Subsidy Eye

Alternative Energy Storage Is an Investment Tsunami

Wow, great chart of the cost per Watt and per kWh. Thank you, John!

Wind Power: What We Can Learn from Denmark

Comment on Candooman's comment:

"He [Obama] just has to make sure the power lines, steel towers, etc. (materials) should be made in the USA."

Um, unless this infrastructure is actually procurred by, and remains in the posession of the government (and even then, it would be subject to the USA's obligations under the WTO Agreement on Government Procurement), there is no way that Obama can stipulate that all the goods are made in the USA and not run the risk of a challenge from another WTO member. That said, whether the steel for the towers is domestic made or imported, the increased demand on the world market could be enough to raise steel prices -- good for steel makers everywhere, but not necessarily for other industries.

The Future of Ethanol

Tim: obviously, I'm not willing to subsidize any corn farmers to change over their machinery to plant and harvest sorghum. I was simply trying to see what Adam's answer to the question would be. These kind of articles are wearisome, because they suggest that there is the proverbial money on the table that companies are not picking up. Your answer makes sense, Tim. But one has to wonder why it did not occur to John Adam.

The Future of Ethanol

John, if sweet sorghum is such a great idea, then why are 99% of the existing ethanol plants based on corn? Surely a company like ADM or VSE would have not been dumb enough to have overlooked the biofuel equivalent of money lying on the table.

Study Shows Ethanol Energy Efficiency Is Growing

Wheels,

You ask: "Is it safe to assume that you thik the whole carrot-and-stick methodology of our tax system is wrong? If we don't like something,"tobacc... alcohol," we tax it. It we want to promote something, "ethanol, wind power," we give it tax breaks or credits."

Well, first of all, you are mixing tax systems. Tobacco and alcohol are subject to excise (product-specific, per unit) taxes. Ethanol benefits at the federal level from something called an excise tax credit, but which is actually a subsidy provided through the IRS -- i.e., through reducing corporate income taxes. That means that it is not subject to budgetary limits, which it would be if the subsidy were provided through the USDA or the USDOE. It also means that somebody who walks or rides a bicycle to work is subsidizing people who drive.

The way that ethanol is supported in the United States also has very poor equity characteristics. Moreover, taxpayers pay the highest ethanol subsidies to people driving the least-efficient vehicles -- big, E85-guzzling flex-fuel SUVs and trucks -- to the tune of $1000 per year PER VEHICLE in the case of a typical FFV, the Chevy Tahoe.

Second, sound tax policy calls for taxing what what we know to be bad -- e.g., pollution. If one of the justifications behind supporting biofuels is to reduce greenhouse gas emissions, it would make more sense to provide a tax differential in the gasoline tax based on its life-cycle GHG emissions. The current rate of subsidization is far higher than the tax differential one would allow at a typical carbon tax of, say, $50 per metric ton of CO2-equivavlent.

It is much more hazardous to directly subsidize the production of something we think to be good, especially a product (as opposed to say, a service like health care for the needy). For one, if subsidizing that product lowers the price of both it and its close substitute (in ethanol's case, gasoline), then what the subsidy amounts to is, essentially, a subsidy for consumption. And we know how self-defeating such subsidies can be.

If the public policy goal is to discourage gasoline use, then why not raise the federal excise tax on gasoline to something closer to the excise taxes levied on gasoline in most other industrialized countries. (Even Turkey charges a far higher tax on gasoline than does the United States.)

That goes, by the way for wind power and other renewables. By providing tax credits to those renewables we are hiding the true cost of producing clean electricity from consumers. In other countries (and in some U.S. states), renewable portfolio standards give preference to wind and solar power, but at least in so doing they force the higher cost of the renewable-generated electric power to be borne by electricity consumers, not taxpayers (and especially not taxpayers from another part of the country).

