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Big Brother Black Box for Your Car?

November 13, 2013 by Leave a Comment

A recent story in the LA Times explains that government officials at various levels are keen on putting little black boxes in everyone’s vehicle. Civil liberties groups are concerned—and rightly so—about Big Brother being able to track everyone’s movements. Yet even the official reason is ominous: It will allow the government to tally a citizen’s mileage and then send him or her a tax bill.

Here are the chilling details:

WASHINGTON — As America’s road planners struggle to find the cash to mend a crumbling highway system, many are beginning to see a solution in a little black box that fits neatly by the dashboard of your car.

The devices, which track every mile a motorist drives and transmit that information to bureaucrats, are at the center of a controversial attempt in Washington and state planning offices to overhaul the outdated system for funding America’s major roads.

…

And while Congress can’t agree on whether to proceed, several states are not waiting. They are exploring how, over the next decade, they can move to a system in which drivers pay per mile of road they roll over. Thousands of motorists have already taken the black boxes, some of which have GPS monitoring, for a test drive.

…

The push comes as the country’s Highway Trust Fund, financed with taxes Americans pay at the gas pump, is broke. Americans don’t buy as much gas as they used to. Cars get many more miles to the gallon…

“The gas tax is just not sustainable,” said Lee Munnich, a transportation policy expert at the University of Minnesota. His state recently put tracking devices on 500 cars to test out a pay-by-mile system. “This works out as the most logical alternative over the long term,” he said.

It is no surprise that political liberals support the plan, since it allows government to raise revenue (always a plus for those in favor of Big Government) and it is yet another mechanism to punish the use of fossil fuels.

However, what may surprise some readers is to learn that some libertarians are applauding the innovation as well. Their reasoning is that it’s more efficient to charge for road use in terms of actual miles driven, rather than (say) how many gallons of gasoline are sold at the pump.

It is amazing how often free-market economists analyze government policy from the perspective of the best possible outcome. Yes, in theory a textbook tax system based on miles driven, rather than gallons of gasoline purchased, arguably would be a more sensible way to finance road construction and maintenance.

Yet the government in the real world doesn’t operate according to the textbook plans of economists. Giving the government yet another source of tax revenue will simply mean that…the government gets more tax revenue. The mileage tax will be based on political expediency, rather than a desire to set the “optimal” fee for road usage.

When government manages a resource like a road, they have less incentive to manage it efficiently. Because it derives its revenue from involuntary taxes, the government has little incentive to keep its customers happy. And because it is a monopoly supplier, there is little innovation.

On top of the economic waste, there is the added danger of giving government officials the ability to track every motorist’s movements. One doesn’t have to work for the ACLU to see why that is a bad idea.

IER Senior Economist Robert P. Murphy authored this post.

Filed Under: Facts, News, Products and Power Tagged With: , ,

AP Exposes 'Secret, Dirty Cost' of Federal Ethanol Mandate

November 12, 2013 by Leave a Comment

All energy sources involve tradeoffs. Ethanol production, for example, requires vast amounts of farmland and additional use of fertilizer can contaminate water supplies. As a new Associated Press investigation uncovered, the environmental tradeoffs associated with ethanol production have intensified as the federal ethanol mandate has expanded. The AP explains:

With the Iowa political caucuses on the horizon in 2007, presidential candidate Barack Obama made homegrown corn a centerpiece of his plan to slow global warming. When President George W. Bush signed a law that year requiring oil companies to add billions of gallons of ethanol to their gasoline each year, Bush predicted it would make the country “stronger, cleaner and more secure.”

But the ethanol era has proven far more damaging to the environment than politicians promised and much worse than the government admits today.

As farmers rushed to find new places to plant corn, they wiped out millions of acres of conservation land, destroyed habitat and contaminated water supplies, an Associated Press investigation found.

