Topic: Energy and Environment

Rethinking Ethanol: A Lesson Only Half Learnt by the NY Times

Sunday’s NY Times acknowledges that:

It is time to end an outdated tax break for corn ethanol and to call a timeout in the fivefold increase in ethanol production mandated in the 2007 energy bill.

But then it goes on to state:

This does not mean that Congress should give up on biofuels as an important part of the effort to reduce the country’s dependency on imported oil and reduce greenhouse gas emissions. What it does mean is that some biofuels are (or are likely to be) better than others, and that Congress should realign its tax and subsidy programs to encourage the good ones. Unlike corn ethanol, those biofuels will not compete for the world’s food supply and will deliver significant reductions in greenhouse gases…

Congress’s guiding principle should be to tie federal help to environmental performance. The goal is not just to stop the headlong rush to corn ethanol but to use the system to bring to commercial scale promising second-generation biofuels — cellulosic ethanol derived from crop wastes, wood wastes, perennial grasses. These could provide environmental benefits and reduce dependence on oil without displacing food production.

But as noted on this blog previously, this is wishful thinking. Tilting the field to help cellulosic ethanol, whether directly through subsidies or indirectly through mandates, will inevitably make it more attractive for farmers to divert land and water to grow fuel rather than food. As a result some portion – perhaps even a large portion – of the resources that would otherwise be used for food production would go toward fuel production.

It is, therefore, naïve to claim that fuel production will not compete with food production. But the NY Times seems naïve about mandates, apparently assuming that mandates don’t entail costs, especially if they are in pursuit of goals it deems laudable.

One can get an inkling of the potentially disastrous effects of tilting the field toward biofuels (such as ethanol) from the Burmese experience regarding jatropha, a bush that can provide feedstock for biodiesel. The Wall Street Journal’s James Hookway reported last week that:

United Nations World Food Program officials say the storm wiped out much of Myanmar’s midyear rice harvest and add that grain stockpiles are dwindling because of the military’s jatropha drive. That makes it likely Myanmar’s plans to export rice this year to other needy nations such as Bangladesh will be scrapped…

The most notorious example of errant policy making reflects the fascination of 75-year-old junta leader Senior-Gen. Than Shwe with biodiesel as a way to break the country’s dependence on expensive imported oil.

In December 2005, the battle-hardened commander kicked off a nationwide campaign to grow jatropha, a squat, hardy bush that yields golf-ball-sized fruit containing a sticky, yellow liquid that can be made into fuel. His drive was similar to initiatives in other parts of the world, including the U.S., which encouraged farmers to grow corn, palm oil or other crops for biofuel and which are now facing criticism for driving up the price of food. [Emphasis added]

India, China and other countries grow jatropha on scrubby land where food crops can’t survive. But researchers say that in Myanmar, some of the country’s most fertile land has been converted to cultivating the shrub…

It isn’t clear how much of Myanmar’s arable land has been converted to jatropha cultivation. Organizations such as the U.N.’s Food and Agriculture Organization warned the government about the risks of farming jatropha on land that could be used to grow food. But Gen. Than Shwe’s goal was to set aside an area the size of Belgium to grow jatropha – a huge commitment for Myanmar, which is roughly the size of France.

In 2006, the chief research officer at state-run Myanmar Oil and Gas Enterprise said Myanmar hoped to completely replace the country’s oil imports of 40,000 barrels a day with home-brewed, jatropha-derived biofuel. Other government officials declared Myanmar would soon start exporting jatropha oil.

Despite the military’s efforts, the jatropha campaign apparently has largely flopped in its goal of making Myanmar self-sufficient in fuel.

While this is an extreme example of poorly conceived policy, it should be kept in mind that the Burmese regime was pursuing what many consider to be a laudable goal – energy independence (with – who knows – possibly the hope of obtaining carbon credits). And what a totalitarian regime can effect with fiat (and sticks), other governments can accomplish with a combination of seemingly more benign policies, specifically subsidies and mandates (i.e., carrots and sticks), in pursuit of the same laudable goals.