None of the above applies to subsidies for research. There are plenty of good reasons for governments to support research, and some development and demonstration. But even there, R&D money is not unlimited, so the more neutral or performance-based governments can be in deciding who, and what technologies, benefit from R&D support, the better.

Study Shows Ethanol Energy Efficiency Is Growing

Wheels 14,

My opninion on including a 50% tax break for the building of refineries that process oil shale, as well as tar sands, in the bail-out bill?

How's, "Outrageous, stupid, but not surprising."

As the late, , Brian J. Finegan wrote in, "The Federal Subsidy Beast: The Rise of a Supreme Power in a Once Great Democracy", there is no longer a Democratic Party and a Republican Party in the U.S. federal government. There is only one party, the Subsidy Party.

www.abebooks.co.uk/pro.../

(I'm not sure, by the way, what the other stuff in your message is supposed to refer to.)

Ag Secretary Defends Ethanol

Moreover, the Ag Secretary has stirred up a storm of controversy, suggesting that the federal government will provide loan guarantees on borrowings of up to $25 million per company, to bail out imprudent operators of ethanol plants, who locked in future supplies of corn at $7 per bushel -- or in some cases, speculated in the market.

According to Schaffer: “There's going to have to be some credit applied to companies to buy some lower-priced corn to blend with their higher-priced corn. This is important public policy for the country because corn-based ethanol is a stepping stone to energy independence through cellulosic ethanol. We're going to continue to support it as much as we can.”

www.agweb.com/Blogs/Bl...

In short: there is no limit to the extent to which the U.S. federal government is prepared to come to the rescue of ethanol producers.

Here is a response (see above link) from one conflicted grain co-operative, FAC:

“We have heard an overwhelming swirl of disbelief with regard to US Agriculture Secretary Schafer’s comments in Des Moines Friday about providing USDA/RD assistance for ethanol companies that have come on hard times. Some of this pain in the ethanol industry has come from the market (ethanol margins), but some has come from some players trying to outguess the market and possibly staying unhedged on some part of their positions. Why should the US taxpayer have to pay for their mistakes?

“FAC is a feed company. And like many grain and feed companies (FAC) has had to jump through hoops to be sure that we were able to maintain financing though the rock and roll markets of 2008. And our increased costs have come because of the growth in the ethanol industry sucking more corn from the pipeline and in turn pushing prices to record price levels. The wild market ride is likely to continue. No one knows which way we will go. But we have to agree that there should be no 'bail out' for ethanol producers. Why are they any different than any other segment of the marketplace? We have many livestock producers that have continually asked 'Where is my subsidy for providing demand to the corn market?' We are all for a growing demand base. Ethanol markets have been good markets for us to sell into. But where do we draw the line on providing assistance to this sector of the marketplace?

“We believe that the grain and feed industry must take a stand on this issue. I understand that many of the 'ethanol companies' that we are talking about are members of your associations. This will be a political hot potato, but enough is enough. How do we stop this kind of mentality in Washington? How do we get our story out? And most importantly, how do we do it in the politically correct fashion?”

Study Shows Ethanol Energy Efficiency Is Growing

RickH,

In short, you can't show that ethanol (which replaced more like 4.8 billion gallons of oil in 2007, not 6 billion gallons, though it may be at that higher rate today) has specifically displaced oil imports from "terrorist" suppliers. Of course not: the world oil market doesn't work that way. And, in any case, even if it did, other countries would come in to fill the gap created by reduced U.S. imports. Unless somebody organizes a naval blockade targetted at nasty oil regimes, they will keep exporting at whatever is the world price ... and keep raking in the dollars.

Does that make me an oil supporter? Hardly. And, no, I own no shares in either ethanol or oil companies.

But I do have an interest in good public policy -- which ethanol booseters seem to find quaint. By the way, nobody here challenged the fact that "ethanol efficiency is improving." What I did challenge was Tim Plaehn's twisting of the numbers from the original story to announce that studies had shown that ethanol production is "2 to 3 times more efficient" than originally thought. Tim has shown himself to shoot from the hip whenever he (somebody who DOES own ethanol stocks) defends his favorite industry, often seeming to pull numbers out of thin air.