Passed by Congress in 2005 and expanded in 2007, the Renewable Fuel Standard (RFS) requires oil refiners to blend increasing amounts of biofuels into the U.S. fuel supply. Over the last five years, volume requirements under the RFS have risen from 6 billion gallons in 2008 to 16.55 billion gallons in 2013, the vast majority of which comes from corn-based ethanol.

The dramatic increase in mandated ethanol volumes has coincided with growing concerns about the environmental impacts of ethanol production. According to the AP, “Between 2005 and 2010, corn farmers increased their use of nitrogen fertilizer by more than a billion pounds.” Moreover, since 2009, “Five million acres of land set aside for conservation—more than Yellowstone, Everglades and Yosemite National Parks combined—have been converted on Obama’s watch.”

The Obama administration defends corn-based ethanol as a bridge fuel to greener biofuels. The RFS requires refiners to blend 36 billion gallons of biofuels by 2022, with a cap of 15 billion gallons on corn-based ethanol. So-called “next-generation” biofuels, such as cellulosic ethanol, are supposed to make up the difference. These next-generation biofuels are also supposed to be better for the environment than corn-based ethanol. But as the AP points out, cellulosic biofuel production has fallen woefully short of expectations.

In the case of ethanol, the administration believes it must encourage the development of next-generation biofuels that will someday be cleaner and greener than today’s.

“That is what you give up if you don’t recognize that renewable fuels have some place here,” EPA administrator Gina McCarthy said. “All renewable fuels are not corn ethanol.”

But next-generation biofuels haven’t been living up to expectations. And the government’s predictions on ethanol have proven so inaccurate that independent scientists question whether it will ever achieve its central environmental goal: reducing greenhouse gases.

Cellulosic ethanol plants existed in the U.S. 100 years ago, but because they were inefficient, they went out of business.[i] It wasn’t until last year that cellulosic biofuel was produced commercially again.  As the following chart shows, EPA mandated 5 million gallons of cellulosic biofuel in 2010, yet not a drop was produced for commercial purposes. In 2011, EPA actually increased its mandate, but still no cellulosic was biofuel was produced. EPA raised the mandate to 8.65 million gallons the following year, though cellulosic producers eked out just 20,269 gallons. So far this year, a little more than 217,000 gallons have been produced, despite a mandate for refiners to blend 6 million gallons. Given this track record, the administration’s hope that cellulosic biofuels could play a significant part in reducing greenhouse gas emissions remains a pipedream.

After forcing refiners to blend millions of gallons of biofuel that were never produced, EPA then fined refiners millions of dollars for failing to blend fuels that did not exist. As a result, the American Petroleum Institute successfully challenged the 2012 mandate, with the D.C. Circuit Court declaring that EPA “let its aspirations for a self-fulfilling prophecy divert it from a neutral methodology.”

EPA is poised to once again mandate unrealistic cellulosic biofuel volumes. Despite consistently overestimating cellulosic biofuel production, a leaked draft proposal shows that EPA is considering raising the cellulosic mandate to 23 million gallons in 2014, a nearly fourfold increase.

Under federal law, EPA must adjust required cellulosic volumes “based on“ the Energy Information Administration’s (EIA) annual estimate of cellulosic biofuel production for the next year. EIA, however, has not released their projected cellulosic volumes for 2014. That means EPA’s leaked draft proposes almost quadrupling the cellulosic mandate next year apparently without considering EIA’s 2014 volume projection that the EPA’s cellulosic projection is supposed to be “based on.”

Given that the biofuel industry has failed for four years in a row to meet the EPA’s mandates, it seems unlikely that 23 million gallons is a realistic goal for next year. It is unreasonable to expect refiners to blend fuels that do not exist, and especially egregious to fine them for failing to comply with an unattainable mandate.

The history of U.S. ethanol policy exposes the unintended consequences of government intervention in energy markets. Since the RFS became law, millions of acres of land set aside for conservation have been converted to ethanol production. Meanwhile, refiners are forced to pay fines for failing to blend essentially non-existent “next-generation” biofuels that “haven’t been living up to expectations.” This does not even account for the fact that the RFS raises gasoline prices and damages vehicle engines. Though it may have been designed with good intentions, the RFS is an intrinsically flawed policy that has failed to make America “stronger, cleaner and more secure.”

