Energy & Entrepreneurs #6                                                                                         

Costs of Biofuel Mandates

by Raymond J. Keating

Many of our elected officials like to think that they know more about energy costs and resources than do the millions of individuals and businesses hard at work in the marketplace. Of course, it never works out that way.

An article in the June 8 Washington Post ("Switching to Biofuels Could Cost Lots of Green" by Steven Mufson and Dan Morgan) highlights that politicians who like to push alternative energy resources - in this case, biofuels - do not like to talk too much about the costs and economic realities involved.  That goes for President Bush and many members of Congress on both sides of the political aisle.

For example, the Post reported:

• Regarding "federal requirements for a massive increase in the use of biofuels in motor vehicles," it was noted: "If the current tax credits, grants and loan guarantees are extended, the package would cost taxpayers $140 billion more over the next 15 years. New proposals under consideration in Congress could raise that tab to $205 billion."

• "Neither the White House nor Congress has spelled out how they plan to square the costs with other budget priorities."

• "The biggest single expense would be an extension of a 51-cent-a-gallon ethanol tax credit scheduled to expire in 2010."

• "In his State of the Union address in January, Bush proposed mandating the use of 35 billion gallons of renewable and alternative motor fuels by 2017. Some proposals in Congress go even further. The Senate energy committee recently passed a bill that would give industry until 2022 to meet a 36 billion gallon target. Sens. Richard C. Lugar (R-Ind.) and Tom Harkin (D-Iowa) are backing a measure that would push that to 60 billion gallons by 2030."

• "The agribusiness community has recently split over the issue. The chicken and cattle industries, hurt by rising corn prices as demand for ethanol climbs, have lobbied against the generous tax subsidies for corn farmers and others in the ethanol industry."

• "Besides the ethanol tax credit, other current incentives include a $1-a-gallon biodiesel tax credit, a subsidy for service stations that install E85 pumps, spending by the Agriculture Department on energy programs, and various other Energy Department grants and loan guarantees."

• "The American Meat Institute, along with dairy, poultry and pork organizations, is raising concern about the rising price of food because of higher corn prices. A University of Iowa study said consumers are already paying an extra $14 billion a year as a result."

• "The Senate energy bill mandates that ethanol made from materials other than corn, such as prairie grasses, eventually exceed output of corn-based ethanol. But an Iowa State University study was not optimistic about the ability to accomplish that. In corn-producing regions, it noted, subsidies of $270 an acre -- in addition to the existing highway fuel tax break and state tax breaks -- would be needed to induce farmers to switch from corn to prairie grasses. Moreover, the technology to produce cellulosic ethanol -- made from wood, waste or grasses -- at a commercially competitive price does not yet exist. ‘It's a pipe dream to think we're going to get a lot of farmers switching to cellulose without a lot of subsidies,' said Bruce Babcock, an economics professor at Iowa State."

None of this should be surprising.  When government gets involved with mandates and subsidies, unintended consequences multiply, costs rise, taxpayers get a raw deal, and those being subsidized are fat and seek more handouts. 

Our elected officials would do far better in removing tax and regulatory barriers to the development and production of current and new energy resources, stop trying to pick winners and losers, and let markets work.  Political meddling in energy markets - usually undertaken according to incorrect assumptions about the realities of resources and markets - only promises to create problems now and in the future for consumers, businesses and the energy industry.

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Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.