By the way, I'm glad that you at least acknowledge that high prices induce reductions in demand. That's progress of a sort.

Study Shows Ethanol Energy Efficiency Is Growing

Dear Rick H,

I guess that means we agree that ethanol subsidies have not saved taxpayers money. Good, at least we have that settled.

Have ethanol subsidies, on balance, created more jobs than they have cost the economy? That would be quite a feat for a heavily subsidized industry. Mostly they have driven up commodity prices (affecting food prices for everybody), which in turn means increasing the price of farmland:

www.extension.iastate....

Got some figures to back up your assertion that ethanol has substantially reduced U.S. imports of petroleum from, say, Iran? (Which, in your opinion, are the "terrorist" suppliers?) Because, according to the latest figures from the Energy Information Administration, year-to-date imports of petroleum (crude plus products) are DOWN from Canada and Mexico (our No.1 and No. 3 suppliers), but UP from Saudi Arabia (our No. 2 supplier).

www.eia.doe.gov/pub/oi...

Study Shows Ethanol Energy Efficiency Is Growing

Rick H,

I was refuting Wheels' specific point, which was that 2005 was not an aberrant year. S/he may not understand how the marketing-loan payments work, which depend more on how low the price dips in the year than the average price in the year. In the case of 2005, the closing of the Gulf Ports in the aftermath of Hurricane Katrina coincided with the new harvest. Prices plummeted and marketing-loan payments soared.

My larger point is that, if one is going to "credit" ethanol subsidies for reducing farm subsidies, you have to compare with a more average year, or construct a realistic counter-factual.

Point 1: Ethanol subsidies are not part of the envelope of farm payments that are limited under the USA's commitments to the WTO. Hence, as long as those payments are under the limit, Congress will find a way to keep the money flowing. When you look at total payments over the last several years, expected payments in 2008 are close to the average, assuming that 2005 was an outlier. (See my numbers, above.) Hence, it is hard to make the case that there have been any significant savings overall in farm payments.

Point 2: In saying that "14 billion bushels of corn per year with an average support cost of 50 cents per bushel is more than this years ethanol subsidy". It is more than what will be paid out in the volumetric ethanol excise tax credit (perhaps $4 billion this year ... but rising every year, and it is not the only subsidy benefiting ethanol), but 3-4 billion of those bushels are themselves due to ethanol support policies. Hence, the quantity for comparison should be the amount of corn that would have been produced in the absence of ethanol.

Looking at the trend in recent years (before ethanol production started expanding rapidly), annual U.S. production was fairly stagnant, at around 250,000 metric tonnes (around 10 billion bushels):

farm4.static.flickr.co...

With rising world demand, and therefore U.S. exports, production in the absence of ethanol would have risen to perhaps 11.5 billion bushels. But, that leads me to point 3 ...

Point 3: With that rising world demand, corn prices would have risen -- not by the same degree that they have with the additional demand for ethanol, but by at least $1.50 per bushel. Even the World Bank's Donald Mitchell, whose estimate of the contribution of ethanol to the rise in commodity prices is the highest among the major studies,

papers.ssrn.com/sol3/p...

allows that some 1/3 of the rise (between 2002 and April 2008) was due to rising energy prices and factors such as increased world demand for food and feed and the fall in the value of the dollar against other currencies.

So, to complete our counter-factual, even in the absence of support for ethanol, corn prices would have risen above the levels that would trigger price-support payments.

Conclusion: ethanol subsidies have not saved taxpayers money. They have, and will continue to be, an additional burden on top of the already existing farm payments.

Study Shows Ethanol Energy Efficiency Is Growing

Sorry, obviously I meant to say, "then why shouldn't the long-term trend (all else equal) for corn prices have been downwards, or at least rising at less than the rate of general inflation?"