The lesson from all this, which the NY Times doesn’t quite get (reiterating from the earlier post) isn’t that biomass – and farmers — shouldn’t play a role in helping meet our energy needs, but that “If farmers can profitably grow fuel rather than food through their own efforts, so be it. But we shouldn’t favor growing one over the other either through subsidies or indirectly through government mandates for so-called renewable fuels. And if anything should be subsidized or mandated, it shouldn’t be growing fuels. That would inevitably compete with food.”

Global Warming and the Burmese Cyclone

In his excellent blog, Roger Pielke, Jr., notes that “On NPR’s Fresh Air earlier this week, Al Gore suggests that Typhoon Nargis, which may have killed 100,000 people in Myanmar, is linked to greenhouse gas emissions, or does he? He said ‘we’re seeing consequences that scientists have long predicted might be associated with continued global warming.’”

So I checked the sea surface temperature (SST) “anomalies” (that is, differences in temperature from the long-term average) along the track of Cyclone Nargis to see if SST might have been unusually warm from April 28th to May 3rd (when it hit Burma) of this year compared to last year. Comparing the SST anomalies from NOAA for April 28, May 1, and May 5 of 2008 against April 28, May 1, May 3, and May 7 of 2007, SSTs along the track of Cyclone Nargis don’t look that much different from last year. And for April 30, May 3, and May 7 of 2005, the Bay of Bengal seems to have been noticeably warmer.

Granted, this is based on a cursory eye-ball view of the maps using a non-continuous data set. I await more detailed analysis with bated breath.

I Have a Dream …

… that one day, corporate executives will tire of being bullied by demagogic politicians. I was reminded of that dream by a press release issued yesterday by Sen. Pete Domenici, ranking member of the Senate Energy and Natural Resources Committee and long-time Republican major-domo on energy policy. Sen. Domenici asked the heads of the five largest oil and gas companies in America (BP America, Chevron, ConocoPhillips, ExxonMobil, and Shell America) to promptly send reports to his office “explaining” their individual corporate investment strategies with particular attention to their work in the “clean energy” sector.

In my dream, Senator Domenici would get a reply like this:

Dear Sen. Domenici:

We appreciate your interest in our corporate operations, but we are too busy at the moment to expedite your request as outlined in your letter dated April 30. You write in that letter that you are interested in a compilation of all previously released, publicly available data on this matter. Accordingly, we suggest that you put some staffers on the job and compile those reports for yourself. To help you on your way, you will find enclosed our 2007 Annual Report.

That having been said, Senator, we answer to our stockholders, not to you. Our investment strategy is our business, not yours. While we are happy to discuss our perspective on the energy market and the merits of existing and proposed public policy, we are not interested in encouraging the idea that our investment strategy is a legitimate matter of interest to the United States Senate.

Cordially,
Big Oil CEO

Alas, it is only a dream.

Wishful Thinking on Cellulosic Ethanol

Supporters of ethanol, stung by the backlash over its unintended but foreseeable consequences (see, e.g., here and here), namely, increasing hunger due to a run-up in global food prices and increased threats to biodiversity, now tell us that cellulosic ethanol will come to the rescue. The theory is that cellulosic ethanol, which is still in the research and development phase, would be produced from non-edible plant material, e.g., switchgrasses, crop residue and other biomass that is not currently grown or used as edible crops. Thus, it is implied, it would have no effect on food prices.

But this is wishful thinking.

If cellulosic ethanol is indeed proven to be viable (with or without subsidies), what do people think farmers will do?

Farmers will do what they’ve always done: they’ll produce the necessary biomass that would be converted to ethanol more efficiently. In fact, they’ll start cultivating the cellulose as a crop (or crops). They have had 10,000 years of practice perfecting their techniques. They’ll use their usual bag of tricks to enhance the yields of the biomass in question: they’ll divert land and water to grow these brand new crops. They’ll fertilize with nitrogen and use pesticides. The Monsantos of the world – or their competitors, the start-ups – will develop new and genetically modified but improved seeds that will increase the farmer’s productivity and profits. And if cellulosic ethanol proves to be as profitable as its backers hope, farmers will divert even more land and water to producing the cellulose instead of food. All this means we’ll be more or less back to where we were. Food will once again be competing with fuel. And land and water will be diverted from the rest of nature to meet the human demand for fuel.

