Topic: Energy and Environment

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.

The New York Times Should Take Credit Where It’s Due

In a piece by Jad Mouawad, Tuesday’s NY Times reports that Oil Price Rise Fails to Open Tap.

He identifies a number of reasons for the lack of responsiveness on the supply side:

  1. OPEC countries’ “explicit goal is to regulate the supply of oil to keep prices up”. Iran and Iraq’s productive capacity has been crippled by war and civil unrest. In non-OPEC countries, problems are due to “sharply higher drilling costs and a rise of nationalistic policies that restrict foreign investment.”
  2. Some regions are simply running out of reserves, e.g., Norway, Britain, Prudhoe Bay.
  3. “In many other places, the problems are not below ground, as energy executives like to put it, but above ground. Higher petroleum taxes and more costly licensing agreements, a scarcity of workers and swelling costs, as well as political wrangling and violence, are making it harder to raise production…”
  4. “Foreign investment could help Mexico produce oil from deeper waters, but that is a controversial proposition in a country where oil has long been seen as part of the national patrimony.”
  5. “The Russian government has been muscling Western companies to gain more control over its energy resources. That rise in energy nationalism could freeze new investment and slow any meaningful growth in supplies there for years.”

Surprisingly, in an otherwise decent article, absent from this report is the credit that is due to the New York Times itself (and like-minded entities) in their long-standing efforts decrying the search for oil and gas within the US. A search of the Times site for the words “editorial drilling oil gas”(sans quotes) over the past few years reveals a constant stream of editorials in the Times decrying efforts to drill for oil and gas. Examples include:

Leave Bristol Bay Alone, December 6, 2006: “President Bush is thinking about rescinding a longstanding presidential order that specifically prohibits oil and gas drilling in Alaska’s pristine Bristol Bay… Mr. Bush has been speaking out lately about the importance of making America more energy independent. Few things are more important for the new Democratic Congress than developing an energy policy more heavily weighted toward conservation, efficiency and development of alternatives to traditional fossil fuels. This might be a rare area in which both sides can work together, but opening Bristol Bay to drilling would be exactly the wrong way to begin the conversation.”

Regulatory Games and the Polar Bear, January 15, 2008. Interior Secretary Dirk Kempthorne could do the polar bear … a favor by ordering a timeout and halting the [oil] lease sales for at least a year… There is no urgency to lease Alaskan waters. President Bush’s suggestion that new oil production will bring short-term relief at the pump is nonsense, since oil fields take years to develop. It is urgent to help the bears.

Losing Patience, August 21, 2007. Dirk Kempthorne’s arrival … raised hope among conservationists that he would moderate the Bush administration’s aggressive search for oil and gas in some of the country’s most environmentally sensitive lands. This has not happened.

Protecting a Monumental Sculpture, February 18, 2008. “There is every good reason to call this plan to a halt on aesthetic grounds. But there are other reasons too. This stretch of the lake is also a critical breeding ground for many species of shorebirds.”

Drain America First, July 25, 2006. “The Senate measure is narrower and less mischievous than the House bill. Yet it, too, is aimed exclusively at increasing production. … This is mind-boggling. The bill’s stated purpose is to reduce fuel prices. But while the gulf may hold enough natural gas to affect the price of that commodity, the same cannot be said of oil.”

And of course the NY Times has been in the forefront of opposition to any drilling in the Arctic National Wildlife Refuge based on the logic that it would supply only six months of US oil consumption while forever sullying the Wildlife Refuge (an arguable claim).

Using this logic we could shut down every farm in the U.S. – and the world – since no single farm provides more than a few hours’ worth of food, and food production is the single greatest threat to terrestrial and freshwater biodiversity worldwide.

This is not to say that drilling – or farming, for that matter – is acceptable everywhere, but reflexive opposition to energy production is not.

Carbon Credits and Persian Prostitution

What do they have in common?

Apparently, buying and selling indulgences.

A piece in Slate, How To Spot a Persian Prostitute: Streetwalkers in chadors, by Juliet Lapidos, informs us:

The penalties for prostitution [in Iran] are severe—ranging from whipping to execution. But there’s a loophole in Islamic law called sigheh, or temporary marriage. According to Shiite interpretation, a man and a woman may enter an impermanent partnership with a preset expiration date. There’s no legally required minimum duration (a day, a week, anything goes) and no need for official witnesses—unless the woman is a virgin, in which case she needs the consent of her legal guardian. An Iranian who’s wary of arrest can simply escort a prostitute to a registry, obtain a temporary contract from a Muslim cleric, and then legally satisfy his sexual needs.

QED (quite easily done).

Is this reminiscent of purchasing carbon credits for that jet flight to Bali, or what?

Were getting real meaningful emission reductions as simple.

Don’t Shoot the Messenger

I’m sorry to bring bad tidings so close to the weekend, but apparently House and Senate conferees have reached agreement [$] on the broad outlines of a Farm Bill.

We will have to wait until Monday to get the full, disgusting details but broadly, we know this about the proposed bill:

  • it will raise the target prices and loan rates for northern crops (i.e., wheat, soybeans, other feedgrains) beginning in 2010
  • raise the sugar loan rate three-quarters of a cent
  • include a sugar-to-ethanol program (whereby the USDA would buy sugar that would otherwise threaten the domestic minimum price and sell it, presumably at a loss, to ethanol plants)
  • an additional $4 billion for conservation programs
  • $10.361 billion extra for domestic and international food aid programs
  • The bill also includes the new “permanent” disaster program (some thoughts on that here), albeit at $250 million less than the original $4 billion request

To pay for this, your representatives in Congress cut the $5.2 billion per year direct payments program (that is the program that pays farmers on the basis of past production and yields, regardless of what they produce now) by 2 percent per year for four years. Recall that the direct payments program, while an offence to taxpayers everywhere, is at least less trade distorting than the price-linked subsidies that the conferees have agreed to increase. And in the final year, when it really counts for purposes of planning future spending levels (i.e., the baseline), the direct payments will go back up again.

The one possible bright light at the end of this sewer-pipe: a presidential veto. No word from the administration on this latest deal, but it does not fit their past definition of an acceptable amount of reform and thus, assuming intestinal fortitude on the part of President Bush (I know, I know), would likely elicit a veto threat.

Happy weekend, everybody.