IER Policy Associate Alex Fitzsimmons authored this post.

[i] See Barry D. Solomon, et. al., Grain and cellulosic ethanol: History, economics, and energy policy, 31 Biomass and BioEnergy 416 (June 2007).

Filed Under: Facts, News, Products and Power, Renewable Fuel Standard, Threats Tagged With: , , , ,

Cellulosic Production (Still) Falls Woefully Short of Mandate

November 6, 2013 by Leave a Comment

The EPA recently released updated Renewable Fuel Standard (RFS) data showing Renewable Identification Number (RIN) generation for the month of September. A RIN is a 38-digit number assigned to a gallon of ethanol that refiners use to demonstrate compliance with the RFS. The updated data show, once again, that the EPA’s mandate for the use of cellulosic biofuel is woefully out of touch with actual production levels.

The 2013 Renewable Fuel Standard (RFS) requires that refiners blend 6 million ethanol equivalent gallons of cellulosic biofuels into the fuel supply. However, the EPA’s report shows that the RINs generated from cellulosic biofuels will fall short of the requirement, potentially leaving refiners on the hook to pay significant fines because of the cellulosic industry’s shortcomings.

According to the EPA’s numbers, the biofuel industry generated 211,569 RINs for cellulosic biofuel from January through September of this year. This is well below the 6 million gallon requirement. With the end of the year approaching, the possibility of meeting the mandate is falling increasingly out of reach.

The EPA’s gross overestimate of cellulosic biofuel production is no surprise though, as the agency has consistently missed the mark on its production estimates. For example, the EPA’s 2012 RFS called for 8.65 million gallons of cellulosic biofuel, but only 20,069 gallons were actually produced.

The EPA’s phantom fuel mandate has not gone unopposed, however. Just recently, the American Fuel and Petrochemical Manufacturers (AFPM) and the American Petroleum Institute (API) filed lawsuits with the D.C. Circuit Court challenging the 2013 cellulosic biofuel mandate. API successfully challenged the 2012 mandate and the D.C. Circuit court found that the EPA “let its aspirations for a self-fulfilling prophecy divert it from a neutral methodology.”

It seems that the EPA has learned nothing from the court’s ruling, as they continue to let their ideological aspirations get in the way of reality. Despite the fact that the EPA’s past requirements for cellulosic biofuels have been unattainable, a recently leaked proposal shows that the agency is considering increasing the cellulosic biofuel requirement to 23 million gallons for 2014. If the biofuel industry cannot meet the 2013 requirement of 6 million gallons, and has failed for four years in a row to meet EPA’s cellulosic mandate, it is hard to imagine that 23 million gallons is an attainable requirement.

The cellulosic biofuel mandate is a perfect example of the EPA trying to create a “self-fulfilling prophecy” instead of neutral policymaking. It is unreasonable to require refiners to blend a fuel at levels that are non-existent, yet the EPA continues down this path. It is time EPA stops trying to create a cellulosic biofuel industry through mandates and instead allow the market to sort it out.

IER Press Secretary Chris Warren authored this post.

Filed Under: Facts, News, Products and Power, Renewable Fuel Standard, Threats Tagged With: , , ,

Nationwide Coalition Calls for End to Wind PTC

November 5, 2013 by Leave a Comment

WASHINGTON — The American Energy Alliance joined today with over 100 organizations from across the nation in opposition to the wind Production Tax Credit (PTC). The organizations released a letter urging Congress to allow the wind PTC to expire. The letter states:

“The principal federal support for the wind energy industry is scheduled to expire at the end of this year. The undersigned organizations and the millions of Americans we represent stand opposed to extending the production tax credit (PTC).