Does this mean that biomass – and farmers – should play no role in helping us meet our energy needs? Not necessarily. If farmers can profitably grow fuel rather than food through their own efforts, so be it. But we shouldn’t favor growing one over the other either through subsidies or indirectly through government mandates for so-called renewable fuels. And if anything should be subsidized or mandated, it shouldn’t be growing fuels. That would inevitably compete with food.

The 998th Cut - and the 999th?

Here’s a new bill in Congress that strikes me as a peculiar encroachment on freedom. H.R. 5912 would amend the U.S. code to make cigarettes and certain other tobacco products nonmailable. Undoubtedly, this would make it a teensy bit harder for some people to smoke and chew tobacco.

More importantly, I think, it would deepen the role of the Postal Service in surveillance and enshrine the USPS a part of our niggling nanny state.

Does this bill affect you directly? Chances are it doesn’t, as few people send or receive cigarettes in the mail. But what happens tomorrow when you’re part of a disfavored group?

The bill’s sponsor is Rep. John McHugh (R-NY) who today features on his homepage House passage of a bill to establish a thing called the Hudson-Fulton-Champlain Commemoration Commission.

‘The Amazing Hillary’

Hurry, hurry, hurry! Step right up, ladies and gentlemen, and see the Diva of Deception, the Impresario of Illusion — THE AMAZING HILLARY!! Watch her make the federal gas tax SEEM TO DISAPPEAR!! But in fact, you’ll still be paying the same price for gas! Even the media can’t figure out this trick!! She’s remarkable! She’s astounding! So hurry right in and see the First Lady of Legerdemain, the Mistress of Magic!

That’s what Hillary Clinton’s campaign managers should be barking about her joining John McCain in proposing to suspend the federal gasoline tax for the 2008 summer driving season. Says Candidate Clinton, the move would “immediately lower gas prices.”

What makes her proposal a true work of wizardry is that, she claims, it would not reduce government tax revenues. Whereas McCain says he would reduce government spending to make up for the lost tax money (an example of magical thinking?), Clinton would implement “a windfall profits tax on the big oil companies” to close the revenue gap.

Did you catch The Amazing Hillary’s trick? Did you see why consumers would still pay the same price for gasoline? No? OK, let’s watch the sleight of hand in slow motion:

The price of any good is ultimately set by just one factor: the equilibrium of supply and demand. If demand for a good increases, consumers will bid against each other to obtain it, driving up the price. The higher price encourages producers to supply more of the good and allows them to use costlier means of production. The higher price also incentivizes consumers to moderate their demand. This dynamic operates until a new equilibrium price is reached. Similar dynamics occur if demand falls, or if supply increases or falls.

Taxes affect prices by reducing the supply of a good. Most goods (including gasoline) can be furnished in a variety of ways from a variety of inputs. Some of those supply lines are more expensive than others, and producers will only operate lines that are profitable. If a tax takes away some of the revenue that producers receive for their goods, the producers will idle the lines that are unprofitable given the post-tax revenues. The decrease in supply will push up the price until it reaches a new equilibrium between supply and demand.

Let’s apply this specifically to gasoline. Gas can be produced from many different supplies of oil, ranging from cheap-to-extract-and-refine Saudi light crude to more-expensive Texas crude and oil pumped from shallow-water wells in the Gulf of Mexico, to even-more-expensive oil from deep-water wells, or from the frozen ground of Prudhoe Bay, or from the oil sands of Canada. That oil can then be transported by a variety of methods to different refineries with different operating costs. The resulting gasoline is then transported to consumers through countless routes in the global supply chain.

Gasoline suppliers, like all other suppliers, will use only the lines that are profitable and idle lines that are not. A tax on gasoline — assessed either as a sales tax or as a corporate excise tax — will reduce the profits of different supply lines. Some of those lines will become unprofitable and be idled by suppliers, reducing overall supply. The result is that consumers pay a higher price that should produce more supply, but suppliers receive lower revenue that prompts them to decrease supply. (The difference between what should be supplied at a given price and what actually is supplied underlies what economists refer to as a “deadweight loss.”)