Study Shows Ethanol Energy Efficiency Is Growing

"The university of Illionis shows corn prices growing at half the rate of inflation dating back 30 years." Well, we're always hearing from the industry that they continue to improve yields and drive down costs. Given that farmers are price takers, then, why should the long-term trend (all else equal) for corn prices have been downwards?

Of course, subsidies played a role in depressing prices also. But, I maintain, 2005 was not a typical year. Marketing loan payments for crops during that year were TWICE what they were in 2004. And ad hoc and emergency payments were 10 times what they were in 2004.

All in all, federal government payments to farmers in 2005 were almost twice ($24.3 billion) what they were in 2004 ($13.0 billion). In 2008 they are expected to be $13.4 billion -- i.e., no lower than what they were in 2004, and a bit higher than what they were in 2002 ($12.4 billion).

fpc.state.gov/document...

Study Shows Ethanol Energy Efficiency Is Growing

Wheels 14: that was in 2005, an a-typical year (thanks to Hurricane Katrina, which shut down the Mississippi ports for several months, thus limiting exports and depressing the domestic price).

The point about ethanol subsidies (unlike the crop payments), is that the USA has committed to reducing crop subsidies as part of the WTO's Agreement on Agriculture, whereas in the case of ethanol subsidies, the sky's the limit. And the annual expenditure is growing fast.

Study Shows Ethanol Energy Efficiency Is Growing

Wheels 14, as for deducting the costs of crop subsidies, that is an interesting question. Crop subsidies depressed crop prices, some would say (in the nine years following the 1996 reforms) by 23% below average farm production costs for corn, and 15% for soybeans.

www.ase.tufts.edu/gdae...

Rather than speaking of "savings" in crop subsidies, however (which I do not think should be treated as entitlement), when we count the contribution of corn-ethanol subsidies to increases in the cost of corn, we should count only the increase above the price that would have obtained in the absence of crop subsidies -- i.e., which would at least have covered production costs. Sorry, but I can't provide that figure at the moment.

Study Shows Ethanol Energy Efficiency Is Growing

Frflyer, I'm glad to learn that you are "not a big advocate of ethanol unless it proves to be economical and environmentally makes sense." I can agree with that.

As for the $84 billion a year estimate from the "Set America Free Foundation", I can't find in the document. The figure I find is $43 billion in lost local, state and federal tax revenues. That figure is $10 billion higher than the $33 billion reported by Freinds of the Earth, and is presumably explained by the inclusion of state and local tax breaks and subsidies.

The report also enumerates numerous other costs of oil, some of which would be hard to confirm or refute without looking at the original studies from which teh data are derived.

But back to the comparison with ethanol subsidies, the figures I referred to above were just federal subsidies for ethanol. Throw in state and local tax breaks and subsidies, and the total value comes to over $1 per gallon currently.

www.earthtrack.net/ear...

Of course, if one were to expand ethanol use on the basis of (U.S. produced) cellulosic ethanol, then you're looking at $1.01 per gallon ($1.50 per gallon of gasoline equivalent) just in federal tax credits, not to mention subsidies for related infrastructure and (at least in the near term) for plant construction. Add to that various state sales-tax and fuel-tax exemptions for ethanol (or E85) and the total cost could exceed $2.00 per gallon of gasoline equivalent in a number of states.

Of course, as the Set America Free Foundation document points out, there are indirect costs associated with oil dependency. So to are there from biofuel use, especially biofuels made from cropland. Higher prices for food and other agricultural materials is just one. Economic losses due to supply disruptions could also be high: witness the panick that preceded this year's corn crop before the floods finly subsided.

Again: the country needs to wean itself off of oil, and stop subsidizing it, but it is hardly a winning strategy to try to buy itself freedom from that dependency by creating a new industry that itself is massively dependent on subsidies.