“The wind industry has very little to show after 20 years of preferential tax treatment; it remains woefully dependent on this federal support. Yet despite this consistent under-performance, Congress has repeatedly voted to extend the PTC, usually in 1- or 2-year increments. This past year, Congress dramatically expanded the credit in addition to extending it.

“This year, Congress should break from the past and allow the wind PTC to expire as scheduled, once and for all. Americans deserve energy solutions that can make it on their own in the marketplace—not ones that need to be propped up by government indefinitely.”

To read the full letter, click here.

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Filed Under: News, Press Releases Tagged With: , ,

Markets, Not Government, Should Determine Energy Prices

November 5, 2013 by Leave a Comment

The following is IER’s response to the National Journal Energy Insiders question, “Is the (Energy) Price Right?“

Especially since the breakup of the Soviet Union, Western intellectuals and government officials have acknowledged the flaws in top-down central planning, and have paid lip service to the wonders of a decentralized market process in determining prices and the allocation of resources. Yet as our recent policy debates illustrate, the central planner mentality is alive and well in the corridors of power, especially in the energy sector. Hardly a day goes by without some new proposal to tax, regulate, mandate, and otherwise coerce American producers and consumers to alter their energy choices. Yet the urge to tinker is as harmful here as in other areas of the economy: The proper energy prices should be set through competition in a free market, not by government edict.

The specific rationale for overriding the market outcome in energy markets has changed over time. Back in the 1970s, the claim was that the United States was on the verge of depleting its domestic petroleum resources, and hence the urgent need to ration usage and develop alternatives. Now that the United States is poised to lead the world in natural gas and oil production, that particular rationale is impotent. But don’t worry, proponents of government intervention are very creative; they will always come up with another good reason.

Lately, the rationale has been anthropogenic global warming. In terms of textbook economic theory, markets work great unless there is a “negative externality”—in this case, greenhouse gas emissions that impose harms on future generations. Intuitively, the claim is that energy derived from CO2-intensive sources has a price that is too low, because it doesn’t reflect all of these harms. Levying a carbon tax or other measures is supposed to lead people in the market to “internalize the externality,” so that markets can get on with their great work in efficiently allocating resources.

That’s the theory, but there are several fundamental problems with this type of argument. First, even on purely theoretical grounds, the calculation of the “social cost of carbon” (SCC)—which is needed to calibrate a carbon tax or other restrictive measures—is a very dubious enterprise. For example, the SCC is highly sensitive to assumptions about the proper discount rate. The recent Working Group report estimated a 2010 SCC at $11/ton using a 5% discount rate, but $52/ton using a 2.5% rate. That is an enormous range, almost a fivefold increase, just from adjusting the dial on the discount rate we use in the calculation.

But the problems are worse than just extreme sensitivity to mild adjustments in parameters. A recent peer-reviewed article from an expert MIT economist was absolutely scathing in its assessment of the “Integrated Assessment Models” used to calculated the social cost of carbon. The author, Robert Pindyck, has the following to say about the climate change “damage functions” in the three computer models used by the Obama Administration’s Working Group to generate the latest round of SCC estimates:

[The] loss function [in the DICE model] is [not] based on any economic (or other) theory. Nor are the loss functions that appear in other IAMs [Integrated Assessment Models]. They are just arbitrary functions, made up to describe how GDP goes down when T [temperature] goes up.

The loss functions in PAGE and FUND, the other two models used by the Interagency Working Group, are more complex but equally arbitrary…[T]here is no pretense that the equations are based on any theory. [Robert Pindyck, “Climate Change Policy: What Do the Models Tell Us?,” p. 11.]

So we see that there are very serious problems with the calculations of the “negative externality” from greenhouse gas emissions. But now we hit a second problem: Even if we accept the claim that markets underprice energy, that doesn’t mean the government would be justified in imposing even more restrictions.