Deadweight losses from taxation are undesirable, but they are tolerated because government provides important services. One of the virtues of the gas tax, specifically, is that it acts (ostensibly) as a user fee for roads and other services that motorists need. Now, there certainly are more efficient ways to finance roads, but the fuel tax isn’t half bad.

However, there is something wrong with assessing a tax but claiming that it’s not there. Candidate Clinton’s “trick” is to swap the gas tax for a special tax on oil companies. Because she intends for the windfall profits tax to generate the same revenue as the gas tax, the windfall profits tax will have the same effect on gasoline supply, demand, and price as the current gas tax. The only difference is that the gas tax is transparent to consumers while the windfall profits tax is not. Voilà — the gas tax seems to disappear, but gas prices stay the same and the government still gets its money.

Theoretically, there are ways to construct a windfall profits tax so that it doesn’t suffer this problem. One way would be to levy a one-time lump sum tax — that is, to pass legislation mandating that, in 2008, the oil companies will hand over a specific amount of dollars to the federal government regardless of profit or production levels. Another theoretical windfall profits tax would apply only to lines of supply that are low-cost and would remain profitable and continue to operate despite the tax. If either of those taxes were substituted for the current gas tax, it would lower gas prices and increase supplies by getting rid of the gas tax’s deadweight loss.

However, windfall profits taxes are much easier to construct in theory than in reality. The United States tried the “low-cost supply” tax in the 1980s and found that it produced little revenue but it had some unpleasant unintended consequences. Conversely, the lump sum tax would set off one amazing (and costly) legal and political battle.

So far, I can find no information on the design for Clinton’s windfall profits tax. Perhaps The Amazing Hillary has figured a way to make the tax work. More likely, it’s just hocus-pocus.

So, in the battle of presidential rivals, give McCain a little credit for having a less illusory gas tax proposal. But the real credit should go to Sen. Barack Obama, who has dismissed the idea entirely as a “short-term, quick-fix” proposal. What Obama said last week about the very small monetary gain of McCain’s call for suspending the tax also covers Clinton’s nicely: “A half a tank of gas — that’s [their] big idea.”

The Global Warming Hysteria that Isn’t, Part II

Last week, a Gallup poll was released revealing that about one-third of Americans worry “a great deal” about global warming, a number that hasn’t changed much since 1989. Less than half of the respondents believed that climate change would pose a serious threat to them in their lifetimes. The trade publication ClimateWire (subscription required) quotes a Gallup official as noting that “there has been no consistent upward trend on worry about global warming going back for decades.”

Today, ClimateWire reports that a new study from the Pew Research Center for the People & the Press has even worse news for environmentalists: climate change is at the absolute bottom of the public’s list of priorities for the federal government (oddly enough, there’s no trace of the report on Pew’s website). When given a list of issues and asked to state whether the issue should be a “top priority” for President Bush and the Congress, those surveyed responded as follows:

Strengthening the nation’s economy: 75%
Defending the country against terrorism: 74%
Reducing health care costs: 69%
Improving the educational system: 66%
Securing social security: 64%
Improving the job situation: 61%
Securing Medicare: 60%
Dealing with energy problems: 59%
Reducing the budget deficit: 58%
Protecting the environment: 56%
Reducing crime: 54%
Providing insurance to the uninsured: 54%
Dealing with the problems of the poor: 51%
Dealing with illegal immigration: 51%
Reducing middle class taxes: 49%
Dealing with moral breakdown: 43%
Strengthening the military: 42%
Reducing the influence of lobbyists: 39%
Dealing with global trade: 37%
Making tax cuts permanent: 35%
Dealing with global warming: 35%

Surprised? You shouldn’t be. The political strength of the environmental lobby is almost entirely based on the proposition that they represent a large number of well organized swing voters who will reward and/or punish politicians for their position on environmental issues in general and climate change in particular. Hence, a great deal of hard work and effort goes into the Green campaign to scare hell out of politicians regarding the political risks associated with saying no to things like a cap & trade program to reduce greenhouse gas emissions. To be fair, all special interest groups have the same incentive to talk-up their alleged public support. Regardless, this particular political Green emporer has no clothes.