President Bush’s ability to pull‐off impressive political sleights of hand was on full display this week. As some may recall, the Supreme Court recently found that the EPA has the legal authority to regulate greenhouse gases under the Clean Air Act without any further act of Congress. Moreover, the Court argued that, unless the agency were to find that greenhouse gas emissions cause no substantial injury to human health or the environment, the EPA must go forward and do exactly that. Fine, the president said, I’ll administratively order the implementation of my plan to reduce oil consumption by 20 percent over the next ten years whether Congress likes it or not. Thus, the president proposes to kill two political birds with one administrative stone — and with a stone that he hoped to throw regardless.
Give the man an “A” for political cleverness. Confirming public sentiment is what politics is all about, and if there’s something that the public agrees on these days, it’s that people ought to be conserving energy and that finding a replacement for gasoline would be a wonderful. Judging by polling data, only promising to cure cancer would be more popular … maybe.
Nevertheless, give the president an “F” for economic and environmental sense. That’s because his two main suggestions to get from here to there — tightening automobile fuel efficiency standards and mandating even greater amounts of ethanol consumption — will fail to substantially reduce oil consumption or reduce greenhouse gas emissions. Of course, by the time this becomes apparent (2017), our good president won’t be on the scene to face the political consequences, but then again, it’s unlikely that anyone will remember these Bush‐ite promises in 2017 anyway.
Remarkably, the president is getting a lot of applause for proposing initiatives that will, without any doubt whatsoever, simultaneously increase the price of cars and gasoline. That this fact is lost on so many otherwise intelligent people speaks volumes about the difficulty most have with negotiating even simple economics.
Fuel efficiency is not a free good. All things being equal, it costs more money to manufacture a fuel efficient car than it does to manufacture a fuel inefficient car. If it were otherwise, then all our cars would get 40+ miles per gallon. Now, it might make sense to trade‐off higher up‐front costs for lower operating costs over the lifetime of the vehicle (and a close examination of consumer behavior by Clemson economist Molly Espey reveals [pdf] that car buyers actually overvalue fuel efficiency, despite widespread belief to the contrary), but that doesn’t change the fact that the sticker price will be higher as a consequence.
How much more expensive both cars and light trucks will become is unknown because the details are yet to come. But to put this in perspective, the National Research Council reported a few years ago that improvements in automotive fuel efficiency would increase sticker prices for passenger cars by $1,018-$3,578, depending upon how aggressive those fuel efficiency improvements were and the vehicle class in question.
Similarly, mandating ethanol, and other biofuels, consumption will increase fuel prices at the pump. That is obvious if you spend even a nanosecond to think about it. If ethanol were cheaper than gasoline, there would be no need for a consumption mandate in the first place. After all, the only aspect of motor fuel that people care about is price. So if ethanol were price competitive, it would sell without the mandate. Mandates increase ethanol sales by mandating the purchase of ethanol that consumers would otherwise eschew — and they eschew ethanol absent government intervention because it is expensive.
Pricing the president’s promise to increase ethanol and other renewable‐fuel consumption from about five billion gallons a year to 35 billion gallons in ten years is difficult because massively increasing ethanol consumption will obviously effect consumer demand and thus price. We can’t with any certainty predict what ethanol supply and demand curves will actually look like under these mandates ten years out. We can reasonably assume, however, that increases in government‐mandated demand will yield higher ethanol prices tomorrow.
Ethanol prices today are already substantially higher than gasoline prices. Ethanol is selling in wholesale futures markets for $2.17 per gallon for June delivery, which compares unfavorably to gasoline selling at $2.30 per gallon for the same. That’s because ethanol has only three quarters of the energy content of gasoline. Hence, it costs $2.89 to buy enough ethanol in wholesale markets to displace gasoline that costs $2.30 per gallon. Costs would be even higher without the blizzard of federal and state subsidies in play — about $4.00 per gallon of gasoline equivalent, by conservative estimates. (The best numbers we have on ethanol come from a 2002 producer survey conducted by the U.S. Department of Agriculture. That survey reported that it cost an average of $2.53 cents to produce a gallon of ethanol in 2002; $1.57 per gallon for the cost of building ethanol processing facilities and 96 cents per gallon to run those facilities and pay for the corn. The USDA recently reported, however, that the sharp increase in corn prices since then has raised operating costs to $1.45 per gallon, which suggests that ethanol costs somewhere around $3.00 per gallon to produce at the moment. $3.00 * 1.33 = $3.99.)