U.S. energy markets are already flooded with gasoline taxes, CAFE standards, power plant regulations, and various other measures designed to penalize CO2-intensive fuels. At the same time, so-called “green” energy sources have received lavish subsidies and mandates to encourage their use. As a result, the government is already heavily tilting the field away from CO2-intensive fuels. When you count the implicit cost to the consumers from these various measures, the final price of energy is already far higher than it would be in a truly free market. I have yet to see a study quantifying the implicit “carbon price” embedded in these other regulations, to see how much lower a new carbon tax ought to be.

Instead, the argument is always to throw on yet more regulations, as if we’re starting from a laissez-faire blank slate.

As both economic theory and history attest, government officials and scientific “experts” do not possess the wisdom or the incentives to plan an economy. The price of energy—just like the price of food and clothing—should be determined in a competitive marketplace, free from political interference.

IER President Thomas Pyle authored this post.

Filed Under: News, Products and Power Tagged With: , , ,

In Congress, Opposition to Harmful Biofuel Mandate Grows

November 4, 2013 by Leave a Comment

In a letter to EPA Administrator Gina McCarthy, members of Congress are urging the EPA to reduce the required biofuel volumes under the Renewable Fuel Standard (RFS) for 2014. The letter, signed by more than 150 members from both parties, correctly points out that the RFS is a flawed policy, based on faulty assumptions, that hurts the economy and the environment:

“Unfortunately, despite the best intentions of the RFS, its premise and structure were based on many assumptions that no longer reflect the current market conditions, and the imposition of the 2014 volumes now threatens to cause economic and environmental harm. As Congress continues its bi-partisan work to address these concerns, we are writing to request that the EPA use its authority to adjust the 2014 RFS volumes.”

The RFS is indeed premised on assumptions that are no longer valid. When Congress passed the RFS in 2005 and expanded it in 2007, gasoline consumption was rising while U.S. oil production was falling, prompting Congress to search for alternative fuels to replace what were perceived to be America’s dwindling oil resources. Today, however, the exact opposite is true. Oil production has skyrocketed thanks to advancements in technology that combine hydraulic fracturing and horizontal drilling, while gasoline consumption has leveled off. As a result, U.S. oil imports have fallen from about 60 percent of supply to less than 40 percent.

The Energy Information Administration (EIA) recently announced that U.S. weekly oil production is now at its highest levels since 1992. Over the last two years, domestic oil production grew by almost 1.9 million barrels per day (bpd), an increase of 34 percent. This increase is roughly equivalent to adding Venezuela’s total average annual oil production since 2008 to U.S. production totals.

The RFS is a fatally flawed policy of a bygone era. America’s new energy landscape obviates the need for inflexible government mandates handed down by bureaucrats who think they can precisely predict the country’s fuel needs more than a decade into the future.  As the growing chorus of RFS critics in Congress explain, “the rigid nature of the federal law has not allowed it to change as new realities emerge in the market place.” Government edicts, especially those not based on reality, are destined to hurt American families.

IER Policy Associate Alex Fitzsimmons authored this post.

 

Filed Under: Facts, News, Products and Power, Renewable Fuel Standard, Threats Tagged With: , , , , , ,

AAA Slams ‘Outdated’ Federal Ethanol Mandate

October 29, 2013 by Leave a Comment

Yesterday, AAA called on the Environmental Protection Agency (EPA) to lower the 2014 ethanol mandates under the Renewable Fuel Standard (RFS). AAA’s statement comes in response to a recently leaked draft copy of the EPA’s 2014 requirements, in which the agency weighs decreasing the total biofuel mandate.

EPA’s leaked draft proposes reducing the total renewable fuel requirement to 13 billion gallons in 2014, down from 16.55 billion gallons this year. As AAA President Bob Darbelnet explains:

“It is just not possible to blend the amount of ethanol required by current law given recent declines in fuel consumption, and it is time for public policy to acknowledge this reality. The EPA should lower ethanol targets immediately as part of the proposed 2014 RFS rule to support consumers and promote alternative fuels.”

