Analysts now warn that a “corn shock” might not be far off — and it could lead to $5 gas and $3.50 eggs as the effects reverberate across the economy. “We are replacing price volatility from the Middle East with Midwestern weather price volatility,” said Michael Swanson, a Wells Fargo & Co. vice president and agricultural economist.

As our food and fuel sectors become more and more integrated, we face the possibility that high food prices would be made all the more potent by a slowing economy driven by high fuel prices. However, in lamenting the consequences for our grocery budgets, it’s easy to forget that other economies would likely be hit even harder than our own. Lester R. Brown, president of the Earth Policy Institute, notes:

“The rest of the world is less able to pay high prices for food. What’s annoying for us is life-threatening elsewhere.”

Honestly, in general terms, I think we would all do well to think in these terms as we go forward making policy.

Subsidies quote of the day

If the biofuels industry expects taxpayers to make it competitive through subsidies, they will quickly break the bank. Subsidies to oil need to be eliminated as well, of course. But we doubt doing so would change the relative competitiveness of biofuels. What do subsidies to gasoline and diesel work out at on a per-litre basis? The estimates we’ve seen suggest that in the USA the value of the various tax breaks are worth around 3% of the current price of oil. That comes out to a big number in terms of total transfers. Perhaps they are as high as 10%. But that would still put them far below subsidies as a percentage of market value for biofuels, which are typically on the order of 50% of the retail price, or more.

That is Ronald Steenblik, in an interview about a report he co-authored entitled “Biofuels: Is the cure worse than the disease?”

Sentence of the day

“The amount of water needed to grow the corn, process the fuel and dispose of the waste at a small ethanol plant is about equal to the water needs of a town of about 10,000, according to an Environmental Defense Fund report.”

–Wall Street Journal (subscription req’d, sorry)

Edwards’ ethanol guarantee

John Edwards continues to develop his energy platform in his new “Plan to Build One America“. Specifically, he comes a step closer to advocating full auctioning of permits (quote from page 52):

Edwards will cap emissions of greenhouse gases and reduce them by 20 percent by 2020 and at least 80 percent by 2050. He will auction the right to emit any greenhouse gases after a short transition period.

His overall plan retains many of the vague gimmicks noted by Rich in his earlier, more comprehensive post on the Democratic front runners, such as establishing a Green division of Americorps. He also still loves his command-and-control measures, many of which have questionable value:

Require oil companies to install biofuel pumps at 25 percent of their gas stations and require all new cars sold after 2010 to be “flex fuel” running on either gasoline or biofuel.

One policy I found particularly interesting is a plan to offer loan guarantees to new ethanol refineries. Under such a scheme, the government essentially co-signs a loan. There are two sides to this policy. On the one hand, by overcoming information asymmetries in the credit market, the government can help allocate credit to unproven but promising projects. This theoretically releases societal benefits that would have otherwise gone untapped. On the other hand, there is the issue of moral hazard; those partnering with the government are more likely to take on excessively risky projects.

Loan guarantees have been used to underwrite coal gasification, ethanol, and geothermal projects in the past with varying levels of success. Of the three ethanol projects, two defaulted and were sold for salvage, while one defaulted but became a major ethanol producer after extensive refinancing.

However, the point of a loan guarantee is to fund a large project with a huge amount of associated risk. At this point, are ethanol plants really the sort of thing the government ought to be cosigning on? They seem to be a pretty proven investment at this point (especially if Edwards mandates that all cars be able to use E85 after 2010 and oil prices continue on their way up). Perhaps loan guarantees would be more appropriate for truly risky, potentially revolutionary technologies such as CCS coal or tidal energy.

Michael Bloomberg, economist

As reported (and rejoiced over) elsewhere, the New York City mayor will be calling for a national carbon tax in a speech later today. His full speech will apparently call for four key measures to address climate change: a price on emissions (preferably a carbon tax), more funding for energy-related R&D, an end to agricultural subsidies for biofuels, and an increase in CAFE standards. I’ll bet you could get most economists solidly behind at least three of those four proposals (and some would support all four). Excerpts from his prepared speech below the jump:

Biofuels

Martin Wolf has a column in the Financial Times about biofuels, summarizing the report Biofuels — At What Cost? from the Global Subsidies Initiative:

Energy security and climate change are two of the most significant challenges confronting humanity. What we see, in response, is the familiar capture of policymaking by well-organised special interests. A superb example is the flood of subsidies for biofuels. …

Already the support in members of the Organisation for Economic Co-operation and Development costs about $13bn to $15bn a year. But this sum generates much less than 3 per cent of the overall supply of liquid transport fuel. To bring the biofuel share to 30 per cent, as some propose, would cost at least $150bn a year and probably more, as marginal costs rose.

Ethanol-industrial complex

Cross-posted from my personal blog:

Quite often we hear plaudits for ethanol. So here is an interactive page from Conde Nast Portfolio which gives a simple overview of the anti-ethanol side of the story. Swallow an enormous grain of salt, then check it out. To quote Futurama: interesting if true.

The site has some interesting features, notably a list of the major players in the ethanol game. However, it departs from any fundamental discussion of whether or not ethanol is sustainable or efficient to produce. Instead, it mostly focuses on the impacts of ethanol on the prices of other corn-based goods.

Cob mentality

According to Greenwire (subscription req’d), Barack Obama and Tom Harkin have proposed a new bill that would expand the national Renewable Fuels Standard:

The Obama-Harkin bill would require use of 18 billion gallons of ethanol and other renewable fuels by 2016, with 3 million gallons coming from “advanced” biofuels like cellulosic ethanol.

My grocery budget is about to double

The worst knock-on effect I’ve heard of yet from subsidies for biofuels like corn ethanol:

That six pack of high-brow beer is about to come at a higher price, thanks to the sharpest surge in decades in the cost of the hops and barley that give each brew its distinctive taste.

Consumers could pay 50 cents to $1 per six pack more in the coming months for many small-batch “craft beers,” as brewers pass on rising hops and barley costs from an unpalatable brew of poor harvests, the weak dollar and farmers’ shift to more profitable crops. Other makers of craft beers, the fastest-growing segment of the U.S. brewing industry, say they may eat the higher ingredient costs, which will pare their profits. …

Craft beer makers have faced escalating costs over the past year. Prices for malting barley, which accounts for a beer’s color and sweetness, have jumped as farmers increasingly shifted to planting corn, which has been bringing higher prices because of high demand from makers of biofuels, like ethanol.

H/T: John Whitehead.

Can my ethanol bum a ride from one of you guys?

The New York Times reports that ethanol prices are crashing as supply outstrips the distribution network:

Because ethanol is corrosive and soaks up water and impurities, it cannot be shipped through the country’s fuel pipeline network. So it must be transported by train, truck and barge, a more expensive transportation network that is suddenly finding it hard to keep up with the surge in ethanol production.

Oops. With high demand on the coast, and a huge amount of corn in the heartland, it turns out that we actually need infrastructure for the market to work. Since corn ethanol is so inefficient in terms of energy balance (not to mention the economic inefficiency of doubly-subsidizing corn), we should be taking this ethanol boom as incentive to invest in fuel transport infrastructure. If we make a breakthrough in cellulosic ethanol, hopefully production will be less concentrated in my beloved home state; still, we’ll be needing to distribute it to truly harness market forces.