What would we gain from this energy jihad? Little. The aforementioned study by the National Research Council calculates that even a 45‐percent increase in automotive fuel‐efficiency standards would not reduce automotive greenhouse‐gas emissions below where they are today. While improved automotive fuel efficiency would slow the increase, the fact that automotive greenhouse emissions represent only one‐fifth of total man‐made emissions in the United States suggests that this step alone will have no measurable impact on global temperatures.
Whatever positive impact tighter fuel‐efficiency standards for automobiles would have on greenhouse gas emissions would likely be offset by the president’s ethanol blitzkrieg. Despite what you may have heard, increasing ethanol consumption would almost certainly increase greenhouse gas emissions above where they would otherwise be. That’s the conclusion of two recent studies issued by academics at MIT’s Laboratory for Energy and Environment and the University of California. Expanding corn production means migrating from more to less productive corn‐growing lands, which will in turn necessitate an increase in the use of energy inputs — primarily in the form of fertilizer and irrigation — that are required to grow commercially viable yields. Analysis shows that total greenhouse‐gas emissions will increase as a consequence.
There are also unintended environmental side effects that are escaping attention. Ratcheting up automotive fuel efficiency standards will reduce the marginal costs of driving. This will result in more vehicles miles traveled and, hence, more congestion. As a consequence, net emissions of conventional pollutants will increase. Pennsylvania State economist Andrew Kleit, for instance, calculates that a 3 mile per gallon increase in federal fuel efficiency standards would increase tailpipe emissions of volatile organic compounds, nitrogen oxide, and carbon monoxide (all of which contribute directly to urban smog) by 1.64 percent, 1.8 percent, and 1.86 percent respectively. A 50 percent increase in fuel efficiency standards would increase emissions by 2.3 percent, 3.82 percent, and 4.97 percent respectively.
Ethanol likewise increases total air pollution according to a thorough review of the literature published in 2005 by Australian academic Robert Niven and a study subsequently published last February by Prof. Mark Jacobsen of Stanford. Niven’s review also found a whole host of other environmental problems, such as water pollution and ecological destruction, that would follow from turning America’s heartland into a giant fuel‐factory. In short, if ethanol is “green,” then so is coal.
Other unintended consequences include major increases in dairy, beef, pork, and poultry prices, along with just about anything that uses corn‐based sweeteners and other corn related products. That’s happening now and will only get worse in the future as corn prices continue their inexorable rise. Fuel efficiency also threatens to make cars lighter than they otherwise would be, and thus less safe. (This last observation is hotly controversial, but can’t be dismissed lightly.)
Whether you’re a conservative or a liberal, there’s nothing here to like. Conservatives cannot possibly cheer ambitious government interventions that increase consumer prices and dictate to producers what to produce and to consumers what to buy. Nor can they be happy with a president who’d rather abandon the debate about whether government should act to address global warming so that he can opportunistically ram through a preexisting policy agenda of dubious merit without need of congressional approval. Liberals genuinely concerned with greenhouse gas emissions and environmental quality will find that the president’s plan offers only a symbolic gesture of action while packing a whole host of negative environmental consequences.
President Bush and the GOP should come to their senses: Either argue that industrial greenhouse‐gas emissions are not a significant threat to human health or the environment (as those terms are understood in the Clean Air Act); make the case for waiting; argue for adaptation and low‐cost mitigation strategies; or propose a global carbon‐tax initiative and let the market sort out how best to get the job done. Ill‐considered half measures arguably represent the worst of all worlds.