As we have mentioned on these pages before, the federal ethanol mandate harms Americans. An increase in the RFS coupled with a decline in demand for gasoline could force the amount of ethanol blended into gasoline above 10 percent—more than automakers have certified their engines to use. As most cars are not made to run on higher ethanol blends, this could cause “voided warranties and vehicle damage,” as AAA puts it. Moreover, if the ethanol mandate is not lowered, many refiners will not be able to meet the requirements and will be on the hook for significant fines, meaning an increase in gasoline costs for Americans.

Though EPA may lower the overall mandate, their leaked draft still proposes unrealistic cellulosic biofuel volumes. According to the draft, EPA would raise the cellulosic mandate from 20,000 gallons of actual production last year, to 23 million gallons in 2014. This is particularly egregious, as only 220,000 credits of cellulosic ethanol have been generated this year, despite EPA’s requirement to produce 6 million gallons.

As AAA correctly stated, it is impossible for refiners to meet the mandate as it currently stands. Not only is the RFS a burden on refiners, but it is also damaging to Americans as it will lead to higher gasoline and car maintenance costs. While the possibility of a decrease in the RFS mandate is encouraging, it is a far cry from the simple fix need the RFS really needs—no more mandates.

IER Press Secretary Chris Warren authored this post.

Filed Under: Facts, News, Products and Power, Renewable Fuel Standard, Threats Tagged With: , , , ,

Krugman: Forget Taxing Carbon, Let's Just Ban Coal

October 28, 2013 by Leave a Comment

The proponents of a carbon tax claim that it is a “market-based” approach to curbing so-called “negative externalities” (such as greenhouse gas emissions). They argue that a “putting a price” on carbon, for example, is far more efficient than command-and-control regulations where the government imposes its own technology choices on the energy sector. Yet in a recent article, Paul Krugman lets the cat out of the bag: He’s fine with the government just banning coal. Krugman’s candor is significant, because as a Nobel Prize winning economist and one of the top-read economics blogs on the planet, he sets the parameters of the policy debate for many of his readers. If even Krugman is only paying lip service to “market solutions,” you can bet the rank and file activists are only using that phrase as a rhetorical ploy too.

The context is Krugman’s lengthy review of William Nordhaus’ new book, The Climate Casino: Risk, Uncertainty, and Economics for a Warming World . Here’s the relevant passage, where Krugman lets out his central planner inside:

And yet there is a slightly odd dissonance in this book’s emphasis on carbon pricing. As I’ve just suggested, the standard economic argument for emissions pricing comes from the observation that there are many margins on which we should operate.…Nonetheless, the message I took from this book was that direct action to regulate emissions from electricity generation would be a surprisingly good substitute for carbon pricing—not as good, but not bad.

And this conclusion becomes especially interesting given the current legal and political situation in the United States, where nothing like a carbon-pricing scheme has a chance of getting through Congress at least until or unless Democrats regain control of both houses, whereas the Environmental Protection Agency has asserted its right and duty to regulate power plant emissions, and has already introduced rules that will probably prevent the construction of any new coal-fired plants. Taking on the existing plants is going to be much tougher and more controversial, but looks for the moment like a more feasible path than carbon pricing. [Bold added.]

So don’t let the Ph.D. economists with their fancy jargon make you think this is “let the chips fall where they may” exercise: Sure, he’ll let Nordhaus talk about internalizing externalities, having “the market” come up with a least-cost solution, not imposing arbitrary government regulations that assume the bureaucrats know the answer upfront…but when all is said and done, Krugman knows we need to knock out coal-fired power plants to save civilization itself. (That’s not hyperbole on my part: The title of Krugman’s review is, “Gambling With Civilization.”) If Nordhaus can’t convince elected representatives to put his “market-based solution” in place, then Krugman is happy for the EPA to impose the outcome Krugman wants.

Incidentally, in case the reader thinks I’m exaggerating, consider Krugman’s discussion of how to force China and other countries to go along with a penalty on carbon emissions:

On one side, “carbon tariffs” on imported goods from nonparticipating countries would provide a powerful inducement to join in. My reading of international trade law is that such tariffs would probably be ruled legal by the World Trade Organization—and if not, so much for the WTO. Saving the planet trumps free trade.

