Common Tragedies

Thoughts on Environmental Economics


Posted by Daniel Hall on October 31, 2007

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.

EtOH Costs and Benefits

Note that sugarcane ethanol from Brazil is the only type of ethanol that is less expensive than gasoline. It also is the only one that gets significant emissions reductions. Corn-based ethanol, on the other hand, is expensive and ineffective. The left-hand chart is interesting, too: with all the complaints about corn-based ethanol in the U.S., I did not realize that Europe was ploughing ahead with even larger subsidies for biofuels. But here’s the likely reason for all the attention paid to corn ethanol:

This highly subsidised source of demand is also having a big impact on demand for foodstuffs. In 2007, for example, the increase in US demand for corn-based ethanol will account for more than half of the global increase in demand. Much the same is true for US and EU use of soyabeans and rapeseed in biodiesel. The rising price of food is good for producers. It is dreadful, however, for consumers, particularly for those in poor food-importing countries. Increased production of biofuels also adds stress on existing land and water supplies. Is it possible to justify this cornucopia of complex and expensive subsidies, mandates and protectionist measures? No. But that does not stop people from trying.

Corn consumption

U.S. ethanol production has accounted for more than half of the increase in global demand for corn in the last three years! That’s mind-boggling.

Biofuels aren’t much help with regards to energy security or climate change either:

…biofuels are, under current technologies, complements to, rather than substitutes for, fossil fuels and are also vulnerable to their own risks of weather and disease. …

According to the report, the cost of eliminating a tonne of carbon dioxide equivalent through biofuels varies from a low of about $150 to as much as $10,000. Even the lower of these figures exceeds almost all estimates of the marginal benefit of reducing a tonne of emissions. It certainly much exceeds the cost of many alternative ways of doing so.

That is a very big number. Prices for emissions reductions in 2008 in the EU ETS (the cap-and-trade program) are ~$30 per tonne carbon dioxide equivalent.

The column concludes with some sensible recommendations:

So what should be done? Here are some simple negative suggestions: eliminate increasingly popular (because apparently costless) mandates to use specific quantities of biofuels, since these shift all the risk of fluctuations in demand and supply of foodstuffs on to their use as food; discipline the stacking of subsidies on one another; and eliminate all open-ended supports for production before these become impossible to reverse.

Here, also, are some positive ideas: define the objectives and instruments of policy precisely, in terms of the overall goals of energy security and reductions in emissions of greenhouse gases; create a single global price of carbon that governs all activities; make producers compete for any support that is offered; let the markets decide on sale of flexible-fuel vehicles (and indeed the energy efficiency of vehicles); and, above all, move to free trade in biofuels.

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