In conclusion, I suppose we should be thankful for Krugman’s candor: He’s admitting he’s on a mission to save civilization and indeed the planet itself from coal-fired power plants. If this mentality is driving a Nobel laureate in economics, how concerned do we think the rank-and-file advocate of energy regulations is with economic growth and energy prices?

There is a reason the U.S. produces so much of its electricity—37 percent in 2012, according to EIA—from coal: It is a very efficient way to deliver affordable energy to American consumers. A de facto ban on coal would lead to a sharp surge in prices, and would cause harms especially to poor Americans—an ironic outcome for a “progressive” like Krugman.

The advocates of a carbon tax claim to embrace it as a “market-based solution,” but Krugman’s recent article shows this is merely a rhetorical move. They will support a top-down government blueprint for the energy sector if the public won’t allow Congress to impose an explicit carbon tax. This is precisely why so many critics opposed the EPA’s entry into such areas; it is effectively imposing the restrictions on emissions that the Congress could never achieve through the legislative process.

IER Senior Economist Robert P. Murphy authored this post.

Filed Under: Facts, News, Products and Power, Threats Tagged With: , , , , ,

Feds Throw More Tax Dollars at Biofuels to Cover Up Mandate Mistake

October 24, 2013 by 8 Comments

Reuters reports on the latest tomfoolery from Uncle Sam regarding biofuels:

The U.S. government on Monday announced $181 million in loan guarantees to build commercial-size refineries making advanced biofuels or to retrofit existing biorefineries to produce the cleaner-burning renewable fuels.

Since 2008, the Agriculture Department has provided $684 million through the Biorefinery Assistance Program to support projects in eight states. Applications for the latest round of funding are due by Jan. 30.

Although loan guarantees are different from an explicit cash grant, they still put the taxpayers on the hook for projects that private investors won’t touch. Let’s not forget the infamous bankruptcies that occurred under the Department of Energy’s loan guarantee program and other subsidies for “alternative” energy. Indeed, a recent Inspector General report finds that, after obligating $929 million for biorefineries, DOE “had not yet achieved its biorefinery production and development goals.”

The Reuters article goes on to suggest a clue as to why the USDA keeps pumping in so much to support biofuels:

USDA announced the funding at a time the federal mandate for biofuels is under challenge in Congress and in the bureaucracy. The Environmental Protection Agency has said it is considering whether to scale back the mandate, now dominated by corn-based ethanol.

Part of the problem here is that EPA has set cellulosic biofuel refinery targets that are physically impossible to meet, and then fines refiners for failing to do the impossible. A favored producer of cellulosic, KiOR, has badly missed production targets and is facing a class action suit  from investors for misleading them about its capacity growth.

Rather than admit its horrendous track record in picking winners and losers in the energy markets, the federal government is doubling down. It first uses the stick of unrealistic and arbitrary mandates to expand biofuels, then uses the carrot of loan guarantees and other subsidies. The hapless American citizens get hit with a one-two punch of higher energy prices (from the mandates) and less money (from the tax-financed subsidies). Only when it comes to government does an initial failure invite more of the same.

IER Senior Economist Robert P. Murphy authored this post.

Filed Under: Facts, News, Products and Power, Renewable Fuel Standard, Threats Tagged With: , , ,

Big Ethanol's 'Trifecta' of Goodies

October 23, 2013 by Leave a Comment

Rep. Peter Welch (D-Vt.) offered an astute observation recently about federal ethanol policy. Speaking at a National Journal event titled, “Biofuels Mandate: Defend, Reform, or Repeal,” Welch pointed out that the ethanol industry has benefited from a “trifecta” of preferential federal policies: subsidies, tariffs, and mandates.

Beyond wasting taxpayer funds, these policies have real, harmful effects on the American people. We’ll explain each policy and address their impacts, starting with subsidies. Subsequent posts will explore tariffs and mandates.

Tax Credits and Grant Programs

Over the years, the federal government has offered several tax subsidies for biofuel production. The most expensive subsidy is the Volumetric Ethanol Excise Tax Credit (VEETC), a 45 cents-per-gallon credit to refiners for ethanol blended with gasoline. The VEETC, which expired at the end of 2011, cost taxpayers $3.8 billion for just the four months it was available in fiscal year 2012. Had it not expired, the VEETC was projected to cost $7.2 billion annually, on average, between 2014 and 2021, according to a recent report by the National Research Council.

Though VEETC expired, other tax subsidies for biofuel production remain. The biodiesel tax credit awards $1 per gallon of biomass-based biodiesel produced. Passed by Congress as part of the Energy Policy Act of 2005, the credit has expired twice, in 2010 and 2012. Congress revived the credit at the end of 2012 as part of the deal to avert the fiscal cliff and will give retroactive payments to biodiesel producers who produced fuel in 2012 even though the credit had lapsed. The U.S. produced 991 million gallons of biodiesel in 2012, which means taxpayers will likely fork over close to $1 billion for fuels that were produced when the credit was no longer in effect.

In addition to tax subsidies, biofuel producers also benefit from numerous federal grant programs. The Energy Policy Act of 2005, for instance, directed the U.S. Department of Energy (DOE) to provide funding for biorefinery projects. To date, DOE has awarded more than $929 million for 29 projects, including $561 million from the federal stimulus in 2009. Last month, a DOE Inspector General report found that more than $600 million in biorefinery funding “had not yet achieved its biorefinery development and production goals.”

Other grant programs include the U.S. Agriculture Department’s (USDA) Bioenergy Program for Advanced Biofuels, which spent more than $211 million[1] since fiscal year 2010, and the Biomass Research and Development Initiative, a joint DOE and USDA program that spent more than $144 million[2] since fiscal year 2009. All told, the biofuel industry has benefited from billions of dollars in federal tax preferences and grant programs.

Subsidies Distort Markets

Tax subsidies and grant programs harm consumers by distorting markets. In a free market, profits and losses serve as indicators of consumer preferences. But grants and tax credits replace consumer preferences with political preferences. Companies have less incentive to serve customers if they can still turn a profit by collecting government handouts. This can lead to less innovative companies that spend more time lobbying for subsidies than delivering superior products to their customers.

In addition to replacing consumer preferences with political preferences, subsidies can also distort the price signals received by consumers. Subsidies, to the extent that they allow companies to reduce prices, can make uneconomical products seem like a good deal to consumers. For example, the VEETC made ethanol appear more economical to refiners than it really was. But this does not create real value for consumers, since those consumers are also usually taxpayers. What appears to be a valuable purchase for consumers is really just a wealth transfer from consumers to producers.

Rather than giving tax preferences and government grants to specific energy technologies, a more effective approach is to reduce the marginal tax rate across all energy sources. A simplified tax code with low marginal rates promotes economic growth and prevents legislators and bureaucrats from picking winners and losers by rewarding favored groups with tax preferences and punishing other groups with punitive tax hikes.

As will be discussed in subsequent posts, the distortionary effects of subsidies are compounded when combined with tariffs and mandates. Before it expired in 2011, the ethanol tariff protected domestic producers from foreign competitors, potentially raising prices on consumers. The federal ethanol mandate, the Renewable Fuel Standard (RFS), provides ethanol producers guaranteed, rising market share by forcing domestic competitors to purchase their products.

IER Policy Associate Alex Fitzsimmons authored this post.

[1] Using USASpending.gov, search CFDA Program Number 10.867.

[2] Search CFDA Program Number 10.312 on USASpending.gov. Note that these figures are only as reliable as the government data.

Filed Under: Facts, News, Products and Power, Renewable Fuel Standard Tagged With: , , , , ,
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